KUALA LUMPUR: Bank Negara Malaysia's (BNM) decision to allow certain foreign financial institutions issue ringgit bonds and finance local entities, will increase demand for ringgit as well as cut red tape and costs for investments flows into the country.
The central bank yesterday announced a liberalisation of foreign exchange policy (FEP) for multilateral development banks (MDBs) such as the World Bank, and qualified non-resident development financial institutions (DFIs).
The MDBs and qualified non-resident DFIs will now be able to issue ringgit-denominated debt securities for use in Malaysia; and provide ringgit financing to resident entities.
Interested DFIs may submit the application form to be a qualified DFI to the BNM FEP department.
The liberalisation aims to facilitate investment into key growth areas in Malaysia.
This includes the electrical and electronics (E&E) industry, technology adoption, sustainability and data centres.
Economist Dr Geoffrey Williams said MDBs and DFIs are financial institutions, such as the World Bank and the Asian Development Bank, that focus on financing economic and social development rather than on commercial contracts.
He noted that this makes the ringgit more important as the primary currency for these types of loans and avoids the need to change dollars into ringgit to carry out the projects.
"This simplifies the process and cuts costs. It also creates demand for ringgit which supports its value more related to economic fundamentals and less related to market volatility."
"There will be quicker transactions, less hedging against currency risk and greater confidence in the ringgit as a regional currency."
"This should help stability of the ringgit and attract more investment," he told Business Times.
Meanwhile, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid explained that the policy is a means for MDB and qualified DFI's to participate in financing the investment activities in Malaysia.
He said this could attract foreign investors to purhase debt issued by such entities and thereby, creating demand for ringgit and there would be more inflows into the country.
"We have seen investment activities pick up its pace quite considerably this year. "I suppose the MDBs and non-resident DFIs may have good credit rating and therefore it will give more choice for investors to invest bonds or sukuk issued by these entities," he noted.
BNM said the move will allow both financiers and businesses to structure financing in ringgit for domestic projects while reducing the risk of currency mismatch.
'The liberalisation would better facilitate greater participation from global investors in key growth areas in Malaysia. This is in line with greater demand and interest by international financial institutions to finance high-value investment projects in Malaysia that we have observed in the recent period,' BNM governor Datuk Seri Abdul Rasheed Ghaffour said in a statement.
BNM said the MDBs and qualified non-resident DFIs can share their technical expertise, particularly in blended finance, that would complement existing domestic players in meeting financing demand to support strategic investments and climate transition efforts in Malaysia.