Moody’s sees stability, profitability under new forex measures

KUALA LUMPUR: Malaysia’s recent foreign exchange (forex) measures will support currency stability and bank profitability, and are credit positive, said Moody’s Investors Service.

The credit rating agency said the measures will allow greater flexibility in managing export proceeds and hedging foreign currency obligations.

“The measures should help to limit currency and broader financial market volatility by making it easier for companies to retain earnings within the country, and contain the sovereign’s vulnerability to external risks,” it said in a statement recently.

Moody’s said the new rules should increase the flow of hedging transactions, and this was positive for bank profitability.

On August 18, Bank Negara Malaysia announced changes to forex administration policies aimed at facilitating operational efficiencies and risk management by businesses and financial institutions.

Moody’s said the measures would also allow for greater flexibility in hedging foreign currency obligations and aim to deepen the onshore market for interest rate derivatives.

“While they do not reverse those measures, they could foster greater currency stability in the near term by reducing the steps involved in retaining earnings within the country.

“The measures differ from those implemented by (other) governments to foster currency stability that often resort to restrictions to curb capital outflows,” it said.

Over the longer term, Moody’s said these measures would facilitate the deepening of onshore markets and introduce greater sophistication around the availability of risk management tools to limit currency volatility.

“The new rules will have implications for financial institutions and companies.

“By allowing greater flexibility in the use of export proceeds to meet outstanding foreign currency obligations, exporters can reduce the overall cost of hedging.

“Lower hedging costs will support businesses’ profitability and their ability to manage foreign exchange risks and service bank debt.”

Moody’s said the move to allow banks to offer ringgit-denominated interest rate derivatives to non-resident companies would broaden access to interest rate derivatives to a larger group of businesses.