Malaysia looks increasingly likely to lift partially a decade-old ban on offshore trade in the ringgit this year, seizing the chance to please investors while its currency is strong and reserves ample.
The central bank could allow trade with certain limits and score points with foreigners who have shunned Malaysia for years because of the ban, which they say hampers investment and capital flows.
Analysts say a strong economic outlook and growing competition for foreign investment could prompt Malaysia to act sooner rather than later and remove the last of capital controls imposed in the wake of the 1997/1998 Asian financial crisis.
"Reserves are pretty good, we've got inflation really down now, plus the fact that the ringgit is in a strengthening mode," said Suresh Kumar Ramanathan, head of market economics and strategy at Malaysia's Affin Investment Bank.
The ringgit hit a nine-year high this week, the economy is expected to expand by up to 6 percent this year, and the central bank's reserves stood at $91.6 billion at the end of April, their highest level in at least seven years, according to Reuters data.
The authorities have begun liberalising the economy in earnest with the removal of the ringgit peg in July 2005 in their drive to develop the financial industry and diversify the $130 billion economy away from manufacturing.
Most capital controls imposed a decade ago have been unwound over the years and the final step would be to allow the ringgit to be traded internationally again.
Central bank chief Zeti Akhtar Aziz suggested earlier this year Malaysia could eventually do that, though as a small open economy it had to tread carefully and could take a gradual approach.
Analysts say the ban could be lifted as early as the end of this year, but probably with some restrictions, such as volume limits on certain types of transactions. Singapore, for example, has put volume limits on some Singapore dollar instruments such as swaps and options in the offshore market.
"The authorities will continue to take a cautious approach and the events of 1998 are still fresh in their memory," said Callum Henderson, head of currency strategy at Standard Chartered in Singapore.
"Just because Malaysia is the flavour of the month at the moment, it doesn't mean it will be at the end of this year or next year." Today only domestically licensed banks can exchange ringgit for foreign currencies, allowing the central bank to keep a close eye on trades to clamp down on speculation. The ringgit can still be traded internationally through the non-deliverable forward market.
But the restrictions are seen as one of the reasons why many investors seeking a slice of Southeast Asia's boom story have shunned Malaysia in favour of neighbours Singapore and Thailand. "It is a barrier which most investors can do without," said Nizam Idris, a currency strategist at UBS.
Malaysia's weighting in the MSCI Asia ex-Japan stock index stood at just above 4 percent in February, compared with more than 20 percent in February 1996. Capital controls have also driven a wedge between asset prices in Singapore and Malaysia, said Nizam. For example, prime property in Singapore costs S$3,500 per square foot, while a similar property in Malaysia will fetch S$500, he said.
However, some analysts say Second Finance Minister Nor Mohamed Yakcop, the architect of Malaysian capital controls, appears more cautious than the central bank on the issue of offshore trade.
This suggested that, in the near term, Malaysia may opt for other means to develop its financial industry, some say. "The preference would probably be to have banks set up offices in Malaysia, investing capital and show that you're here for the long term and you're not here just for a punt," said Daniel Koh, Standard Chartered Bank's Malaysia treasurer.