Malaysia in no hurry to change ringgit
peg By Chee Yoke Heong
Over
the past few weeks, speculation has been rife that the
Malaysian government will either re-peg or remove the
ringgit/US dollar peg sometime next year. The latest
round of speculation was triggered after a number of
international research houses and rating agencies
indicated a likelihood that the government might review
its pegging policy and either remove or re-peg the
ringgit. Then on Monday, Forbes reported that former
premier Mahathir Mohamad had urged countries and
companies to curb their reliance on the dollar and
increase their holdings in euro and Japanese yen.
However, government officials, including Prime
Minister Abdullah Badawi, have shrugged off such a move,
saying it is unlikely in the foreseeable future - though
they did not rule out a review "when necessary". The
Malaysian ringgit is currently pegged at 3.8 to the US
dollar, a peg imposed in 1998 amid the Asian economic
crisis.
"Global dollar weakness and the
likelihood of greater flexibility in the Chinese
renminbi [yuan] provide an excellent opportunity to
remove the peg," Sanjay Mathur, an economist at UBS
Investment Research, wrote in a report released last
month. He added that this is likely to take place in the
first half of 2005 and that a managed float should be
the preferred exchange-rate regime as it gives the best
compromise between predictability and flexibility.
Following the release of his report, the stock market
rallied on November 18, pushing the Kuala Lumpur
Composite Index to a four-year high.
In recent
weeks, the dollar has depreciated sharply against the
yen and the euro. As the ringgit is pegged to the US
dollar, the weakening of the US dollar against other
major currencies has led to the ringgit trending
downward against most major currencies in nominal terms,
raising concerns that it is undervalued and therefore
needs to be revalued.
In another report, DBS
Economic-Market Research said that rising inflation in
the Malaysian economy, the highest in two years, is
likely to put pressure on the ringgit peg. According to
the report, a stronger than expected consumer-price
index of 2.1% and 1.6% in October and September suggest
that oil prices and the weak ringgit are beginning to
bite. "This raises the possibility that Malaysia will
abandon the peg in the near future, possibly within the
next six months," it said.
The report said the
ringgit fell by 33.7%, 20.8% and 8.5% against the euro,
yen and Singapore dollar over the last two years and
predicted that local authorities would abandon the peg
to contain inflationary pressures. But Bank Negara
(central bank) governor Zeti Akhtar Aziz said on
November 30 that there was no need to re-peg the ringgit
as the current exchange rate is providing stability
against other currencies. Malaysia would retain its
exchange rate policy as it has served the nation well,
he said, adding that the ringgit remains fairly valued
in a volatile exchange rate environment.
Second
Finance Minister Nor Mohamed Yakcop also brushed aside
concerns that the ringgit is undervalued, saying the peg
is not materially misaligned against major and regional
currencies, and that the government has no immediate
plans to review the policy. According to Nor Mohamed,
the ringgit has depreciated by 11.2% against the pound
sterling, 10.5% against the euro and 25.2% against the
yen. Vis-a-vis regional currencies, the ringgit has
depreciated 5.8% against the Singapore dollar, 2.7%
against the Thai baht and 21.8% against the Korean won.
The ringgit, meanwhile, appreciated by 17.1% against the
Indonesian rupiah and 29.5% against the Philippine peso.
Therefore, he concludes, the ringgit peg is not
misaligned vis-a-vis other regional currencies.
Government officials had previously, on
different occasions, stated that Malaysia would consider
reviewing its peg if the US dollar falls below 1.40
euro; the dollar falls below 100 yen; Asian currencies
fluctuate by about 20% either way - all three over a
sustained period.
On China's exchange rate
policy, Badawi says: "Malaysia's decision on whether to
change its six-year-old ringgit peg to the dollar would
not depend on any adjustment in China's foreign-exchange
regime," but would be based on the country's own
requirements. Again, this is a deviation from his
earlier statement that Malaysia would monitor closely
China's potential review of its exchange-rate regime.
The government is now changing tack, saying any
review of the ringgit peg would consider a series of
factors. Nor Mohamed said such a review would hinge on,
among other things, the impact on exports, inflation
expectations, allocation of resources, exchange rate and
stability of the exchange rate for growth and economic
development.
Some economists are also of the
opinion that Malaysia should not rush into either
re-pegging or un-pegging the ringgit, adding that though
the ringgit is undervalued at the moment, it's still not
time for change. "Fundamentally, there is no strong
compelling reason to review the peg," said Lee Heng
Guie, chief economist of CIMB Securities. Unlike China,
there is no clear pressure for Malaysia to adopt a
flexible exchange rate. Hence it is more of a "herd
instinct" expectation that Malaysia may be "pressured"
to review its currency peg if China bows to external
pressure to revalue or float its currency, he said. Lee
believes Beijing will not act hastily on the issue and
is more likely to implement the change gradually. If the
yuan moves into a more flexible exchange regime, there
will be greater pressure on the ringgit peg.
Another research house economist believes any
ringgit re-pegging has to be supported by fundamentals.
Based on a real effective exchange-rate model, the
indicative fair value of the ringgit is around RM3.69/$.
"A re-peg is therefore not necessary in this case, and
only a de-peg to a 'managed float' system to allow
greater flexibility for its monetary policy management
makes more economic sense," he said.
But then,
Malaysia's current decision not to review the peg is not
etched in stone either. According to Nor Mohamed: "If we
want to change, we will change. We have no qualms about
that. The pegging by itself and the pegging rate was
never an ideological issue."
(Copyright 2004
Asia Times Online Ltd. All rights reserved. Please
contact us for information on sales, syndication and republishing.)
