RETURN OF THE RINGGIT NIGHTMARE: BACK TO MARKET FORCES – CAN BANK NEGARA COPE?

Malaysia is disappointed with close neighbour Singapore for launching offshore ringgit futures that could derail its efforts to stem ringgit speculation.

ALTHOUGH the Singapore Stock Exchange (SGX) and the republic’s Intercontinental Exchange (ICE) launched the ringgit futures trade last month, Bank Negara Malaysia (BNM) chose to proteÁst against this unfriendly move on Aug 9 – Singapore’s national day.

The choice of the date by the Malaysian central bank speaks volumes. Singapore’s move is likely to derail all efforts by Malaysia to discourage offshore speculation against the ringgit.

In its short statement on Aug 9, the central bank – which had hardly criticised other financial regulators – said:

“The recent introduction of the ringgit futures at the SGX and the ICE Futures Singapore is inconsistent with Malaysia’s foreign exchange administration (FEA) policy and rules.

“The Malaysian ringgit is a non-internationalised currency and thus, offshore trading of the ringgit in any form whether as a non-deliverable forward traded out of offshore financial centres or as a futures, options and other derivative contracts on exchanges outside of Malaysia, is against Malaysia’s policy.”

BNM’s delayed but strong reaction over the trading of ringgit futures is understandable as this offshore trade, if excessively active in the wrong direction for Kuala Lumpur, can cause havoc in the Malaysian economy as seen in the 1997/98 Asian financial crisis.

Bank Negara efforts nullified

It can also nullify all the efforts of BNM to stem speculation or even manipulation of the local currency.

To recap, last November BNM forced currency traders overseas to stop speculating the ringgit down after instructing banks in Malaysia to cease trading the ringgit on the offshore non-deliverable forward (NDF) market.

The offshore NDF market rate had served as an indicator for the ringgit trend. And it was driving the ringgit down, with players betting against the currency.

Late last year, BNM also introduced a requirement for local exporters to convert a minimum of 75% of their export income into ringgit, thus curbing the demand for the US dollar while boosting demand for the ringgit.

All these measures were necessary as the ringgit has since mid-2014 been hit by various kinds of negative news surrounding Malaysia.

Over the past three years, the falling ringgit has had an adverse impact on the economy and investor confidence. It has hit importers, who have to pay more in ringgit to import the same goods from abroad. It has also brought about imported inflation.

The ringgit rate began to weaken in September 2014 when the price of crude oil, a major revenue earner for the country, started to plunge. Since early 2015, the local currency has also been clouded by news on 1MDB and other controversies.

The implemention of BNM’s recent measures has stabilised the ringgit, which has stayed between 4.23 and 4.30 per dollar in recent months. At the height of its weakness last year, it hit 4.49.

Return of nightmare

But the introduction of the MYR/USD and MYR/SGD ringgit futures by Singapore may bring back the nightmare for BNM in managing the ringgit.

Like the NDF market, this futures trades in Singapore can influence the direction of the ringgit. In a worst case scenario, its spot futures could even become the international benchmark for the ringgit forex rate.

Indeed, the emergence of the ringgit futures in Singapore is almost as good as reviving the NDF market.

As most of the futures trades – either transacted for hedging or speculation – do not end up taking delivery of the physical commodity or currency, players harbour no fear that the ringgit is not physically available outside Malaysia as this is not their ultimate aim.

A futures market is one in which participants can buy and sell commodities for future delivery. They can sell the commodities even though they do not possess the commodities. They can choose not to take delivery of the commodity by squaring off their open positions. This is the market that provides a medium for hedging and speculation, or arbitrage.

Hence, if there is excessive speculation by international hedge funds, which are beyond the jurisdiction of Malaysia, BNM’s current international reserves of about US$100bil (RM429bil) would not be able to defend the ringgit.

BNM saw this during the 1997/98 Asian crisis. The fixing of the ringgit at 3.8 to a dollar then was one of the means to overcome the economic crisis.

Despite stronger economic fundamentals, the ringgit is still fragile. Malaysia has every reason to get upset with Singapore for launching the ringgit futures at this time.

Due to the close bilateral relations with Malaysia, Singapore is expected to respect the strategic interest and wishes of its Asean neighbour.

So far (as of Aug 17), SGX and ICE have not responded to BNM’s warnings.

But on the other hand, Malaysia has to take cognisance of the fact that Singapore, as a separate sovereign and important global financial centre, has every right to introduce financial products to widen its offerings.

Indeed from the commercial perspective, Singapore appears to be responding to market demand.

The SGX says on its website in a market update: “SGX introduced new futures contracts on MYR/USD and MYR/SGD on 17 July to address the needs of market participants. The MYR/USD Futures in particular has seen some positive trading activity since launching.”

Need for vigilance

A look at the trading volume of the ringgit futures on ICE and SGX suggests this contract is not posing an immediate threat to Malaysia due to its low trading volume.

It can be deduced that banks operating in Malaysia might not be participants on the SGX after the NDF episode.

And even foreign banks in Malaysia might not be involved for fear of consequences.

Foreign banks, which had speculated against the ringgit in the 1980s, have learnt their lessons. In mid-1986, the country head and treasury chief of an international bank were forced to quit after speculating against the ringgit.

In its Aug 9 statement, BNM took the opportunity to remind market participants to observe the existing FEA rules, which effectively imply that trading the ringgit futures on SGX is illegal for local players.

“Contravention of the FEA is an offence under the Financial Services Act 2013 and Islamic Financial Services Act 2013. Appropriate action under the law will be taken against any person that does not comply with prevailing rules and regulations.”

BNM also advised foreign participants to deal directly with Malaysia’s licensed financial institutions or their appointed overseas office for their ringgit needs.

Still, no one can be sure if BNM’s warning will be heeded by powerful speculative funds which have no link with Malaysia.

Market players can easily sniff out money-making opportunities as long as there is a disparity in the rates of onshore and offshore ringgit.

It looks like Malaysia’s central bank will have no choice but to be vigilant at all times, and be on high alert over ringgit behaviour on the SGX and ICE.

– ANN