On 2 December 2016, Malaysia’s central bank, Bank Negara Malaysia (BNM) issued a Supplementary Notice on Foreign Exchange Administration Rules (Supplementary Notice). The Supplementary Notice provides a set of foreign exchange measures which seek to, amongst others, promote the settlement of trade and investment in ringgit, enhance liquidity of onshore financial market and stabilise the Malaysian currency (ringgit). The Supplementary Notice takes effect from 5 December 2016.

Summary of Measures

The significant measures introduced by BNM are summarised as follows:

  1. A resident exporter is allowed to retain up to 25% of foreign currency export proceeds of goods and such foreign currency export proceeds must be retained only with Malaysian licensed banks.
  2. All settlement of domestic trade in goods or services between residents shall be made only in ringgit.
  3. A resident is allowed to hedge its foreign currency exposure up to an aggregate net open position limit of RM6 million per bank with any licensed onshore bank without providing documentary evidence.
  4. Foreign Currency Account I and Foreign Currency Account II have been renamed as Trade Foreign Currency Account and Investment Foreign Currency Account respectively.

Conversion of Export Proceeds into Ringgit 

Prior to the Supplemental Notice, resident exporters of goods were allowed to retain their export proceeds in ringgit or foreign currency. However, pursuant to the Supplementary Notice, a resident exporter of goods is only allowed to retain up to 25% of its export proceeds (which must be retained with Malaysian licensed banks) and is further required to convert 75% (or more) of its foreign currency export proceeds into ringgit with a licensed onshore bank. The ringgit funds can be converted into foreign currency to pay and service its import and loan obligations for up to 6 months.

As an incentive for resident exporters to retain more ringgit proceeds in Malaysia, all licensed onshore banks are now required to offer a special deposit facility (SDF) to resident exporters for conversion of foreign currency export proceeds into ringgit and the licensed onshore banks will pay a daily rate of 3.25% per annum under the SDF.

Settlement of Domestic Trade in Ringgit 

Prior to the new foreign exchange measure, a resident with export earnings could make payment in foreign currency to another resident for settlement of domestic trade in goods or services by using, amongst others, its foreign currency funds in its foreign currency account II.

The Supplementary Notice now imposes the requirement that all settlement of domestic trade in goods and services between residents must be made in ringgit only. This new measure may pose an issue with some resident entities who have existing contractual obligations to settle domestic trade in goods or services in foreign currency with no optional settlement in ringgit.

Hedging without Documentary Evidence

The Supplementary Notice now accords more flexibility in terms of hedging, allowing residents to hedge their foreign currency exposure for USD/MYR and CNH/MYR with a licensed onshore bank up to an aggregate net open position limit of RM6 million per bank without the requirement for documentary evidence, provided that the resident makes a one-off declaration in writing to the licensed onshore bank prior to entering into any forward contract. It is worth noting that residents are still allowed to undertake hedging transactions exceeding RM6 million as long as they can provide the requisite documentary evidence and the normal due diligence process by the Malaysian licensed bank would apply.

Renaming of Foreign Currency Accounts

The Supplementary Notice has renamed the existing Foreign Currency Account I and Foreign Currency Account II to Trade Foreign Currency Account and Investment Foreign Currency Account respectively. The change of name of these foreign currency accounts seek to provide clarity on the sources of funds and uses of funds in respect of each of these accounts. Most notably, residents may only apply the funds in the Trade Foreign Currency Account for limited purposes, such as import payments and foreign currency loan repayments, whereas they are free to use the foreign currency funds in the Investment Foreign Currency Account for any purpose.

Commentary and Observations 

BNM’s introduction of these measures, while is intended to create a long term development of the onshore financial market and to make the onshore foreign exchange market more efficient, may be seen by the market or some businesses or industries as disruptive to their business operations. These new measures could, during the initial adjustment period, possibly lead to increase in costs of doing business in Malaysia, especially amongst resident exporters that transact primarily in foreign currency, as it will be necessary for them to undertake multiple conversions of foreign currency into ringgit and vice versa given that only 25% of their export proceeds can be retained in foreign currency.

The sudden introduction of the Supplementary Notice has not allowed time for companies to gradually ease into the new measures, and BNM has not yet announced if a grace period will be provided for the compliance with these policies although BNM does not rule out the possibility of granting approval for resident exporters to retain more than 25% of their foreign currency export proceeds (which applications will be considered on the merit of each case).

This Client Alert has only highlighted the more noteworthy measures of the Supplementary Notice and companies likely to be affected are encouraged to consult their professional advisors for advise to comply with these new measures.