Malaysia limits swap transactions to $2m
Malaysia limits swap transactions to $2m
KUALA LUMPUR (Agencies)): The Malaysian central bank announced
yesterday a powerful restriction aimed at curbing swap
transactions to beat currency speculators with effect from today.
Malaysian banks are required to limit non-commercial
transactions to US$2 million on outstanding non-commercial
related ringgit offer side swap transactions with each foreign
customer on a group basis, the central bank said.
A swap enables a company to exchange the currency they hold
for the currency they need.
In June 1992, the central bank had used a similar weapon to
discourage inflows of speculative funds.
"Banks which have exceeded the limit will not be allowed to
transact in any further non-commercial related ringgit offer side
swaps with such foreign customers until the outstanding amount
has been reduced below the limit," the central bank said in a
one-page statement here.
"Hedging requirements of foreigners for trade related and
genuine portfolio and direct investments in Malaysia are not
affected by this measure, " it added.
The "guardian" of the Malaysian monetary policies said this
measure would allow domestic interest rates to be more reflective
of domestic conditions.
"The introduction of this measure is in line with the policy
objective of promoting an environment that is stable and more
predictable for genuine investments," the central bank said.
In recent weeks the local ringgit has come under extensive
speculation.
The Malaysian ringgit closed last Friday at 2.6285 to the U.S.
dollar, down four percent from its level before July 2.
An analyst said the central bank's measure was a direct hit at
currency speculators.
"It is a right step in the right direction to ward off rogue
speculators," she said, adding that the new measure could
influence interest rates to slide.
Analysts had expected such a measure despite the recent
strengthening of the currency, especially after Prime Minister
Mahathir Mohamad had earlier in the week hinted of possible
punitive action against currency speculators.
Analysts said on Friday it would be foolish to rule out the
possibility of anti-speculation measures being introduced.
"The fact that this (warning) was coming from the prime
minister, you have to take it seriously. There's a strong
possibility of new measures being introduced," said Derrick Lee,
senior analyst at market analysis firm Technical Data.
Speculation had been rife that Malaysia might soon impose a
restriction similar to the one imposed in Singapore on foreign-
exchange swaps, which are forward agreements on exchanging one
currency to another.
An onshore bank in Singapore is only allowed to quote to
offshore parties the sale side of the swap deal for a maximum $5
million per day, thus preventing internationalization of the
local currency and dampening speculative moves.
"A swap restriction would be an appropriate solution to that,"
said Sani Hamid, an analyst at research house MMS International.
Southeast Asian currencies came under speculative attack early
this summer, resulting in de facto devaluations of the Thai baht
and the Philippine peso.
Bank Negara Malaysia, the central bank, has spent $2-3 billion
defending the ringgit in the past few weeks.
In February 1989, Bank Negara imposed a daily limit on non-
trade-related swaps -- on the sale side -- that commercial banks
could undertake with offshore banks of up to $2 million per
offshore customer.
The limits were extended to cover the bid side in June 1992.
And faced with a strong flow of short-term money into the
country in 1994, Bank Negara imposed negative interest rates on
foreign deposits, banned swaps trading and stopped foreigners
from buying Malaysian government paper.
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