PSUKPP/21/0353/46(37)
10th January 2017
Yang Amat Berhormat Dato’ Sri Mohd. Najib Tun Haji Abdul Razak
Prime Minister and Finance Minister
Prime Minister Department
Blok Utama, Bangunan Perdana Putra
Pusat Pentadbiran Kerajaan Persekutuan
62502 PUTRAJAYA
(FAX: 03 – 8888 3444)
Yang Amat Berhormat Dato’ Sri,
BANK NEGARA MALAYSIA’S MEASURE REQUIRING EXPORTERS TO CONVERT 75% OF FOREIGN EXCHANGE PROCEEDS TO RINGGIT HARMS THE INVESTMENT CLIMATE IN PENANG AND MALAYSIA
The Penang State Government wishes to highlight to Yang Amat Berhormat Dato’ Sri the ‘Initiative to Develop the Onshore Financial Market’ that was announced by the Financial Markets Committee (FMC), in collaboration with Bank Negara Malaysia (BNM), has caused grave concern and hardship to the businessmen, traders and exporters especially in the electrical and electronic industry. Furthermore the measures have been ineffective to prevent the further decline in the value of the ringgit vis-a-vis US dollar which recently dropped to a low of RM 4.50.
2. This measure has the potential to harm the investment climate and reduce Foreign Direct Investments (FDI) into Malaysia because it indirectly increases the risk exposure of foreign exchange losses as well as transaction costs to those who trade actively using various foreign currencies. This is particularly so in regards to exporters being required to convert no less than 75% of their export proceeds in foreign currency into Ringgit effective 5 December 2016.
3. Based on feedback received from the electrical and electronic industry, this measure by FMC will further complicate export transactions which are usually transacted in foreign currencies, especially in US Dollar (USD). Exporters also similarly use foreign currencies in cost hedging to reduce their cost and import input prices. While exporters receive their export proceeds in foreign currency, any foreign inputs for production which are imported are also paid in foreign currency.
4. In other words, exporters face both transaction costs of conversion as well as foreign exchange losses when they have to convert to back and forth between ringgit and US dollars to complete their export orders should the currencies move against them. Although exporters are allowed to hedge import or foreign currency loan obligations into foreign currency up to the value of 6 months of import and foreign currency loan obligations, this latest measure by FMC is still seen as detrimental to the ease of doing business and increases cost for exporters.
5. We would also like to convey our concerns that with the FMC’s announcement, business involving foreign transactions in Malaysia is expected to be more complicated and may be a factor that will reduce Malaysia’s competitiveness and impact our attractiveness as an investment destination to foreign investors. Malaysia’s exports managed to grow by a muted 0.5% year-on-year in 2016, only because Malaysian exports saw a 7.8% year-on-year increase in November 2016. Why the electrical and electronic industry is so critical can be seen by it recording a growth of 13.2% and accounting for 36% of total exports in November 2016.
6. The Penang state government has received many complaints from the electrical and electronic industry about the FMC ruling. Whilst none of the foreign multi-national corporations have indicated that they will leave Malaysia because of this new ruling, the Penang state government is concerned that it will affect new investments coming in.
7. As such, the Penang State Government proposes that this measure by FMC to be abolished completely, or if still deemed necessary to impose some controls, be reduced to a lower percentage of 25% of export proceeds. After all, the ringgit continues to decline in spite of this measure, which appear at best ineffective and at worst, do more harm than good to the investment climate. We also wish to highlight that several trade associations and industry groups have already released similar statements to urge the Federal Government to review this measure.
8. The Nikkei Malaysia Manufacturing Purchasing Managers Index (PMI) booked its 21st consecutive monthly contraction of 47.1 in December. ( A score below 50 is a contraction). This indicates a continued weakness in manufacturing, which has been blamed on both domestic and foreign demand.
9. In fact, the new Export Orders Index ( a component of overall PMI) contracted for a seventh consecutive month in December. “ Greater global competition and a slowdown in the world economy were cited as some of the reasons for the decrease in export orders,” notes Nikkei’s latest PMI report.
10. The State Government sincerely hopes that Yang Amat Berhormat Dato’ Sri Prime Minister and Finance Minister will give due consideration to mitigate this latest measure to safeguard both the investment climate and economic well-being of Penang and Malaysia. Thank you.
Yours faithfully,
LIM GUAN ENG
Chief Minister of Penang