Capital controls pressure only if reserves fall to US$80b level: AmBank Research

PETALING JAYA: Currency peg pressure will only kick in if and when the reserves level approaches US$80 billion (RM332.1 billion) or six months of retained imports, AmBank Research opined.

“Our estimation suggests the threshold is around five months retained imports or about US$70 billion (RM290.6 billion) in reserves for the currency to be pegged,” the research house said in a note yesterday, in response to Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus’ remarks that capital controls should be an option for Asian markets to pre-empt financial crises.

As at Sept 28, BNM’s international reserves amounted to US$103 billion (RM427.5 billion), which is sufficient to finance 7.4 months of retained imports and is 0.9 times the short-term external debt.

Some RM17.7 billion was used for liquidity management via short position for forward and futures as at end-August.

While the option to use capital controls at the moment could be fairly premature, AmBank Research said the market should be mindful of it, especially if global volatility remains strong or becomes stronger, resulting in a huge capital outflow.

“Added pressure on Malaysia will be the risk of rising fiscal deficit/GDP and the challenge to lower the public debt/GDP. Should the depreciation of the currencies turn out to be drastic, it will exert a strong pressure on countries exposed to high USD-denominated debt, including Malaysia. Such pressure may potentially provide justification for capital controls.”

AmBank Research said the reserves level plays a crucial role in determining the need to peg a currency, which will reduce uncertainties regarding the value of the currency and improve competitiveness, thus benefiting the export-oriented sectors more.

However, it noted that the potential setback is that an undervalued ringgit makes imports of capital and intermediate goods more expensive and this has deleterious effects for the country’s medium- and long-term capacity expansion and growth.

“Besides, it will not augur well for short-term foreign players in the local bourse and global pension funds with restrictions to invest in markets with capital controls.”

Malaysia introduced capital controls on Sept 1, 1998, during the height of the 1997/98 Asian financial crisis, with the ringgit being pegged at 3.80 against the US dollar.

The move was widely criticised by the International Monetary Fund (IMF) which advised countries to liberalise their capital accounts and avoid imposing capital controls.

The currency peg was only removed on July 21, 2005 after China ended the yuan peg to the greenback.

In 2012, the IMF adopted a more flexible approach by accepting temporary controls on capital flows if these are used to stem a crisis and in conjunction with sound fiscal and monetary policies.

Still, the IMF is cautious on capital controls and believes that controlling capital outflows in “non-crisis situations” can fuel capital flight while tarnishing a country’s credibility.

In 2016, Malaysia introduced some capital flow management measures in a move to clamp down on ringgit trading in the offshore non-deliverable forwards market. It was aimed at containing the currency’s fall amid an emerging market sell-off following the election of Donald Trump as US president.

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