Ringgit seen more stable but new rules limit export FX proceeds

Kuala Lumpur

NEW initiatives by Malaysia to boost foreign exchange liquidity in the onshore market are expected to result in a more stable ringgit, but could add to business costs for exporters as the flexibility to keep export proceeds in foreign currencies has been scrapped.

At noon Monday, the local currency was quoted at 4.4495 against the US dollar from 4.4480 on Friday, but it was slightly improved against the Singapore dollar at 3.1216 from 3.1234.

RHB Investment Bank said the measures would support and stabilise the ringgit in the immediate term, but added it was more important over the medium-term "to enhance confidence on the fundamentals of the Malaysian economy".

Analysts said Bank Negara's (BNM) new measures were pre-emptive amid changing and volatile FX market conditions and the rising strength of the greenback which has hit the ringgit particularly hard. But UOB Global Economics and Market Research believes US yields in 2017 will be key to the ringgit's performance; it sees the ringgit trading at 4.35 to the US dollar by the middle of next year.

More immediately, exporters - particularly small to medium-sized enterprises - expect to be affected by the requirement that they convert three-fourths of export proceeds into ringgit upon the repatriation of proceeds back to Malaysia within six months of completing a transaction.

They are only allowed to retain 25 per cent of proceeds in foreign currencies where previously they could decide how much to keep for future imports. Under the latter arrangement, business costs were reduced as they did not have to convert the proceeds into ringgit and back again into foreign currencies.

SME Association of Malaysia president Michael Kang believes the 25 per cent cap would affect SMEs badly. He said association members are already hoping to meet with the central bank to negotiate to retain more than 25 per cent of proceeds in foreign currencies for raw material purchases.

"A lot of SMEs can't control raw material costs and if the ringgit continues to fall, our margins will be further hit."

Also, most do not have access to hedging facilities as they are unable to obtain bank support, and rely on spot rates instead.

While most SMEs do not have overseas accounts, Mr Kang said multinational companies can likely exploit loopholes - for instance asking export proceeds to be paid into their overseas accounts in Hong Kong or Singapore.

Still, it may be a necessary move to deepen the onshore FX market given that only 1 per cent of export proceeds were converted into ringgit between 2011 and 2015, compared to 28 per cent over 2006 to 2010, according to BNM data.

Estimates of the amount currently held by exporters in foreign currencies range from 90 billion ringgit (S$29 billion) to 114 billion ringgit. In the nine months to September, export proceeds averaged 53-59 billion ringgit.

With the new measures in place, analysts expect the repatriation and conversion of export proceeds into ringgit to lift Malaysia's international reserves, which as at Nov 15 amounted to US$98.3 billion.

However, the new ruling applies only to export proceeds from the sale of merchandised goods and not services, and on proceeds received on and after Dec 5 and not before.

As an incentive, banks will give exporters 3.25 per cent per annum on ringgit proceeds placed in a special deposit facility. As the rate is applicable until Dec 31, 2017, the initiatives could be dialled back should the FX market normalise.

Other initiatives announced last week include allowing fund managers to actively manage their FX exposure up to 25 per cent of invested assets.