On 15 April 2021, the central bank of Malaysia, Bank Negara Malaysia (BNM), has issued new Foreign Exchange Notices (FX Notices) which take effect from the same date. The new FX Notices supersede the previous FX Notices that have been in effect since 30 April 2020.
BNM continues to maintain a liberal foreign exchange policy (FEP) in times of Covid-19, which are aimed at providing greater flexibilities to businesses as part of BNM's continued efforts to strengthen Malaysia’s position in the global supply chain and ensuring FEP continues to support the competitiveness of the Malaysian economy by facilitating a more conducive environment for domestic and cross-border economic activities in attracting foreign direct investment (FDI) into Malaysia.
The FEP, which are manifested in the form of these FX Notices, are a set of rules that are administered by BNM under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA) and therefore have the force of law.
The FX Notices set out (i) the approvals required of BNM for transactions which otherwise are prohibited under section 214(2) read together with Schedule 14 of the FSA and section 225(2) read together with Schedule 14 of the IFSA; (ii) the requirements, restrictions and conditions of the approvals and (iii) the directions of BNM. As with the mechanics and concepts under the previous FX Notices, a person shall obtain written approval of BNM to undertake or engage in any transaction listed in Schedule 14 of the FSA or IFSA that is not permitted by BNM under the FX Notices.
In this article, we seek to highlight some of the key changes brought about by the new FX Notices. It is not exhaustive.
Summary of Key Changes in the FX Notices
Preamble and Interpretation
The new Preamble and Interpretation incorporates substantially the provisions of the previous Preamble and Interpretation and the drafting of the various definitions are much clearer. The new Preamble and Interpretation section seeks to clarify that the terms used in the FX Notices shall have the same meanings assigned to them in the FSA, the IFSA and the Interpretation Acts 1948 and 1967. Some of the revised definitions include:
(a) the term "Borrowing" now expressly includes any utilised or unutilised trade financing facility, including but not limited to, trade guarantee or guarantee for payments of goods. When interpreting "Borrowing", though one will already include the trade financing facility under the "financing facility" defined in the "Borrowing" in the previous FX Notices, it is now clearer that trade financing facility is inside the definition of "Borrowing";
(b) the term "Exchange Rate Derivatives" is now refined to expressly include both conventional and Islamic derivatives;
(c) the term "Financial Institution" is now refined to expressly include an approved issuer of a designated payment instrument under the FSA or a designated Islamic payment instrument under the IFSA. The previous FX Notices only included issuer of a designated payment instrument under the FSA as part of the "Financial Institution" and that gave rise to many queries to BNM on whether an issuer of a designated Islamic payment instrument under the IFSA will be bound by the rules of the FX Notices. Its inclusion gives certainty to the definition of a "Financial Institution";
(d) with respect to the definition of "Foreign Currency Asset Offshore":
(i) foreign currency-denominated assets mean both tangible and intangible assets;
(ii) it now expressly includes a financial asset in Malaysia swapped for a financial asset in a Labuan entity and the deposit in a Foreign Currency Account maintained with a Labuan Entity;
(iii) the definition is further refined to mean a Financial Instrument or Islamic Financial Instrument (excluding Exchange Rate Derivatives) without Firm Commitment issued or offered by a Non-Resident, as opposed to the previous FX Notices where it meant a Financial Instrument or Islamic Financial Instrument (excluding Exchange Rate Derivatives) without Firm Commitment undertaken by a Resident Individual from a Non-Resident;
(e) a new term "Global Supply Chain", which is defined as "a business activity where a Resident imports goods or services to support production or distribution of goods or services by a Resident exporter for the Resident exporter’s export activities. This includes domestic trade in goods or services between the Resident importer and the Resident exporter undertaken through a Resident intermediate Entity", is added;
(f) the term "Portfolio Investment" now includes derivatives or Islamic derivatives without Firm Commitment not covered by the term "Exchange rate Derivatives".
Please note that all the capitalised terms used in this section have the same meanings assigned to them in the new FX Notices.
FX Notice 1 - Dealings in Currency, Gold And Other Precious Metals
There are no material changes in the new FX Notice 1.
FX Notice 2 – Borrowing, Lending and Guarantee
We set out below some material amendments which are particularly remarkable:
(a) The new FX Notice 2 allows a resident entity to borrow in foreign currency up to RM100 million equivalent in aggregate from a non-resident outside the resident entity's group, other than from a non-resident financial institution or a non-resident special purpose vehicle which is set up to obtain borrowing from any person outside the resident entity's group of companies.
(b) A non-resident continues to be allowed to borrow in Ringgit from a licensed onshore bank up to the amount of an overdraft facility (not exceeding two (2) business days and with no roll over option) to avoid settlement failure for purchase of shares or Ringgit instrument but it is refined and clarified in the new FX Notice 2 that such borrowing is for settlement failure for purchase of shares or Ringgit instrument traded on Bursa Malaysia or through RENTAS. In addition, the persons who are eligible to utilise the overdraft facility have been expanded to also include trust bank, international central securities depository acting on behalf of non-resident investor or a non-resident investor purchasing shares or Ringgit instrument mentioned above for its own account, from just a non-resident custodian bank or a stockbroking corporation as approved in the previous FX Notice 2.
(c) With this new FX Notice 2, a non-resident guarantor may make payment in Ringgit or foreign currency to a resident lender arising from a financial guarantee in Ringgit to secure a borrowing in Ringgit which is approved in accordance with FX Notice 2 or otherwise approved in writing by BNM.
FX Notice 3 – Investment in Foreign Currency Asset
There is no substantial amendment to FX Notice 3 except that in calculating the threshold amount that a resident individual, sole proprietorship, general partnership or a resident entity with domestic Ringgit borrowing, who is allowed to invest in foreign currency asset, the relevant party is required to also take into account the funds sourced from the aggregate of swapping of a Ringgit-denominated financial asset in Malaysia for a financial asset in Labuan entity, and not just the financial asset geographically located outside Malaysia.
FX Notice 4 - Payment and Receipt
A material change in the new FX Notice 4 is the liberations provided to the export-oriented industries to allow the resident exporters to settle domestic trade in goods and services in foreign currency with other residents involved in the global supply chain to better support the economic recovery. Under the previous FX Notice 4, this flexibility applied only to domestic trade between resident exporter and small and medium enterprise (SME) and before payment was made, the resident exporter and the resident SME are required to comply with the requirements stated in the previous FX Notice 4, including that the resident SME shall, among others, make a declaration that it is a SME as defined in the "Guidelines for New SME Definition" issued by SME Corporation Malaysia in October 2013. With the advent of the new FX Notice 4, all the previous additional requirements are no longer applicable but one must be mindful that the foreign currency payment between the resident exporter and other resident for the domestic trade in the global supply chain can only be made from the available foreign currency funds in its trade foreign currency account (Trade FCA) or proceeds from the foreign currency trade financing facility. Conversion of Ringgit into foreign currency by the resident payer for the purposes of payment in foreign currency to another resident payee is prohibited.
In addition to the above, the following changes and practical implications in the new FX Notice 4 are particularly noteworthy:
(a) Resident entities can pay or receive foreign currency to or from non-residents for settlement of foreign currency-denominated derivatives, excluding exchange rate derivatives offered by a non-resident, Ringgit-denominated conventional or Islamic derivatives and foreign currency-denominated conventional or Islamic derivatives offered by a resident.
(b) Under the previous FX Notice 4, the non-resident is allowed to maintain a Ringgit account with a financial institution in Malaysia and the sources and uses of Ringgit funds in that account are subject to a set of requirements, restrictions and conditions. In the new FX Notice 4, such requirements, restrictions and conditions are removed.
(c) Similar to the above, the previous requirements, restrictions and conditions imposed on the sources and uses of foreign currency funds of a Trade FCA or investment foreign currency account of a resident no longer apply.
FX Notice 5 – Securities and Financial Instruments
The new FX Notice 5 incorporates substantially the provisions of the previous FX Notice 5 and the drafting of the various provisions are much clearer. A material amendment in the new FX Notice 5 is that licensed onshore banks can now offer and transact ringgit-denominated interest rate or profit rate Islamic derivative with non-resident banks without any underlying commitment directly or through its appointed overseas offices.
FX Notice 6 - Import and Export of Currency
There are no material changes in the new FX Notice 6.
FX Notice 7 - Export of Goods
In line with BNM's objective to strengthen Malaysia’s position in the global supply chain, the new FX Notice 7 gives Malaysian exporters (inclusive of individual, sole proprietorship and general partnership) greater flexibility in the treatment of their export proceeds. Some of the material amendments that are particularly noteworthy include:
(a) Resident exporters can extend the period for repatriation of full value of export proceeds either in Ringgit or foreign currency beyond 6 months (up to 24 months) from the date of shipment under exceptional circumstances listed below:
(i) the resident exporter has no control over the delay in receiving proceeds of export of goods which includes:
(1) buyer in financial difficulties;
(2) cancellation of order by the buyer (e.g. shut out);
(3) restriction on foreign exchange transactions in the buyer’s country;
(4) quality and/or quantity claims; or
(5) incidence of fraud;
(ii) the resident exporter has exported goods on credit terms of up to 24 months from the date of shipment to the buyer for:
(1) consignment sale; or
(2) goods that involve testing and commissioning.
While the previous 6-month rule remains in place, this flexibility eliminates the need for exporters to seek BNM’s approval in repatriating their export proceeds beyond the 6-month period for reasons discussed above. For other purposes, approval from BNM is still required. This flexibility is applicable for export shipment dated 15 October 2020 onwards.
(b) Resident exporters are no longer required to comply with the export proceeds conversion requirement and therefore the resident exporters may now manage the conversion of export proceeds according to their foreign currency cash flow needs.
(c) Resident exporters are now allowed to offset or write-off export proceed against permitted foreign currency obligations with non-residents. With this flexibility, resident exporters are no longer required to seek approval from BNM for netting arrangements involving export proceeds. This would enhance business efficiency and cash flow management for exporters.
The new FX Notices can be found here (https://www.bnm.gov.my/fep).
In addition to the new FX Notices, BNM has also issued 4 explanatory documents on the new FEP:
(a) Summary of key changes to Foreign Exchange Notices, issued on 15 April 2021;
(b) Frequently Asked Questions on Liberalisation of Foreign Exchange Policies (FEP) in April 2021, issued on 31 March 2021;
(c) Frequently Asked Questions relating to FX Notice 4, issued on 15 April 2021;
(d) Frequently Asked Questions relating to FX Notice 7, issued on 15 April 2021.
Conclusion
Throughout the years, Malaysia has always revised its FEP to befit its then economic conditions, by tightening the exchange controls in times of economic or financial crisis, and liberalising the controls gradually to support its growing economy. Since the emergence of Covid-19, the Malaysian government has unveiled a plethora of recovery measures to focus not only on the financial aspects but also on social safety nets, food security and education of the people such as the Economic Stimulus Package, the PRIHATIN package, the Additional PRIHATIN Package, the National Economic Recovery Plan and the Kita PRIHATIN Package to name a few which cost billions of Ringgit to weather the impact of Covid-19.
The recent changes in the new FX Notices irrefutably form part of the government's measures to support the economy recovery from the Covid-19 pandemic. The relaxation of control over repatriation and retention of export proceeds and flexibility for settlement of domestic trade in goods and services from the available foreign currency funds in the Trade FCA between Malaysians will expedite export, import and transit of goods. We hope that the Malaysian government's actions will yield positive results and be successful in supporting the global supply chain and attracting more FDI into Malaysia.
