BNM Watch: Liberalisation Measures

Announced yesterday, among the first moves under the new Financial Sector Blueprint:

Liberalisation measures to develop the domestic financial markets

As part of continuous efforts by Bank Negara Malaysia to enhance competitiveness in the economy and to develop the domestic financial markets, Bank Negara Malaysia wishes to announce the following liberalisation measures, with effect from 31 January 2012:

• To further spur the domestic foreign exchange market through greater product innovation, licensed onshore banks are permitted to trade foreign currency against another foreign currency with a resident.
• To further deepen the domestic interest rate derivatives market, a licensed onshore bank is allowed to offer ringgit-denominated interest rate derivatives to a non-bank non-resident.
• Towards enhancing the asset liability management of residents, flexibility is permitted for a resident to convert their existing ringgit or foreign currency debt obligation into a debt obligation of another foreign currency.

The above measures which are in line with the broad thrust of the Financial Sector Blueprint will contribute towards increasing the liquidity, depth and participation of wider range of players in the domestic financial markets.

Unless, you’re (very) rich, none of these will be of interest to you. But the impact will be felt in corporate circles, and thus indirectly to all Malaysians.

The topmost measure is probably the one of most interest as it looks like BNM is opening up forex trading to residents. Potentially, this could mean the eventual introduction of forex products (not just deposits) at the retail level, though I hope not – the volumes and volatility in forex are orders of magnitude higher than even the equity markets. If you think share trading is gambling, you ain’t seen nothing yet.

But what I’m seeing here is a further step towards the reintroduction of the Ringgit as an international currency. Offshore (non-)convertibility remains the very last vestige of the capital controls implemented in 1998. There’s also the relaxation of access to Ringgit denominated interest rate derivatives, which should attract foreign investors interested in Malaysia’s big bond market.

The only downside I see is the increased vulnerability to capital flows – but that’s the price for attracting such flows in the first place. Whether that price is worth paying, I’m not sure. There’s no real economic benefit to attracting foreign financial and portfolio flows, excepting of course for the domestic financial sector itself.

Insofar as that goes, it’s all good, as it contributes to the development and contribution of the financial sector to the economy. But we’ve seen where that road could lead, haven’t we?