Malaysia may lift offshore ringgit trading ban


Bloomberg

KUALA LUMPUR — Malaysia central bank Governor Zeti Akhtar Aziz said the country may scrap its remaining capital controls and allow offshore trading of the ringgit, making the economy more attractive to investors.

Malaysia banned offshore trading of the ringgit in 1998 and pegged the currency to the dollar as regional currencies collapsed during the Asian financial crisis. The offshore trading ban is the last remnant of those controls.

“Malaysia will consider removing this non-internationalization of its currency when we have a very developed and vibrant foreign-exchange market,” Zeti said in an interview in Washington on Oct. 21. She declined to give a date for when offshore trading of the ringgit would be allowed.

Removing the last capital controls would be the latest measure to attract investment that includes tax breaks and easing of race-based rules for foreign companies in some parts of the country. Foreign direct investment jumped 72 percent to 25.9 billion ringgit (US$7.7 billion) in 2006, according to the government.

“Malaysia has lagged behind some Southeast Asian nations in attracting investment and removing the non- internationalization policy will encourage more flows into the country,” said Chua Hak Bin, an economist at Citigroup Inc. in Singapore. “That can only benefit the economy.”

The ringgit weakened as much as 0.3 percent to 3.385 against the U.S. currency before trading at 3.377 per dollar as of 1:21 p.m. in Kuala Lumpur. Easing the restrictions on offshore ringgit trading will help Malaysia develop its domestic foreign-currency market by increasing the volume of transactions, Zeti said.

“It will take some time,” Zeti said. “Many of these require not only putting in place the financial infrastructure, but the players, the financial institutions, also have to do their part. We have started the process and it remains to be seen” how long it will take.

The amount of spot and swap transactions traded on the Kuala Lumpur foreign-exchange market rose 42 percent last year to 926 billion ringgit, Bank Negara said in its annual report in March. That equates to an average 2.54 billion ringgit a day for 2006, compared with 5.4 billion ringgit a day in 1997, the year before Malaysia imposed capital controls.

The ban on overseas trading of the ringgit remained even though the central bank scrapped the currency’s peg to the U.S. dollar in July 2005 in favor of a managed float system against a basket of undisclosed currencies.

The nation has “extensively” eased foreign-exchange administration rules, making them less restrictive than before the Asian crisis, and “will continue to do so,” Zeti said. The central bank in April made it easier for overseas investors to buy local-currency bonds and properties.

This month, it removed five registration requirements on ringgit transactions for residents, abolished limits on foreign investments by Islamic funds and eliminated deadlines for non- residents on forward foreign exchange contracts.