Thursday, August 19, 2010

One More Step Towards Internationalisation Of The Ringgit

One last vestige of the capital controls that Malaysia implemented in September 1998 is that the Ringgit is still barred from international convertibility – to change any foreign currency into Ringgit or vice versa, you still have to come to Malaysia.

BNM yesterday announced one more step to getting rid of that restriction. Effective immediately, settlement of foreign obligations can now be conducted in Ringgit terms. You still have to go through a local bank, but you can use an account with an overseas branch of those banks – a big step.

Two further liberalisation measures were also announced:

  1. No more limits on inter-company borrowing in foreign exchange
  2. No more limits on hedging, again with the restriction that you have to go through a locally licensed bank

Full details are in this press statement.

I am in two minds about international convertibility. On the one hand, its absence is definitely a limiting factor on foreign investment in Malaysia – if you’re not sure you can get your money out, you’re less likely to put your money in. To offset this is the potential volatility and vulnerability to capital flows that this will bring to trading in the Ringgit. Given the size of the Malaysian economy relative to global money flows, that’s always a big risk factor to consider.

There’s no doubt however that this step will boost non-interest earnings in Malaysian banks, and in the long term help in the development and relative attractiveness of the local financial sector. We’ve also traditionally had an open capital account (the last twelve years has been an aberration), so this slow unwinding of controls is a step back to more historical norms.

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