Currency swap initiative a success

PETALING JAYA: Malaysia’s decision to enter into a currency swap deal should benefit the country in the short term, as it will boost trade and investment at a time when the global economy is plagued by higher inflationary pressures and growing risks of recession.

Foreign exchange (forex) market strategists and economists contacted by StarBiz said the move could help ease upward pressure on short-term foreign currency funding needs, improve liquidity, head off tensions on the market and maintain the trajectory of economic growth.

A currency swap is an agreement where two countries agree to exchange a given amount of currency at an agreed interest rate and a common maturity date for the exchange.

This concept was recognized as an important derivative tool after the 2008 global financial crisis.

Earlier this month, it was reported that the central banks of Malaysia and Turkey were finalizing a possible currency swap.

To date, Turkey has concluded currency swap deals with China, Qatar and South Korea worth around US$23 billion (RM103 billion).

Commenting on the currency swap move, OCBC Bank rate strategist Frances Cheung said such an arrangement between the countries would facilitate settlement in their respective currencies, to avoid any liquidity-related disruptions of the trade and investment flows.

“Lines of exchange with major trading partners will help ensure the facilitation of genuine flows and also alleviate any high pressure on short-term foreign currency funding in times of crisis.

“Malaysia has bilateral swap lines with China, South Korea, Indonesia and Japan, and is also part of the Chiang Mai Initiative.

“These lines will not affect spot exchange levels as the focus is on short-term liquidity needs,” she added.

Juwai IQI’s global chief economist, Shan Saeed, described the decision to undertake the currency swap as timely.

“As well as improving trade between Malaysia and Turkey, overall, the currency swap improves system liquidity, hedges currency risk, avoids market stress and maintains economic momentum.

“Malaysia’s trade reached RM270 billion and gross domestic product (GDP) peaked at 8.9% in the second quarter (2Q). Furthermore, the country’s GDP growth is the highest in the ASEAN region.

“To accelerate economic growth, these (currency swap) arrangements help mitigate currency risk and can prevent market stress when liquidity becomes an issue as central banks raise interest rates.

“The government has taken a strategic decision to maintain the long-term growth trajectory,” Shan added.

To ensure the success of the currency exchange, the Chief Executive of the Center for Market Education (CME), Carmelo Ferlito, said it was important for Malaysia to set the terms of the deal in such a way that it is protected from the extreme volatility of the Turkish lira, in order to preserve the real value of mutual transactions.

The currency swap aims to protect the two countries from the risk of currency fluctuation, especially in light of the depreciation of the Turkish lira, he noted.

“This may be particularly interesting for Malaysia to open up potential new sources for international trade, in light of the global supply chain overhaul that has occurred since Covid-19.

“It is also important for Malaysia to go beyond China and be the protagonist in building alternative free trade agreements to expand its global trade reach,” Ferlito said.

AmBank Group Chief Economist Anthony Dass said a currency swap between Malaysia and Turkey is expected to further strengthen economic and financial ties between the two countries.

“Under this agreement, we can expect both countries to have greater flexibility to use the local currency for the settlement of their bilateral trade and investment activities,” he said. .

Dass, who is also a member of the secretariat of the Economic Action Council, is however skeptical about the extent of the success of the currency swap agreement.

“Turkiye’s increasing focus on foreign exchange trading was partly due to the depletion of its foreign exchange reserves by selling hard currency through state-owned banks in an effort to prop up the beleaguered Turkish Lira and bring exchange rates under control, which are crucial to the country’s import dependence economy.

“If we look at previous swap agreements, Turkey’s central bank has emphasized that its main objectives are to facilitate bilateral trade in the respective local currencies and to support the financial stability of both countries.”

The goal of local currency trading seems to have largely remained on paper.

He noted that “While swap deals may help increase Turkey’s gross foreign exchange reserves, that remains to be seen.

“In reality, their currency swap had little impact. If we look at China’s currency swap with Turkey, it had almost no impact.

“The Chinese rarely trade in local currencies. Same with Qatar. Such a scenario may indeed occur for Malaysia.

Therefore, Dass said one should look at the overall dynamics before engaging in a currency exchange, adding that such an arrangement should be acceptable to businesses and investors.

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