Economists point out the proposal to get businesses to keep their investments in Malaysia can help to stabilise the foreign exchange market and bolster value of the ringgit.
The government has proposed to encourage businesses to invest their money domestically rather than outside the country. (Wikipedia pic)
PETALING JAYA: Any initiative to “control” overseas investments by the private sector should not be misconstrued as a move towards a centrally-planned economy, experts say.
Research director at Bait Al-Amanah Benedict Weerasena said it is just a move to intensify engagements with investors and corporations.
Meanwhile Malaysian Institute of Economic Research senior research fellow Shankaran Nambiar said such as move, if implemented, will only be for the short term.
At the end of March, the finance ministry (MoF) said the government and Bank Negara Malaysia (BNM) were taking “remedial measures” to strengthen the value of the ringgit by ensuring that the domestic foreign exchange market remains orderly.
Apart from getting government-linked companies to repatriate earnings from investments abroad, the MoF said, the government also wants to control overseas investments by private companies to encourage them to invest domestically while delaying new investments outside the country.
However, the lack of details on the proposal has generated uncertainty and unease in the business community.
Weerasena told FMT Business it is a move to implement a market-driven approach to counter the decline in the value of the ringgit by getting businesses to voluntarily minimise an outflow of investments.
“I don’t see this as a shift towards centralised economic planning,” he added.
In a centrally-planned economy, also known as a command economy, a government body makes decisions on production and distribution of goods.
Such an economic system is typically associated with socialism or communism but many countries have also adopted elements of it in times of war and national emergencies.
Weerasena sees it as a “trade off” to increase demand for the ringgit in the short term to bolster its performance.
“This is certainly better than raising the overnight policy rate (OPR), which will result in negative consequences such as dampened consumption and heightened cost of living,” he said.
He said people and business servicing loans will be affected and indebtedness will rise.
An unnecessary policy?
Nambiar said that while it is not direct interference, the element of moral persuasion may not be aligned with profit maximisation objectives of businesses.
“I don’t know if this kind of interference is the best thing as it can impede strategic planning at the company level,” he added.
Nambiar said businesses may not find it in their best interest to invest domestically or to delay investing overseas.
He said the initiative may turn out to be unnecessary since the US Federal Reserve (Fed) is likely to cut interest rates in the second half of the year.
“Given the modest external demand, it may even be good to have the value of the ringgit at a low level,” he said.
“The low (value of the) ringgit is a consequence of our conservative stance on interest rate hikes, not because traders are dumping the ringgit. Given all these factors, I would say it is best for the market to sort things out,” he added.
Post-pandemic, BNM has been less aggressive in returning interest rates to previous levels compared with other central banks. As a result, there is now a 2.5% differential between the Malaysian OPR and Fed’s fund rate, prompting a huge outflow of funds to the US market.
Weerasena pointed out that a more efficient way to address the issue of a weak ringgit is to have long-term structural reforms.
“We can take measures to enhance fiscal sustainability through subsidy rationalisation and effective implementation of the Public Finance and Fiscal Responsibility Act,” he said.
“We also need institutional reforms to combat corruption, while a labour market liberalisation will attract investments and help the ringgit perform better in the long run,” he added.
