The non-deliverable forward contracts for the ringgit (NDFs) are unregulated and vulnerable to not only speculation, but also manipulation and collusion by market players. What this means is that a country’s exchange rate is governed by manipulated prices in offshore markets. File pic

Walk into a shopping mall and you will find long queues snaking to the moneychanger outlets. And as they wait, you will find people peering at the currency-conversion board, fixing their attention on the United States dollar-ringgit (US$-RM) exchange rate.

And if we can read their minds, we can pretty well be sure that what goes on in them is whether the exchange rate will stay, strengthen or weaken further, as the naysayers predict it would.

Either way, we shall not be far from wrong. Recent precipitous falls in the US$-RM exchange rate has got not only the banking industry and hedge funds all miffed, but it has also caused the man in the street to rethink some of his household finances.

The depreciation of the US$-RM exchange rate has been due to real and speculative reasons. The rate has been eroding for some time now since the halving of petroleum prices from the halcyon days of US$100 a barrel.

As we are an oil exporter, lower US-dollar receipts, therefore, have certainly dampened the demand for the ringgit. Similarly, the slowdown in the global economy has dented our exports and hammered down the exchange rate.

Such is the peril of an open economy such as ours, where trade constitutes roughly 1.5 times the gross domestic output.

Throw in speculation into this cauldron and you have a brew of a fast-depreciating ringgit against the US dollar.

Trump, the US president-elect, true to his “America First” slogan, has promised Keynesian pump-priming measures of fiscal spending, especially in infrastructure, coupled with a roll-back of taxes.

The consequent impact of these measures on inflation has convinced the market that the Federal Reserve’s benchmark interest rate will correspondingly rise. Hence, foreign funds that had previously flown into emerging markets such as Malaysia are being pulled out to a more lucrative haven in the US.

Compounding this situation is the non-deliverable forward contracts for the ringgit (NDFs).

This market serves as an offshore mechanism to hedge currency exposures of banks, hedge funds, exporters and local companies that invested abroad.

NDFs are profitable as the spreads between forward and spot rates are large, given that the market is thin. Indeed, at one time, the ringgit was the second-most active currency traded in the NDFs in Asia.

However, unlike onshore or in-country hedging platforms that are well-regulated by Bank Negara, the NDF is totally unregulated. It is vulnerable to not only speculation, but also manipulation and collusion by market players.

Indeed, some three years ago, Singapore banks unearthed evidence that traders colluded to manipulate rates in the offshore foreign exchange market.

Although the trades are eventually settled in US dollars, the rates set in the NDFs matter. They have the heft to determine spot rates for the underlying emerging-market currencies. What this in effect means is that a country’s exchange rate is governed by manipulated prices in offshore markets!

In the process, NDFs have created a lot of currency instability.

Such volatility is clearly evident in the case of the US$-RM rate. The NDF exchange rate depreciated heavily of late. Our spot exchange rate followed suit.

Now, who would want his country’s currency to be determined in this fashion?

One would agree to legitimate market forces of supply and demand determining the price of a currency. But surely no one would not want greedy forces out to make money in an unregulated, and worse, illegal environment to determine rates that are often quite out-of-kilter with a currency’s true value.

It is this NDF rate that has sunk the ringgit to lows that have not been seen since the days of the Asian financial crisis of 1997-98. And the rate has further compounded the unidirectional outflows of portfolio funds. Together, they have created an unstable market for the ringgit and exaggerated fears of the ringgit collapsing further.

Not only that, these factors have caused untold misery to businesses and the man in the street, who value ringgit stability above all else.

Overseeing the nation’s currency is one of the most bounden duties of any government. Lenin, a Russian communist revolutionary, politician and political theorist, was certainly right when he remarked: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

And so, our custodian of monetary policy and guardian of our currency has not been sitting idle and watching the ringgit dance in a frenzy to the machinations of unscrupulous offshore speculators and manipulators. Bank Negara last week sprang into action.

In a clever move, Bank Negara has sought to stabilise the ringgit by creating a demand for it.

Exporters have to immediately convert 75 per cent of their export proceeds into ringgit. Bank Negara has sought to clamp down NDF-related transactions by instructing financial institutions not to facilitate such transactions.

Most financial institutions understand the rationale and have been supportive of the central bank’s venture. They have begun to unwind their or their client positions in the NDFs.

To many, especially exporters, this new administrative measure may seem harsh and micro-managing.

This is because these exporters have to meet their trade-financing and import purchases in dollars.

It is akin to a mythical dragon breathing out fire and fury on them. But there is a benign face to Bank Negara. The flexibility to meet financing and import requirements in dollars has always been there. It supersedes the current administrative requirement.

In lieu of NDFs, Bank Negara offers financial institutions greater flexibility in hedging transactions overseas by extending onshore facilities abroad. These institutions can use overseas organisations in their banking group or appoint overseas agents to undertake such hedging overseas.

Bank Negara is not alone in ensuring ringgit stability. Other central banks across the developing world have tweaked their foreign exchange market operations to suppress currency volatility following the anticipated US interest rate rise and commodity price plunge.

Over the past two years, ringgit depreciation has done good for the export competitiveness of our businesses. It is perhaps now a payback time for them. The current measure at conversion of export proceeds is a small price to pay for the long-term stability of the ringgit.

Tough times demand tough action. As Theodore Roosevelt, a former US president, once said: “In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing.”

Datuk Dr. John Antony Xavier is the head of the Strategic Centre for Public Policy at the Graduate School of Business, Universiti Kebangsaan Malaysia

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