ALL THE WRONG MOVES: BANK NEGARA ROLLS BACK UNPOPULAR FOREX ‘RULES’ AFTER FAILING TO CURB RINGGIT SPECULATION

PETALING JAYA – Bank Negara has eased some of the restrictions in the foreign exchange (forex) market to allow for some trading of US dollar/ringgit transactions between local banks.

Effective yesterday, local banks are allowed to transact any foreign currencies up to US$1mil.

For instance, a local bank can undertake the exchange from US dollars to the ringgit or vice versa for any trade up to US$1mil.

According to dealers, the notice from Bank Negara came yesterday.
Since Nov 11 last year, when the US dollar started to spike up against emerging-market currencies, Bank Negara has been imposing restrictions on forex transactions in an effort to curb the influence of the offshore ringgit market on onshore exchange rates between the US dollar and the ringgit.

Among the restrictions were that local banks were not allowed to enter into transactions with banks that were not incorporated in Malaysia, exporters were compelled to convert 75% of their proceeds into the ringgit, and non-Malaysian banks had to attest that their US dollar-ringgit transactions were not used to settle trades in the non-deliverable forward or NDF market.

Since Nov 11, transactions involving foreign currencies were handled by the central bank. Banks acted as conduits to customers who wanted to convert their US dollars to the ringgit for any amount.

“Effective yesterday, local banks can trade among themselves for transactions of less that US$1mil. This has given marginal life for trading in the inter-bank forex market.

“But it is only a small step. Banks need a lot more leeway for trading in the inter-bank market to pick up pace,” said a source.

Bank Negara’s move to ease the restrictions on the trading of the ringgit versus the US dollar comes as there is some improvement in key economic data that led to an increase in international reserves.

Bank Negara’s international reserves rose to US$95bil (equivalent to RM426bil) as at Jan 31, 2017 from US$94.3bil as at Jan 13, 2017.

The reserves position is sufficient to finance 8.6 months of retained imports and is 1.3 times the short-term external debt, Bank Negara said in a statement.

Apart from international reserves, loans to households, which have been a concern since 2015, slowed down, prompting a leading rating agency to describe the development as positive towards enhancing the asset quality of Malaysian banks and moderating household debt levels.

In a statement released yesterday, Moody’s Investors Service vice president and senior analyst Simon Chen pointed out that the continued deceleration of household loan growth would help stabilise the high household leverage situation in Malaysia, which is among the highest in Asia.

“We expect that household debt to gross domestic product (GDP) for 2016 will moderate from the 89% recorded at end-2015,” he said in the statement.

Bank Negara’s recently released data showed a slower growth in household loans in 2016 from a year earlier.

The central bank’s data showed that as at end-2016, total outstanding household loans made up 57% of total banking system loans and had grown 5%, which was marginally slower than the year before.

Economists concurred that going forward, a continued slowdown in loans to households would result in the household debt-to-GDP ratio moderating.

“However, the debt-to-GDP ratio needs to stabilise first before a downward trend can become more apparent,” AllianceDBS chief economist Manokaran Mottain said.

Chen also pointed out that in 2016, growth in household loans was driven by safer housing loans – specifically, loans supported by property collateral – and which exhibited low delinquency ratios, while the growth in riskier unsecured loans remained weak.

Citing Bank Negara data, Chen also said a decline in auto loan growth also reflected households’ increasing cautiousness towards discretionary spending.

Slow growth in unsecured personal loans and credit cards had reduced the banks’ exposure to these risky loans to 12% of total household loans at end-2016 from a high of 15% at end-2011, which is positive for the banks’ asset quality, he added.

Meanwhile, CIMB Research in a recent report noted that leading loan indicators remained weak last December, mainly due to an 11% to 14% year-on-year (y-o-y) decline in the indicators for residential mortgages, but the contraction in the indicators for working capital loans narrowed.

“Loan applications and approvals fell by 8% and 12.8% y-o-y, respectively, in Dec 16.

“Judging by the uninspiring growth in leading loan indicators and still weak business/consumer sentiment, we see limited scope for a strong recovery in the industry’s loan momentum in 2017. Hence, we are projecting a loan growth of 5%-6% for 2017,” it said, adding that it remained overweight on the banking sector.

According to Kenanga Research, on the whole, y-o-y, both business and households saw a weakening in growth at 4.5% and 6.1%, respectively, (2015: 7.3% and 8.1% y-o-y, respectively). “We expect the growth rate to show weakness for 2017,” the research house added.

Moody’s, meanwhile, also said among the Malaysian banks it rated, Public Bank Bhd and Hong Leong Bank Bhd – the banks with the largest exposure to the household sector – would benefit the most from further improvements in the leverage profile of households.

– ANN