BNM to spend billions in ringgit intervention

Malaysia’s central bank may spend billions to continue defending the ringgit in coming weeks from external factors and local concerns weighing down the embattled currency, which slumped 8% this year against the dollar.

If Bank Negara intends to continue or step up intervention activities, it will do so at the expense of its foreign reserves, resulting on a negative by-effect on the ringgit, said Rosli Yaakop, a former deputy Bank Negara governor.

“The authority needs to seriously consider imposing capital controls or pegging the ringgit to the dollar,” said the former top government official, who worked abroad in finance and now runs a foreign exchange business in Kuala Lumpur.

The ringgit slid over the last two days to as low as 3.8092 versus the U.S. dollar at one point, erasing gains made on an earlier rally in China’s stock market.

Maintaining the value of the ringgit at 3.8 against the dollar will cost Bank Negara’s reserves to deplete quite size-ably over a prolonged period, warned Rosli.

“Efforts to intervene have so far had little effect,” he said.

Trying to push the ringgit to 3.6 or lower could cost the bank “many more billions”, he said.

Rosli told TMR last week that he estimated roughly RM20 billion could have been used to support the ringgit this year.

Malaysia’s gross domestic product grew 5.6% in the first quarter of 2015 due to a pickup in private investment, but Rosli said this has not been reflected in the country’s foreign exchange reserves.

“The move to cap Malaysia’s ringgit was meant to counter weakness motivated by excessive volatility,” said Sim Moh Siong, currency strategist at the Bank of Singapore.

“We see the central bank’s action as more of a smoothening operation than an aggressive intervention,” said Sim.

The ringgit is expected to see pressure today and tomorrow, when the U.S. Federal Reserve chairman Janet Yellen presents the mid-year monetary policy testimony before the House Financial Services Committee and Senate Banking Committee, said Christopher Wong, a Singapore-based foreign exchange analyst at Maybank.

“With the risk of a Greek exit from the euro reduced, we see a refocus on the U.S. economy.

“The Federal Reserve is likely to stay on track with a rate hike this year,” said Wong.

Local fundraising exercises will be affected if the ringgit continues to slide, said Rosli.

“To avoid financial difficulties, Malaysian companies that lend money in external currencies must try to invest these funds on projects that generate foreign currency inflows,” said the former banker.

Rosli said firms with high levels of foreign borrowings such as AirAsia will face challenges when lenders increase premiums on borrowing costs.

After a devaluation of the Thai baht in July 1997 resulted in a slump in Southeast Asian currencies, speculators drove the ringgit to a record low of 4.885 per dollar on January 7, 1998.

Then -prime minister Tun Dr Mahatir Mohamad responded by pegging the ringgit at 3.8 to the dollar on September 2 that year.

The peg was only removed in 2005 after concerns surfaced that the ringgit was devalued.