Time to internationalise the ringgit?

JUST over a week ago, Bank Negara governor Tan Sri Muhammad Ibrahim gave, even for someone known for his candour, an unusually frank speech on the ringgit and how perception and sentiment impacts the currency at the annual dinner of the Financial Markets Association.

Particularly interesting was his call to domestic currency traders, whom he considered to be playing second fiddle in their own market, to play their rightful role and price the ringgit accordingly. Whether or not these traders have taken up his clarion call to play a more active role in the local financial market, the ringgit has certainly rallied.

Part of that strength could be in anticipation of a rate hike that may come as early as January, when the central bank’s monetary policy committee (MPC) next meets. Driving that expectation of higher interest rates was the more hawkish stance that Bank Negara adopted in the November MPC statement. Optimism certainly played a role too with the better-than-expected growth of the Malaysian economy in the third quarter.

However, Muhammad certainly did not mince his words when noting that most of the movements in the ringgit exchange rate were not driven by facts but misperceptions. He listed the five misperceptions as the ringgit being driven by oil prices, the offshore or non-deliverable forwards market knowing best to price the ringgit, the onshore market lacking liquidity, the ringgit being propped up by significant foreign holdings of local bonds, and the continued perception that international reserves below US$100bil were inadequate.

“A little bit of work and use of data often point to these perceptions as misleading, with little reflection of reality. What is worrying is that such perceptions and sentiments, if left unaddressed, would end up shaping reality,” he noted.

Government officials, including those from Bank Negara, have often said that the ringgit is undervalued based on fundamentals. They have also rebutted one or more of the misperceptions on the ringgit. What then is there to stop the ringgit being liberalised further, that is, opening it to offshore trading like how it was prior to the Asian financial crisis of 1997/1998?

After all, Malaysia has fulfilled much of the criteria for liberalising the ringgit further, such as restructuring the economy, as well as reforming the financial system. The matter of opening the currency to offshore trading has been under study since the peg to the US dollar was taken off in 2005. It seems to be taking forever. Perhaps, market conditions are not right, but when are they ever right?