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Bank Negara Malaysia will liberalise direct investments abroad, inter-company loans and trade financing facilities obtained by resident companies effective June 1 to increase business efficiency and enhance competitiveness of the economy.

Governor Tan Sri Dr Zeti Akhtar Aziz said the liberalisation would provide support to private sector expansion of their operations and direct investments abroad, enhance efficient management of financial resources within a corporate group and to provide greater flexibility on sources of competitive financing.

“In other words to facilitate more efficient process for doing business and foreign financial transactions,” she said when announcing the first quarter gross domestic product results today.

Through the liberalisation, she said, resident companies which met the prudential requirements would be permitted to undertake any amount of direct investments abroad and would be excluded from the prevailing RM50 million limit on investments in foreign currency assets.

Resident companies would also be allowed to borrow any amount in ringgit or in foreign currencies from their resident and non-resident non-bank related companies, she said.

Zeti also said the RM5 million limit currently imposed on foreign currency trade financing obtained by resident companies from non-residents would no longer be applicable.

“In this regard, residents may obtain foreign currency borrowings, including foreign currency trade financing, up to the prevailing aggregate limit of RM100 million for companies on a corporate group basis and RM10 million for individuals,” she said.

On the central bank’s intervention in the foreign exchange market, Zeti said the intervention was to maintain an orderly market condition.

“Bank Negara does intervene and then we sterilise the liquidity inflows and liquidity in our financial system,” she said.

She however dened that the central bank relied on the exchange rate to mitigate inflationary pressures due to the volatile nature of the rates.

“The only instrument on the policy (to mitigate inflationary pressures) is the interest rate not exchange rate…yes, it (exchange rate) will help but we don’t rely on it because it could reverse,” she said.

She said the central bank had a wide range of policy measures to deal with the inflation.

On the Financial Sector Masterplan, Zeti said the masterplan, scheduled to be released in June or July, is expected to announce various measures to develop the market to be more integrated with the international financial system.

“We want a more vibrant (financial system) in Malaysia…we are a trading country with high exports and imports and high investments abroad and coming in, yet our foreign exchange market is not as developed as we would like to see,” she said.

Therefore, she said, the masterplan, which would develop the financial system for the next 10 years, would include development of the foreign exchange market into one of its agenda.

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Bank Negara raised the overnight policy rate (OPR) by 25 basis points to 3% and increased the statutory reserve requirement (SRR) by 1 percentage point to 3%, a move that took most by surprise.

The OPR, the benchmark interest rate commercial banks use to calculate their base lending rates for loans, was last raised in July last year.

The central bank hiked the SRR by 100 basis points to 3% effective May 16 as a pre-emptive measure following the build-up of liquidity in the financial system.

“With the economy firmly on a steady growth path, the monetary policy committee decided to adjust the degree of monetary accommodation,” said the central bank in a statement yesterday.

“At the current OPR level, the stance of monetary policy remains supportive of growth. The future stance of monetary policy will depend on the assessment of the risk to growth and inflation prospects.”

Bank Negara acknowledged inflation, which has increased globally on account of higher energy and food prices, has inched up too in Malaysia and has now hit 3% in March to average 2.8% for the first quarter of 2011.

“Global commodity and energy prices are projected to remain elevated during the year, with inflation in major trading partners also expected to rise further. There are also some signs that domestic demand factors could exert upward pressure on prices in the second half of the year,” the central bank said.

However, it noted that despite higher inflationary pressure, latest indicators pointed towards continued strengthening of private investment and sustained private consumption expenditure in the first quarter.

“Growth will be underpinned by the firm expansion of domestic demand. Sustained employment conditions and income growth is expected to provide support to private consumption, while private investment is projected to strengthen amid the improved investment environment,” it added.

In a separate statement, the central bank said the decision to raise the SRR was undertaken as a pre-emptive measure to manage the significant build-up of liquidity, which could result in financial imbalances and create risks to financial stability.

Economists, who were divided over whether the OPR would be raised, told StarBiz that the central bank was sending out a message that inflation was now the concern instead of growth.

AmResearch Sdn Bhd senior economist Manokaran Mottain said policymakers were sending out the message that they were vigilant.

“They’re acknowledging that inflation is putting pressure on the economy,” he said, adding that market consensus was for the OPR to remain unchanged with a Bloomberg survey showing that seven out of 16 economists expected the hike, with the rest expecting the OPR to remain the same.

Nevertheless, economists agreed with the central bank that the rate hikes were still supportive of growth with domestic demand now the focus.

CIMB Investment Bank Bhd head of economics Lee Heng Guie said there was likely to be another 25-basis point hike in the OPR in July but this, judging from the language of the Monetary Policy Committee statement, “will depend on risks to growth and inflationary prospects”.

Meanwhile Affin Investment Bank Bhd economist Alan Tan said the decision to raise the OPR was “a close call” as a lot of brokers expected interest rates to remain unchanged due to the strengthening ringgit.

“Going forward, the central bank is signalling that rising inflation will be of concern and that growth will come from domestic demand as external demand weakens,” he said.

Tan expects another 25-basis point hike before year-end as the central bank moved in tandem with regional peers in normalising interest rates and managing capital flows.

“The normalisation of the rates is important because the US Federal Reserve has indicated that there may be a hike in rates next year and if policymakers here keep rates low for a prolonged period, there’s a risk of a capital outflow,” he said.

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Bank Negara is believed not likely to approve the entry of a private equity firm into RHB Capital Bhd, the fourth largest banking group, following the troubled history of Hong-Kong based Primus Pacific Partners at EON Bank.

“There is no synergy between private equity and banks,” said a source.

Reuters reported last week that the Carlyle group and TPG Capital were making a joint-bid for a US$1.5bil stake in RHB Capital.

Primus is currently embroiled in a court battle in which Ng Wing Fai of Primus, which owns 20.2% of EON Capital Bhd, is challenging the other directors on their decision to table the takeover bid (which Primus considers undervalued) from Hong Leong Bank to shareholders.

The court judgement will be made known by the end of this month.

EON Capital has been rocked by a series of disgreements among shareholders with Ng and Rin Kei Mei ending on opposing sides and issues with Bank Negara such as non-subscription of bonds by Primus.

Abu Dhabi Commercial Bank (ADCB), the 25% investor in RHB Capital, has engaged Goldman Sachs and Bank of America-Merrill Lynch to run the action for the sale of its stake.

TPG has an Indonesian arm, TP Nusantara which currently owns 59.7% of Bank Tabungan Pensiun Nasional; TPG plays an active role in the management of the bank which has done well since the purchase in 2008, said HwangDBS Vickers Research senior analyst Lim Sue Lin.

“If that is true, TPG may like RHB for its value and sustainable business model,” she said, noting that over the last three to four years, the banking group had been able to grow on its own with a proven business model.

Analysts will not discount the possibility that CIMB may be interested in the stake in RHB although they see duplication within the two banking groups.

“Any consolidation will be more for size,” said a senior analyst, adding that a merger between CIMB and RHB would create the fourth largest bank in Asean by assets.

However, analysts caution that there could be another round of voluntary separation scheme (VSS) should CIMB merge with RHB.

CIMB has voiced its ambition of being among the top three banks in South-East Asia by market capitalisation, positions currently held by Singapore banks DBS, OCBC and UOB.

“If it happens, the benefits are likely at the consumer banking level,” said another senior analyst, adding that RHB has higher retail deposits and CIMB will be able to leverage on the “Easy” banking concept based on lower costs, speed of approval and convenience.

RHB has hired 500 new staff for its 150 Easy outlets, targeted to reach 270 by year-end.

Some analysts recall that Maybank was said to be keen on RHB a few years back but are unsure of its interest now,

However, one analyst opined that Maybank might need more time to digest its expensive acquisition of Bank Internasional Indonesia which has yet to contribute strongly to group results.

Analysts are keenly watching for developments in the reported interests of DBS owned by Singapore’s Temasek which, in turn, holds 14.8% of Alliance Financial Group (AFG) and Australia and New Zealand Banking Group (ANZ) which owns 24% of AMMB.

So far, foreign banks like ADCB and Bank of East Asia are holding 25% each in RHB Capital and Affin respectively while ANZ’s investment is up to 25% in AMMB.

While the limit on foreign shareholding in local banking groups is 30%, there has yet to be a precedent, an analyst observed.

“If ANZ were to acquire a stake in RHB, it would need to merge AMMB with RHB,” said Lim in a research note last Friday.

Noting that ANZ has expressed its interest to take a larger stake in AMMB, “even though the threshold for foreign shareholding remains capped at 30%, total returns as a shareholder would be larger for ANZ in an enlarged AMMB-RHB Capital scenario,” said Lim.

Should DBS buy the RHB stake, it is unclear if AFG will be merged with RHB or Temasek will sell off its stake in AFG, as investors can only hold one banking licence.

Hwang DBS said in its regional industry focus that Malaysian banks were currently preferred over those in Thailand and Indonesia, with excitement driven by mergers and acquisitions.

“The target banks will benefit from input the potential stakeholders could bring to the table to improve standalone value propositions,” said Lim in the report dated April 14.

According to Hwang DBS, the AMMB-ANZ alliance has proven to be the most successful foreign strategic shareholding tie-up to date.

It noted that the new management had implemented new risk management and risk scoring systems; made AMMB more flexible to adjust to interest rate hikes; improved its deposit franchise (particularly low cost deposits) and created additional sources of revenue flows from treasury and derivatives.

“These initiatives led AMMB’s net profit to grow from RM670mil in financial year (FY) 2008 (when ANZ became shareholder) to RM1.1bil in FY10,” the report said.

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