Malaysia: Opening doors

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The Bank Negara Malaysia (BNM), the country’s central bank, has put in place a series of new measures aimed at boosting the competitiveness of the national economy and in particular its financial sector. It is hoped this set of reforms will help ease the impact of the European debt crisis and the threat of a further bout of uncertainty in global markets.

On January 30, BNM announced new plans as part of its continued efforts to enhance competitiveness in the economy and develop domestic financial markets. Under the new measures – which came into effect the day after their release – licenced onshore banks and their customers are now permitted to trade foreign currency against another foreign currency, a move BNM says will further spur the domestic foreign exchange market through greater product innovation.

Additionally, licenced onshore banks will be able to offer ringgit-denominated interest rate derivatives to non-residents, which is expected to expand the domestic derivatives market. The bank will also strengthen residents’ asset liability management capacity by allowing them to convert their existing ringgit or foreign currency debt obligation into a debt obligation of another foreign currency.

These measures, BNM said, are in line with policies to boost the Malaysian financial sector and will contribute towards increasing the liquidity, depth and participation of a wider range of players in the domestic financial markets.

However, the new regulations only cover transactions involving foreign currency against another foreign currency and do not include the trading of foreign currency against the ringgit, though it is possible this will change in the future, as the bank further opens up currency trading.

Just days before the new measures were announced, the governor of BNM, Zeti Akhtar Aziz, flagged these reforms and others, telling a conference in Kuala Lumpur attended by Indian financiers that there would be a progressive liberalisation of Malaysia’s foreign exchange administration rules to broaden the participation of regional players in the domestic market.

“Progressive efforts have been made to transform Malaysia’s financial sector, with a major dimension of the transformation moving towards achieving regional integration,” Aziz said late last month.

This process of transformation is expected to gain momentum as BNM and the government enact further measures, unveiled in late December, to boost the financial sector. This blueprint, set to run until 2020, lays out a number of methods to boost the sector’s contribution to the economy from the present 8.6% of GDP to between 10% and 12%. These steps include encouraging the development of a risk-capital ecosystem to support innovation-driven economic activities and start-up ventures, deepening and broadening the financial markets and strengthening regional and international financial integration.

The first step of this process was taken by BNM when it liberalised its foreign currency conversion regulations, which the bank said would help develop vibrant domestic foreign exchange and money markets, while also ensuring sound risk management and corporate governance practices.

The plan also calls for the reinforcing of the regulatory and supervisory regime in order to safeguard the stability of the financial system, which will serve to balance the risks inherent in a risk-capital ecosystem.

BNM’s reforms garnered support from many in the financial community, with the consensus being that they would bring more liquidity into the economy and promote flexibility. According to Nor Zahidi Alias, the chief economist at the Malaysian Rating Corporation, the new regulations would improve the option for corporate foreign exchange hedging to control risks of foreign exchange exposure, particularly in view of increasing volatility in the foreign exchange market.

“It would also enhance Malaysia as a portfolio investment destination for foreign investors who are consistently looking for innovative products and liberalisation measures in the financial market,” Nor Zahidi told the state news agency, Bernama, on January 31. “It can potentially improve options for domestic wealth management and increase domestic banking-fee income through innovative products, as well as strengthen the position of domestic banks in regional markets.”

It is too early to say how effective BNM’s liberalisation of the foreign currency trade segment will be, or when the next raft of reforms will be enacted. In the short term, both that trade and the pace of reform may be slightly muted by current jitters in global markets, with the forecasted downturn expected to slow the growth of the Malaysian economy, but not reverse it. It is likely that BNM will follow a slow but steady approach to further reforms, timing their implementation to best suit the prevailing economic climate.

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