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[KUALA LUMPUR] Malaysia's attempts to force currency traders overseas to stop selling down the ringgit, as investors flee the country's bond market, has had little discernible impact so far, traders and analysts say.
Over a week ago, Bank Negara Malaysia demanded that offshore banks confirm through signed letters that neither they nor their corporate clients would trade the ringgit on the non-deliverable forward markets.
An NDF allows banks and companies to hedge or speculate on emerging market currencies overseas when exchange controls in those countries make it difficult to trade directly on the spot market.
Bank Negara sent the letters to about 58 firms in Malaysia that have connections to offshore ringgit trading. Only a half-dozen offshore firms signed the letters, the Bank said last week.
The move has done little to bring ringgit trading onshore so far, traders said. "If you think the economy is not doing well, then going onshore (to trade) will hardly help, as there is a high possibility the government may slap capital controls to protect its currency or domestic markets. And that would be very painful," said Nitin Dialdas, chief investment officer at Mandarin Capital Limited.
The ringgit has plunged nearly seven per cent over the last two weeks, the worst performing currency in Asia. On Monday, it weakened further to 4.46 to the US dollar in thin trade at 0900 GMT.
The reason for the tumble is mostly because foreign investors have fled Malaysia's bond market - they own 40 per cent of it - after bond yields spiked across the world amid speculation President-elect Donald Trump's stimulus policies will ignite inflation.
The immediate risk for Malaysia is its US$81.4 billion worth of short-term external debt, said Trinh Nguyen, senior economist at Natixis investment bank in Hong Kong.
The Bank is "not without options", said Mr Trinh, noting it could let the ringgit continue to slide, intervene to defend the currency, raise interest rates or even impose capital controls, as Malaysia did during the 1997/98 Asian financial crisis.
The central bank has less ammunition to defend the ringgit. Foreign currency reserves stood at US$98.3 billion as of Nov 15, Bank Negara said, about a third below the record US$141.4 billion reached in 2013.
Malaysia "is treating the symptoms and not the underlying cause of the problem, which is worsening economic fundamentals,"said the head of local rates and FX trading at a US bank in Hong Kong.
"Foreigners should be worried."
NDF markets for Asian currencies began in the 1990s as a way for foreign investors with local investments to hedge their exposure offshore due to local restrictions on currency trading or simply to speculate.
By mid-2000, Asian currencies had dominated NDF trading in the global foreign exchange centers of Hong Kong, Singapore and London.
The ringgit is one of the most actively traded emerging market currencies in the NDF markets. About 60 per cent of ringgit trading is done offshore, where the average daily turnover is nearly US$13 billion.
That makes it far more vulnerable to global events than other emerging currencies, traders say.
Malaysia does not recognise offshore trading in the ringgit because the currency is not international. But since the central bank has no jurisdiction over the offshore markets, it has tried to exert pressure on global banks through their Malaysian operations.
Global banks with operations in Malaysia would have to think twice about trading the ringgit overseas, once they sign letters promising not to do that, say bankers involved in the trade.
"It directly hurts our ability to offer portfolio hedging strategies to our clients, as we don't know whether our domestic operations will be affected because of this," said the head of currency trading at a US bank.
Bank Negara has not spelled out what action it would take against a global bank's domestic operations for trading ringgit offshore.
At the same time, Bank Negara has said it is trying to make the domestic market more attractive for ringgit trading, though it has not disclosed what those measures would be.
Traders say the devil is in those details.
"The (Malaysian) regulators want something to be done fairly quickly but the reality is, operationally, certain things may not be achieved that quickly," said Ng Kheng Siang, head of Asia Pacific fixed income at State Street Global Advisors.
The central bank's move is making Malaysia's foreign bond holders nervous. Nearly half the domestic bond market is owned by foreign investors or roughly US$42 billion, according to Goldman Sachs.
"Our ability to hedge in the NDF market is being slightly restricted and we do have to think about taking those positions where we may not necessarily be able to hedge the currency," said Kenneth Akintewe, senior investment manager for Asian fixed income at Aberdeen Asset Management.
Below the unfolding ringgit saga are more deep-seated issues with the Malaysian economy.
"I think Malaysia is especially vulnerable to any large outflows," said Tim Condon, chief economist at ING based in Singapore, citing the headwinds to the domestic economy from slowing growth and an increasingly unfavorable global trade environment.
Credit default swaps, a type of credit derivative instrument that allows an investor to take a bet on the direction of the fundamentals of a country or a company, has signaled increased problems for the South-east Asian economy.
Spreads on Malaysia's five-year contracts have blown out nearly 50 basis points since the outcome of the US elections on Nov 9, underperforming the broader Asian index, which is up 10 basis points.