The Role of Foreign Exchange Risk Management in Malaysia

Article excerpt

ABSTRACT

During the financial crisis period of September 1997 to August 1998, many Malaysian multinationals suffered badly as a result of currency fluctuations. Thus foreign exchange risk management has become an important theme in the emerging markets such as those in Malaysia. This paper examines the extent of foreign exchange risk management among Malaysian multinationals and investigates the purpose of managing those risks, the types of risks managed and the extent of management control and documentation of the foreign exchange risk management. This is complimented by a mail survey, which was sent to corporate treasurers or finance directors of 90 Malaysian multinationals listed under the Bursa Malaysia Main Board (previously known as Kuala Lumpur Stock Exchange). The study indicates that multinationals are involved in foreign exchange risk management primarily because they sought to minimise operational overall cash flows, which are affected by currency volatility. Another finding is that the majority of multinationals centralised their risk management activities and at the same time imposed greater control by frequent reporting on derivative activities. It is likely that huge financial losses related to derivative trading in the past led to top management being extra cautious. Interesting findings also emerged from the examination of the role of foreign exchange risk management. It appears that economic events related to Malaysian financial markets did influence the involvement in foreign exchange risk management.

INTRODUCTION

Background

In the early 1980s, an increasing number of multinationals from developing countries in Asia, such as Taiwan, Singapore, Malaysia, Indonesia and Thailand, became involved in international businesses. These multinationals are sometimes referred to as the 'new multinationals' (Lall, 1983). Today some of them are among the world's top 500 companies (Timbrell and Tweedie, 1998). Some Malaysian multinationals, for example Sime Darby, Telekom, Berjaya and Petronas, are among Asia's top 100 companies (ELC International, 1997). The New Economic Policy (NEP), introduced in 1970, focused specifically on helping Malay entrepreneurs. Later on the privatisation and corporatisation policy of the 1980s led to the formation of a growing number of 'big' Malaysian companies, with Malays or government acting as the major shareholders. Many of these companies became involved in international business by setting up subsidiaries overseas or by participating in joint ventures with other companies abroad. For instance, Petronas was incorporated in 1974 and started to venture overseas through a wholly-owned subsidiary in 1990. The Petronas group of companies consists of forty-seven wholly-owned subsidiaries, twenty partly owned subsidiaries and twenty-seven other companies with total assets of more than RM68 billion (Petronas Annual Report, 1995). Recently, Petronas was ranked second highest in terms of return on revenues by the Fortune Global 500 Companies of 1998 (Fortune, 1998). Renong, another Malaysian multinational, started in 1982 as a public-listed company. Today the group consists of thirteen public-listed companies and over one hundred established operations currently active in New Zealand, the Philippines, Vietnam, South Africa and Indonesia. These companies are just a few examples of multinationals that, as predicted by Caves (1996), have proven their ability to penetrate the overseas market, especially in other developing countries.

Prior to 1997, the management of foreign exchange risk was not given much attention by Malaysian multinationals, who were quite complacent and passive in managing foreign exchange risk (New Straits Times, 30 May 1998). However, government initiatives leading to the launch of the Kuala Lumpur Commodity Exchange, the Kuala Lumpur Options and Financial Futures Exchange and the Malaysian Monetary Exchange marked the beginning of the derivative market in Malaysia. …