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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