Monday, June 02, 2008

Local Bourse Kicks Up Despite Vietnami



TheEdgeDaily: Companies would become more savvy in their risk management policies with Bank Negara Malaysia’s (BNM) ruling to lift restrictions on borrowing and lending in ringgit and foreign currencies. Bankers said that the move, which was announced by BNM on Wednesday, would boost the corporate sector and pave the way for them to diversify sources of funds.

Standard Chartered Bank Malaysia Bhd managing director and global markets head, Sandeep Bahl, said removing the limits on the amount of foreign currency borrowings by local companies and individuals would boost the corporate sector, given that these companies and individuals would now have a broader choice of financing. “Corporations will also understand better the risks pertaining to foreign currency borrowings and learn to apply hedging policies to mitigate these risks, which would result in a more mature market going forward,” Sandeep told The Edge Financial Daily yesterday. He added that the central bank’s decision to relax the foreign currency rules was the right signal to increase the credibility of the country’s capital market.

On Wednesday, BNM announced several measures to further liberalise the foreign exchange rules on borrowing in foreign currency by residents as well as borrowing and lending in ringgit between residents and non-residents. Among them are:

• Allowing a resident company to borrow any amount of foreign currency from its non-resident non-bank parent company.

• Allowing a resident company to to obtain any amount of supplier’s credit in foreign currency to purchase capital goods from overseas companies and a resident company or an individual is free to refinance outstanding approved foreign currency borrowing, including principal and interest. Previously there was a ceiling of RM100 million for companies and RM10 million for individuals;

• allowing a resident company to borrow any amount in ringgit from its non-resident non-bank parent company to finance activities in the real sector in Malaysia and a resident individual is allowed to borrow in ringgit up to RM1 million in aggregate from non-resident non-bank companies and individuals for use in Malaysia. Previously, any borrowing in ringgit from non-residents required the permission of the Controller of Foreign Exchange.

• allowing a resident company or individual to lend any amount of ringgit to non-resident non-bank companies and individuals to finance activities in the real sector in Malaysia (previously only allowed up to RM10,000). A licensed onshore bank is free to lend any amount of ringgit to non-resident non-bank companies and individuals to finance activities in the real sector in Malaysia (previously only allowed up to RM10 million).

An analyst from Affin Research said the relaxation of foreign currency rules would put local banks and foreign banks operating here on the same platform, encouraging healthier competition in the banking industry. “It is a move that has been long-waited by many,” the analyst said, adding that the move would particularly attract companies with exposure overseas. The analyst said economists were upbeat that the central bank would still maintain its overnight policy rate of 3.5% for now , given the bullishness of the local currency.

However, an industry observer said companies might face risks of uncontrolled foreign currency lending. “There is always the possibility of companies facing such risks, as removing the ceiling on the lending amount is similar to going back to pre-capital control days,” he said. During the 1997 Asian financial crisis, Thailand’s currency collapse had been accelerated by its corporate foreign debts which ballooned following the depreciation of the baht against the US dollar.

However, he said companies had not been taking up a large amount of foreign currency borrowings, as the amount was dependent on the cost of borrowings and their ability to repay in foreign currency. “Most local companies are comfortable in borrowing below the RM100 million threshold and still prefer to borrow in ringgit,” the industry observer said. He added that the central bank’s decision to relax foreign currency rules was part of its preparation for internationalisation of the country’s capital market. Additionally, he said it was not likely that foreign banks would rush into setting up operations, as they had been known to prefer accessing the local market through the Labuan offshore market.

Comments: The moves by Bank Negara are a big step towards full transactability of the ringgit. That alone will kick up the local bourse to at least try for the 1,300 level. The above article by The Edge shows some of the "slacking and lacking though-process" of some so called experts. Look at this statement: "an industry observer said companies might face risks of uncontrolled foreign currency lending" - if you have nothing worthwhile to say, say nothing. Now by opening your mouth, it shows your shallowness. Why bring up 1997 financial crisis, the entire landscape is so different now. Does it mean that we should delay liberalising ringgit landing and borrowing? How about Bank Negara postponed doing that till 2050 ... the trouble is the same bugger would come up with the same statement "we might face uncontrollable risks in foreign currency lending, remember 1997" CBMF....

Why would such moves be good for KLCI? Freer flow of ringgit and other currency into the system is a show of transparency. It shows Bank Negara, which has managed the books very well for the past 5 years, is now more confident in opening this area as the fundamentals are now a lot stronger. In the eyes of international investors this is a big "pre-condition" being OK'ed. The moves in itself may not be highly impactful, but it is highly symbolic and relevant.

p/s photos: Nikki Gil & Lea Salonga

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