Malaysia: Offshore market trading for USD/MYR no longer an issue: BNM – 26 Jul 2017

  • The measures taken to clamp down on non-deliverable forwards (NDFs) or offshore market trading for USD/MYR in Nov 16 were right, according to Bank Negara governor Datuk Seri Muhammad Ibrahim.
  • He said the central bank, while aware of the NDF market, had tolerated the offshore trading of the ringgit up until Nov 16. When markets turned wobbly following the election of Donald Trump as US president, the central bank had to act, as the ringgit weakened well below the fundamentals of the economy due to funds flowing out largely on speculative bets fueled by Trump’s campaign promises.
  • Muhammad explained that the measures to restrict the activities in the NDF market were implemented to stabilise the spot or onshore market. No offshore trading of the ringgit has been allowed since 1998 when the government imposed capital controls in the aftermath of the Asian financial crisis.
  • Muhammad noted that NDF trading for the whole of 2016 was three times Malaysia’s gross domestic product of MYR1.26tr. He added that 80% of the volume in 2017 in the offshore USD/MYR trading was speculative transactions and not reflective of the real economy.
  • The spread between the onshore and offshore rates widened even more after the US presidential election, with the offshore rates showing a weaker ringgit. He also said that the ringgit has become less volatile since Mar 17 after exporters were told to convert three-quarters of their earnings back into ringgit.
  • Meanwhile, Muhammad said Malaysia would need to have strong international reserves to intermediate the potential outflows that could come from investors rebalancing their portfolios.
  • Muhammad said the rule of thumb for a more stable bond market was for foreigners to hold between 15% and 20% of bonds. Foreigners now hold 26% of Malaysia’s bonds, compared to 35% previously.

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