lifestyle leader

Malaysia's currency - the ringgit - soared yesterday after the central bank announced that it was easing restrictions on foreign exchange transactions. The changes allow the ringgit to be used to pay for cross-border trade and eliminate the 12-month limit on currency hedging by domestic firms.

This is good news for Malaysian exporters and, by extension, Malaysia itself.  Despite the encouraging news that Malaysia's economy expanded by 8.9% last quarter, the country is still heavily reliant on exports - primarily commodities and electronics. Exports depend upon foreign demand, and that demand is far from guaranteed. Although the majority of Malaysia's exports go to China, most of these are in turn re-exported to EU and US markets. Thus, even today, the discouraging news about the latter's economic fortunes has tempered yesterday's enthusiasm for the ringgit. 

Until 2005, the ringgit was pegged to the US dollar. The peg acted as a de facto hedge for domestic exporters. The peg is particularly helpful for commodity exporters since commodity markets are inherently volatile and tend to be priced in dollars anyway. Since 2005, however, export-oriented businesses have been subject to the spasmatic re-adjustments that come with a "managed" floating exchange rate operating in the post-Bretton Woods international financial system.

All of which points to the need for Malaysian exporters to be free to effectively manage risk by hedging their contracts to compensate for the ups and downs of global currency markets.