Thursday 28 Mar 2024
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MALAYSIAN corporates have received signals from the authorities, discouraging them from making overseas investments to reduce the outflow of money. Over the last 12 months, capital outflows have caused  the central bank’s foreign reserves to dip by 17% or US$23.7 billion.

This move comes on the heels of the Ministry of Finance’s circular to all government-linked companies (GLCs) to postpone or put on hold the purchase of foreign assets and investments abroad. GLCs have been told to give priority to domestic investments as part of measures to stem the outflow of capital and to stimulate slowing growth.

Industry sources say that apart from this directive to GLCs, the government, through various ministries as well as Bank Negara Malaysia, has also asked non-GLCs to review their foreign acquisition plans and defer them if possible.

“It is not a directive but moral suasion on the part of the government,” says a government source.

But other sources say more than moral suasion is at work.  They say some local corporates that had already been given approval to undertake foreign investments have had it put under review.

Malaysian companies that recently announced acquisitions of foreign assets include IOI Properties Bhd (buying a 37.17% stake in Taipei Financial Center for RM2.74 billion and Eastern & Oriental Bhd (acquiring a 1.2-acre site in Hammersmith, West London, for RM308.9 million).

Over the past 12 months, many others have made or announced similar overseas plans, including FELDA and Malaysia Airports Holdings Bhd.

Note that current efforts are being directed at reducing the outflow of capital via domestic companies. However, foreign investors and companies are not affected and are free to repatriate their money.

 Meanwhile, industry observers do not think capital controls are a possibility. The Bank Negara and government rhetoric is that Malaysia has moved on from capital controls. And, more importantly, the severity of the current situation is nowhere near the 1997/98 Asian financial crisis that prompted the draconian move.

In response to a query from The Edge, Bank Negara reiterates that Malaysia continues to maintain a liberal foreign exchange administration policy that supports international trade and investment.  

“The focus of the current foreign exchange administration (FEA) rules is prudential measures to overall support the objective of maintaining financial and economic stability,” it says.

“Malaysia supports the global presence and ventures of domestic businesses. The current FEA rules, which have been in place since 2007, freely allow investments abroad by resident entities without domestic borrowings. No restriction is imposed on resident entities in obtaining foreign currency borrowings from Malaysian banks for their direct investments abroad.

“However, resident entities with domestic borrowings are freely allowed to invest abroad up to a prudential limit of RM50 million equivalent in aggregate per calendar year on a corporate group basis through the conversion of ringgit.

“Consideration and criteria for resident entities with domestic borrowings to undertake investments abroad beyond the permitted prudential limit remains,” the central bank clarifies.

Nonetheless, Bank Negara can be expected to watch capital outflows like a hawk if the ringgit comes under further selling pressure.

 Since the start of the year, the ringgit has been the worst-performing currency in the region. From a high of 3.15 against the US dollar on Aug 27 last year, the ringgit has fallen 14% to date and is hovering at around 3.60.

Market players say while other regional currencies have also weakened, the ringgit has borne the brunt of the strengthening of the greenback because of the sharp fall in oil and commodity prices, its high household debt and the high foreign holding of government bonds. This is exacerbated by concerns that if commodity prices continue to fall, Malaysia may find itself facing the threat of a twin deficit — in the fiscal and current accounts.

A revision of Budget 2015 last week to take into consideration falling oil prices has not helped stem the ringgit’s depreciation. Most market observers say the revised budget did not contain enough concrete measures to help the economy ride out the turbulence.

The expectation is that the capital outflow will continue in the coming weeks as foreign investors unwind their ringgit asset holdings, primarily Malaysian government bonds and central bank bills.

On Jan 22, Bank Negara reported that the country’s international foreign exchange reserves had fallen from US$116 billion as at the end of December 2014 to US$111.2 billion. Since January 2014, reserves have fallen by US$23.7 billion or 17%, one of the sharpest drops within this time frame in recent history.

Industry players say even without the government’s close vetting of investments abroad, many Malaysian corporates are already reviewing their strategy with the depreciation of the ringgit.

“It is the prudent thing to do. With the ringgit sliding and the global environment still fragile, many Malaysian companies are reviewing their foreign acquisition and expansion plans, even without guidance from the government,” says an industry observer.

 

This article first appeared in The Edge Malaysia Weekly, on January 26 - February 1, 2015.

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