(Published in The Edge in September 2022)
The recent fall of the Ringgit (RM) against the US Dollar (USD) has had many in the country voicing their concerns as to imported inflation and even forwarding suggestions that the RM should be re-pegged against the USD to avoid such volatility. Indeed, the RM has fallen, at the time of writing, by around 7.2% for the year to date. That is a huge movement. Quixotically, other currencies against the RM have remained more or less where they are, even though many have had their interest rates raised markedly. Hence, some have asked, is it just a matter of time before the RM falls against them too?
There is another matter that needs to be examined that swirl around the same issue: whether the falls of the RM presage losses at Bank Negara Malaysia (BNM) as they fight to moderate the movement of the RM.
The past many years, since the 1990s, have thrummed with rumors of forex (foreign exchange) losses at BNM, once accused of such to the tune of RM31.5 billion during the years 1988 to 1994, that was investigated by a Royal Commission of Inquiry (RCI). The report was completed, and matters extended for further investigation. It has since been categorized by the Royal Malaysian Police as requiring “No Further Action” due to the lack of evidence to pursue investigations.
As avid readers, we sometimes wander over to the esoteric and as a financial economist, it means going as deep and as wide as needed to find the answers to burning questions. It is always a joy to find a book written by a non-mainstream writer, and the fresh perspectives brought about by M.A. Akinkunmi in “Central Bank Balance Sheet and Real Business Cycles” was eye-opening. The shocking revelation in that was that book claimed that central banks did not have to follow accounting rules. This set us off in investigating whether some questions we have always had could have been answered by this.
We were happy to find that as far back as the 2012 BNM Annual Report stated that the accounts have been prepared in accordance with the Central Bank Act of 2009 and the applicable Malaysian Financial Reporting Standards (MFRS), and that it (the central bank) will comply as closely as possible to the requirements of the MFRS and their Act. Then, of course, we have the Jabatan Audit Negara (National Audit Department) to keep things on the straight and narrow.
In so checking, we came across a note to the category Risk Reserves in the accounts, that noted it was,
“Used to account for unrealized revaluation gains or losses arising from changes in exchange rates and market prices and to absorb any potential future losses resulting from unfavorable circumstances not within the control of the Bank. The Exchange Rate Fluctuation Reserves, Revaluation Reserve, and Contingency Reserve, which was presented in previous years as “Other Reserves” have been consolidated and renamed as “Risk Reserves”.
That Annual Report also states that for “Market Risk”, it is defined as,
“Market Risk is the exposure of the Bank’s investments to adverse movements in market prices such as foreign exchange rates, interest rates, and equity prices. Market risk is monitored on a daily basis and all of the investments and instruments will have a marked to market value. Investments are guided by a benchmark policy approved by the Board of Directors which reflects the long-term investment objectives and acceptable risk-return profile. “Active Risk” may be taken through investments and instruments that can be different from the benchmark though must be within approved investment guidelines. The degree of “active risk” is measured and controlled through using limits that must be adhered to. Sensitivity analysis and stress testing are undertaken to assess potential marked-to-market losses from adverse movements and volatility in the market”.
The 2021 Annual Report said basically the same thing, hence it is obvious that if there are forex losses, one will find it within this category, specifically an entry called “Movements During The Year” which are nowadays specifically stated.
Thus, how has BNM been performing? We look at the year 2013 to 2016:
| Category (RM million) | 2013 | 2014 | 2015 | 2016 |
| Risk Reserves At Year Start | 13,966 | 39,947 | 52,827 | 112,716 |
| Transfer From P&L | 3,900 | 3,350 | 4,700 | 3,900 |
| Movement In The Year | 22,081 | 9,530 | 56,539 | 9,325 |
| Risk Reserves At Year End | 39,947 | 52,827 | 112,716 | 126,741 |
All seemed quite well, and then we turn towards 2017 to 2021:
| Category (RM million) | 2017 | 2018 | 2019 | 2020 | 2021 |
| Risk Reserves At Year Start | 126,741 | 118,657 | 113,477 | 131,436 | 144,746 |
| Transfer From P&L | 4,900 | 5,000 | 5,400 | 0 | 0 |
| Movement In The Year | -12,984 | -10,180 | 12,959 | 13,310 | 7,437 |
| Risk Reserves At Year End | 118,657 | 113,477 | 131,436 | 139,346 | 152,183 |
There were two years of losses (i.e., negative values in the year’s movements), 2017 and 2018, both absorbed by the amount of Risk Reserves already there plus a small “Transfer from the Profit & Loss” side of things. Hence, all appears well.
Checking the Movements in the Year against the changes of the RM against the USD for 2013 to 2017, to see how sensitive the financials are against forex movements of the RM versus the biggest use currency in the world, we find:
| Category | 2013 | 2014 | 2015 | 2016 | 2017 |
| Risk Reserves At Year Start | 13,966 | 39,947 | 52,827 | 112,716 | 126,741 |
| Transfer From P&L | 3,900 | 3,350 | 4,700 | 3,900 | 4,900 |
| Movement In The Year | 22,081 | 9,530 | 56,539 | 9,325 | -12,984 |
| Risk Reserves At Year End | 39,947 | 52,827 | 112,716 | 126,741 | 118,657 |
| Change in RM/ USD (%) | -6.6 | -6.2 | -18.5 | -4.3 | 10.9 |
For the years 2017 to 2020, they are:
| Category | 2018 | 2019 | 2020 | 2021 |
| Risk Reserves At Year Start | 118,657 | 113,477 | 131,436 | 144,746 |
| Transfer From P&L | 5,000 | 5,400 | 0 | 0 |
| Movement In The Year | -10,180 | 12,959 | 13,310 | 7,437 |
| Risk Reserves At Year End | 113,477 | 131,436 | 139,346 | 152,183 |
| Change in RM/ USD (%) | -2.1 | 0.9 | 1.8 | -3.8 |
It appears that the linkage between RM/ USD’s movements are random and poorly correlated to BNM’s “Movement In The Year” (i.e., the forex gains or losses) as it were. This, of course, can be due to proper management practices such as diversifying the assets under BNM to avoid concentration risk, and minimal operational intervention in the currency markets. The large Risk Reserves amount held ensures that losses can be absorbed. Congratulations to BNM. There seems little to worry about the possibility of large forex losses for BNM currently.
Nonetheless, as we had pointed out in our recent paper, “How Low Can the Malaysian Ringgit Go?”, there is a need to tame the volatility of the Malaysian Ringgit, and there are two ways to do that, either through direct intervention, or through deepening the Malaysian Ringgit market. The first option, of course, means that forex losses could be visibly large at the central bank.
Malaysia, of course, does not need that.