Malaysia's Central Bank is liberalising foreign exchange rules to enhance competitiveness

Malaysia's Central Bank ("Bank Negara") is liberalising the foreign exchange administration rules to enhance the economy's competitiveness and further develop the domestic financial market.

BNM governor Tan Sri Dr Zeti Akhtar Aziz said the economy, which grew by 5.6 per cent in 2012, remains on a steady growth trajectory and domestic demand will continue to become the main driver of growth.

Consumption demand will return to its steady and sustainable growth path of six to seven per cent, she said, despite exceptional growth in 2012.
On the supply side, all economic sectors are expected to expand this year, with the services and manufacturing sectors seen as the key drivers, growing by 5.5 per cent and 4.9 per cent, respectively.

The liberalising measures will only come into effect around mid-2013 when the Financial Services Act (FSA) and Islamic Financial System Act (IFSA) come into force.
The measures include allowing residents to freely invest in onshore foreign currency-denominated assets to spur the domestic foreign exchange market through greater demand for foreign currency products and services.

Another measure allows resident takaful operators to undertake investments abroad of any amount on behalf of their resident client. This measure would further promote the development of the Islamic financial markets through greater flow of cross-border Islamic financial activities, and greater use of Islamic financial intermediaries.

This measure would also enhance regulatory efficiency, as resident takaful operators and resident insurers would only be subject to their risk-based capital framework when undertaking investment abroad for their own accounts.

Residents would be permitted to issue any securities, provided the issuance of debt securities to non-residents was subject to the prevailing rules on borrowing from non-residents, and non-residents were permitted to issue foreign-currency securities in Malaysia to enhance the depth and breadth of the domestic capital market by facilitating fund-raising activities and promoting Malaysia as a centre of origination.

To further promote a risk-management culture and support the development of the foreign exchange market, residents and non-residents would now be permitted to undertake anticipatory hedging involving the ringgit for financial account transactions with onshore banks. Furthermore, non-residents would be permitted to hedge ringgit exposure arising from the ringgit investments acquired prior to April 1, 2005 with onshore banks, in addition to the current flexibility to hedge the ringgit investments acquired from April 1, 2005 onwards.

Entities registered with the Labuan Financial Services Authority would now automatically be designated as non-resident, as part of the move to enhance regulatory efficiency and reduce the cost of doing business.

Governor Tan Sri Dr Zeti Akhtar Aziz said in a media briefing after presenting details of the central bank's 2012 annual as well as the financial stability and payment systems reports that the measures were in line with the Financial Sector Blueprint's agenda to achieve a more developed foreign exchange market.

"Malaysia is an open economy, therefore, we should have a well-developed foreign exchange market to support it," she said, adding that the central bank had no plans to internationalise the ringgit at the moment.

Zeti said the movement of the ringgit remained "orderly" and driven by two-way flows of funds, with the currency recording a mixed performance against major and regional currencies last year.

The annual report revealed that Malaysia continued to experience two-way capital flows last year, with foreign fund inflows registering RM59.2bil, mainly attracted to the country's resilient growth.

Foreign direct investment registered net inflow of RM29.1bil or 3.1% of gross domestic product. The direct investment outflows abroad amounted to RM51bil in 2012.

Zeti said despite the much larger fund flows compared with the Asian financial crisis period, the country's financial system had reached a level of maturity which enabled it to intermediate the flows.

Zeti also noted that Malaysian businesses had become savvier in managing their foreign exchange exposure.

"We have two-way inflows because the corporate sector has taken advantage to buy the ringgit when the ringgit depreciated, and when the ringgit appreciates, they will take the opportunity to buy foreign currency," she said.

Zeti also said measures that had been taken to develop the foreign exchange market included the ringgit-yuan settlement, which allowed the direct use of both countries' currencies for trading purposes.

Malaysia's central bank expects growth at five to six per cent this year

At the same time, BANK Negara Malaysia (BNM) yesterday projected a rosier picture for the Malaysian economy this year and revised upwards its growth outlook to between five and six per cent.

It came in above the 4.5-5.5 per cent projection by the Ministry of Finance at the release of the fiscal budget in September last year.

"At six to seven per cent, it is sustainable. We don't want consumption to be spurred by excessive borrowings beyond the growth of disposable income," she said at the release of the central bank's 2012 annual report here yesterday.

The external demand will offset the moderation in consumption projected in 2013 as trade is expected to improve on the back of better intra-regional trade, which will also show an improvement in net exports this year.

Source: The Star and New Straits Times