Traders still hesitant to use local currencies despite benefits

 

Bank Negara Malaysia (BNM) recently announced a push for wider use of regional currencies in trade and investments to overcome the impact of a volatile US dollar.

PETALING JAYA: Indonesian trader Tadzkiran Tajudeen, who sells cement and coal to Malaysian companies, knows the benefits of conducting business, both in rupiah and the ringgit.

The Penang-based businessman said doing so is more convenient and less costly than using the US dollar.

However, he told FMT Business that 95% of his suppliers, mainly from Indonesia, still prefer to issue invoices in US dollars.

“They are hesitant to accept the rupiah because the cost of items such as fuel, equipment and spare parts is usually denominated in dollars,” he said.

The advantages 

Experts agree that the business community must lead efforts to make the switch away from the US dollar for regional and international trade with many already aware of the advantages.

Abandoning the greenback, they said, can boost trade, cut costs for traders, ensure greater price stability and shield businesses from economic challenges in the US.

Professor of economics at Sunway University, Yeah Kim Leng said Malaysian and Indonesian businesses can reduce forex costs by up to 10% by using the rupiah or ringgit in direct trade.

This, according to economist Geoffrey Williams, makes trading in both currencies “very favourable”.

Recently, Bank Negara Malaysia (BNM) announced that it will push for wider use of regional currencies in trade and investments to overcome the impact of a volatile US dollar.

“Changing local currencies into US dollars and back can lead to losses and make businesses vulnerable to sudden changes in forex rates,” BNM’s deputy director Zaidi Mahyuddin said at a recent forum.

Countries like Malaysia, Indonesia and Thailand have moved to use local currencies in trade to tap into its potential benefits.

However, the value of trade done in these regional currencies remains small.

BNM data shows that Malaysia’s trade with China and Asean has risen to 17.1% and 27.3% of its total trade respectively, but the bulk is still transacted in US dollars. Only 13.1% of trade within Asean is in regional currencies.

Malaysian importers and exporters continue to use the greenback to align their US dollar debts, especially in sectors like electrical and electronics that are closely linked to the global market.

Nonetheless, this does not diminish the importance of switching to local currencies.

Yeah said trade with Indonesia has almost doubled over the last decade – going from RM61.05 billion in 2013 to RM111.21 billion in 2023, and rising at a compound annual growth rate of 6.2%.

“By transacting in local currencies rather than in the US dollar, Malaysian exporters and Indonesian importers can cut conversion losses by 3% to 10%,” he told FMT.

“Given various uncertainties, including speculations about a potential currency crisis that may be triggered by excessive US government debts and the twin current account and fiscal deficits, having the option to settle in local currencies and lower transaction costs will boost bilateral trade between the two countries,” he added.

Challenges

Williams said moving from a market which trades mainly in US dollars to one using several different currencies can lead to competition among those currencies.

This, he said, would give stronger currencies, such as the Singapore and Hong Kong dollars, a distinct advantage.

“(Trading in) local currencies will create greater demand and liquidity in the direct foreign exchange markets and reduce dependency on the US dollar, so this can change the regional currency markets in positive ways,” he said.

Chief economist at Bank Muamalat Afzanizam Rashid said BNM’s decision to adopt the local currency settlement framework (LCSF) shows that the central bank recognises its feasibility as well as its potential to reduce cost for businesses.

“With the LCSF, we don’t have to hedge either currency because the trade is settled using the local currency,” he told FMT Business.

However, he said, the limited supply of local currencies and a deep trust in the US dollar can slow down the shift to local currencies.

“It’s also about convenience and confidence in the US dollar. Businesses must see that switching away from the greenback will benefit them,” he added.

For traders like Tajudeen, the availability of more incentives will encourage them to make the switch.

This could include tax relief for trades conducted in regional currencies, he said. - FMT