KUALA LUMPUR • Malaysia's attempt to cajole currency traders to stop selling down its plunging ringgit is evoking memories of 1998 capital controls among global banks - a comparison policymakers were quick to discourage.
RBC Capital Markets and Brown Brothers Harriman said investors were reminded of the Asian financial crisis 18 years ago, after the Malaysian central bank warned foreign banks this month against using offshore forwards to bet against the currency and vowed to limit speculation.
While Bank Negara said last Friday that it was stepping in to "maintain orderliness" following a 5 per cent tumble over the past month, its assistant governor Adnan Zaylani said it was not considering tightening controls on the flow of funds across its borders.
"The motivation to try and reduce speculation is a reasonable one from a central bank perspective," said Ms Sue Trinh, head of Asia foreign exchange strategy at RBC Capital Markets in Hong Kong. "But there are always unintended consequences. Moving the goal posts suddenly and on a whim has destroyed liquidity and foreign investor confidence."
The ringgit tumbled for nine straight days through yesterday, sinking to 4.4277 per US dollar, its weakest since Jan 7. It was trading at 3.10 against the Singdollar.
One-month non-deliverable forwards, which fix a rate for exchanging the ringgit in the future but are settled in dollars, plunged 6.3 per cent in the period and touched an unprecedented 4.5848 on Nov 11, the widest discount to the spot rate on record.
The latest slump seems more urgent than the currency's slide through to the middle of 2015. While that move helped slow economic growth and made consumers less likely to spend, only the past month's decline spurred the central bank to expressly say it was intervening. The central bank has rarely disclosed any episodes of intervention.
Malaysia's track record means some investors are nervous about the possible introduction of capital controls, though the economy is less vulnerable now than it was in 1997, Brown Brothers Harriman wrote in a Nov 16 report. It said any limits on hedging would risk "scaring away" global bond investors.
Mr Adnan told reporters: "Definitely no capital controls, there's not even any discussion of moving in that direction. We have to contain the influence of the offshore prices on the onshore market."
After the ringgit plunged to a record 4.885 per US dollar in 1998, then Prime Minister Mahathir Mohamad imposed restrictions, including a peg at 3.8 per US dollar and a ban on offshore trading in the currency, blaming US billionaire George Soros and other "rogue speculators".
The peg was eventually scrapped in 2005.
BLOOMBERG
