KUALA LUMPUR -- Indonesia's central bank signed two bilateral memoranda of understanding with its counterparts in Malaysia and Thailand on Friday in order to facilitate the use of local currencies for settlements of trade and direct investments.
The agreements on the local currency settlement framework were inked between Bank Negara Malaysia and Bank of Thailand with the Bank of Indonesia, which will smooth economic and financial activities between the three countries.
The new agreements with Indonesia echo one signed between the central banks of Malaysia and Thailand in August 2015 and the subsequent introduction of a policy framework in March this year.
"The cooperation arrangements between our central banks have now expanded to include clearly defined protocols and operational frameworks in a broad range of areas, including financial market development, supervision, surveillance, payment arrangements and crisis management," Muhammad Ibrahim, governor of Malaysia's central bank, said in a statement.
Ibrahim lauded the deals as an effort "to provide the institutional and policy framework to promote orderly financial market conditions and support the efficient management of financial risks" ahead of expected "continued episodes of volatility to occur in the periods ahead, driven by a combination of policy uncertainties, negative sentiment and speculative activity."
Businesses will benefit from reduced transaction costs and more efficient trade and investment settlements by being able to choose the local currency in which they want to trade.
"The framework will pave the way for wider usage of local currencies in the Association of Southeast Asian Nations Economic Community and spur further development of the regional foreign exchange and money markets, in support of wider economic and financial integration," said the central banks in a joint press release.
The deals come after measures introduced in November by Bank Negara Malaysia to calm financial market volatility, including stopping the offshore trading of ringgit and asking exporters to convert most of their earnings back into the local currency. The ringgit declined to 4.48 against the U.S. dollar earlier this week, which according to Bloomberg data was the weakest it had been in 17 years. It eased back to 4.47 against the dollar on Friday.
Meanwhile, the Thai baht and Indonesia rupiah have also fallen by 0.21% and 1.51% respectively against the dollar this year.