- Published on Sunday, 20 November 2016 20:28
In July 1997, East Asian economies including Thailand, Indonesia, South Korea and Malaysia went into a tail-spin when their currencies and stocks took a severe beating due to excessive speculative activities which led to a full-blown financial crisis. KUALA LUMPUR:
Unlike some other economies, Malaysia refused aid from the International Monetary Fund and unorthodox measures such as strict capital controls and pegged the Ringgit to the U.S Dollar at RM3.80 after it fell to an historic low of RM5.20 versus the dollar in 1998.
This practically ended trading of the Malaysian ringgit overseas, stopped risky speculation on the local currency and enabled the restructuring of huge corporate debts, bringing about a semblance of financial stability to the region.
Way before the crisis in 1997, the Ringgit was trading at a high of 2.42 to the greenback.
As the economy managed to find its strength again, the peg was lifted in 2005 but the Ringgit remained a non-internationalised currency and was only traded in a managed float, onshore.
In other words, post-2005 the Ringgit could only be traded in Malaysia, with either the buyer or seller being a locally licenced financial institution and the deal must be supported by either actual trade or investment.
However, on Nov 11, 2016, the grim scenario of 1997 reappeared to haunt the Malaysian currency market when the Ringgit, along with a number of emerging markets' currencies were hammered and stock markets fell drastically although the reasons were different from before.
But the common factor that roiled financial markets was again "speculators" - especially those who took high risks in trading and often preyed on the downside and weakness.
This is exactly what took place on the day Donald Trump won the US election,
Asian markets turned topsy turvy over his comments on trade deals which were perceived as being protectionist and fears over the negative impact it would on this side of the world.
This was a perfect situation that offered so-called "party" for speculators.
As Malaysia's foreign exchange market is regulated and provided almost no room for speculation, hedge funds and non-resident investors turned to the non-deliverable forward (NDF) or the unofficial offshore market where the Ringgit fell drastically to as low as RM4.55 per U.S Dollar prompting Bank Negara Malaysia (BNM) to intervene.
Until Nov 11, not many were aware of the existence of NDF which created much confusion. It is believed that even some money changers quoted the unofficial offshore rates for their transactions.
The central bank told the market to ignore the NDF rates and price the ringgit from the currency's last traded rate on Thursday as a move to curtail the offshore rate from dictating the ringgit's onshore movement and in the process, fuel further speculation.
It, however, later explained that it was just a one-off call and not something it would do on a daily basis as Malaysia remained an open economy.
BNM also came down hard on foreign banks by requesting that any non-resident bank which transacted in the foreign exchange market to attest that they were not and will not engage in NDF related transactions.
A week later, on Nov 18, the ringgit remained on the downtrend, albeit slowly, in line with regional currencies as sentiment remained jittery on Trump's possible policies with authorities in emerging markets consistently taking steps to stem volatility.
The Ringgit closed about three per cent lower at 4.4140/4190 from last Friday's closing rate, amid a possible increase in US interest rates which seemed more imminent now than before, which would further intensify the flow of funds out of the rest of the world and into the US.
The ringgit, as with other emerging market currencies, will continue to play "hostage" to the strength of the US Dollar and rising US rates as the market monitors and digests Trump's speeches and actions, Affin Hwang Capital said in a research note recently.
The onus would not turn towards how global central banks respond to the threat posed towards their currencies as the year draws to close and market liquidity worsens, it said.
As for the NDF market, it poses challenges not only for Malaysian authorities but also other emerging economies alike as they are conduit to faciltate funds that is frequently transferred between financial institutions or commonly referred to as "hot money".
And sadly, there is no respite from the battle with the NDF market, which operates outside the country's jurisdiction.
It is not transparent but has destablising effects on the onshore market, a sentiment, BNM shares with its regional peers.
Among the questions that were raised during a recent media briefing with BNM is whether the situation warrants the central bank to re-peg the ringgit against the US Dollar as a buffer or even internationalise it.
Bank Negara Assistant Governor Adnan Zaylani Mohamad Zahid said although the Central Bank has bigger reserves and greater regulatory powers as compared with 1997/98, to defend against any speculation, the current arrangement of a managed float served the purpose and was supportive of the country's economy.
He stressed that although the NDF or offshore market cannot be controlled, BNM has all the muscle it needs to contain any spillover effect on the onshore market.
"We can deal with it, such pressure comes and goes," he said pointing out that the banks do "listen" to the central bank when it tells them, which in this situation means ignore the offshore rates.