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Juwai IQI global chief economist Shan Saeed

PETALING JAYA: The move to undertake a currency swap arrangement by Malaysia is expected to benefit the country in the near term, as it will boost trade and investments at a time when the global economy is undermined by higher inflationary pressures and growing recessionary risks.

When contacted by StarBiz, foreign-exchange (forex) strategists and economists opined that the move could help to lessen upward pressure in short term funding needs in foreign currencies, improve liquidity, avoid market stress and maintain the economic growth trajectory.

A currency swap is an agreement whereby two countries agree to exchange a given amount of currency at an agreed upon interest rate and a common maturity date for the exchange.

This concept gained recognition as an important derivative tool after the 2008 global financial crisis.

Early this month, it was reported that the central banks of Malaysia and Turkiye were in the midst of finalising a potential currency swap.

Turkiye to date has currency swap deals with China, Qatar and South Korea worth about US$23bil (RM103bil).

Commenting on the currency swap move, OCBC Bank rates strategist Frances Cheung said such an arrangement between countries would facilitate settlement in their respective currencies, so as to avoid any liquidity-related disruptions to trade and investment flows.

“Swap lines with major trading partners will help ensure the facilitation of genuine flows and also mitigate any elevated pressure in short-term funding in foreign currencies in times of stress.

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“Malaysia has bilateral swap lines with China, South Korea, Indonesia and Japan, and is also part of the Chiang Mai Initiative.

“Such lines shall not affect spot forex levels as the focus is on short-term liquidity needs,” she added.

Juwai IQI global chief economist Shan Saeed described the move to undertake the currency swap as a timely one.

“Besides enhancing trade between Malaysia and Turkiye, on the whole, currency swap improves liquidity in the system, hedges currency risk, avoids market stress and keeps the economic momentum.

“Malaysia’s trade has touched RM270bil and gross domestic product (GDP) peaked at 8.9% in the second quarter (2Q). Furthermore, the country’s GDP growth is the highest in the Asean region.

“To accelerate the economic growth, these agreements (currency swap) support in mitigating currency risk and can eschew market stress when liquidity becomes an issue as central banks are spiking up interest rates.

“The government has made a strategic move to keep the growth momentum trajectory going for the long run,” Shan added.

To ensure the success of the currency swap, Centre for Market Education (CME) chief executive Carmelo Ferlito said it was important for Malaysia to fix the terms of the agreement in a way that it is protected from the extreme volatility of the Turkyish lira, in order to preserve the real value of the mutual transactions.