Around Asia's markets: Malaysia to loosen currency, banks say
Bloomberg News
March 22, 2005
Christina Soon and Chan Tien Hin 

Malaysia will let its currency strengthen for the first time in seven years, UBS, Lehman Brothers Holdings and Bank of America have predicted.
 
Prime Minister Abdullah Ahmad Badawi may allow the ringgit to gain to 3.4 per dollar by year-end, said Robert Subbaraman, an economist at Lehman in Tokyo.
 
Abdullah's predecessor, Mahathir bin Mohamad, fixed the currency at 3.8 in 1998 to stem an exodus of capital during the nation's worst recession.
 
A stronger currency may help Abdullah combat inflation, which held at a five-year high in February, by lowering the price of imported goods. It would also reduce the amount of ringgit the central bank has to sell to stop the currency from appreciating.
 
"Inflation seems to be creeping up in Malaysia," Subbaraman said in an interview last week. "Selling ringgit and buying foreign currencies to try and maintain the peg can lead to too much liquidity."
 
Consumer prices rose 2.4 percent in January from a year earlier, the fastest rate since 1999, while money supply expanded 12.5 percent in the month, the most in at least seven years. Malaysia's foreign reserves, holdings of currency at the central bank, rose to a record $71.8 billion in the last two weeks of February.
 
Malaysia's $118 billion economy expanded 7.1 percent last year, the fastest pace in four years. Exports, which account for about 122 percent of gross domestic product, rose 20.5 percent last year to a record.
 
"Malaysia has gained an upper hand from the competitiveness point of view by maintaining the peg, but you can't have your cake and eat it too," Ashley Davies, a currency strategist at UBS in Singapore, said in an interview last week. "You can't permanently maintain this competitive position if eventually it contributes to inflationary pressures domestically."
 
UBS forecasts that the ringgit will appreciate to 3.5 against the dollar by the end of the year. The Zurich-based bank is the largest currency trader, with 12.4 percent of the $1.9 trillion-a-day market, according to a 2004 ranking by Euromoney magazine.
 
Speculation that Abdullah will dismantle the link increased after Mahathir said on Jan. 19 that the government needed to review the exchange rate.
 
"The time has come for us to review because we have lost a lot as the value of our currency has fallen," Mahathir told reporters after he met with the former World Bank chief economist Joseph Stiglitz in Putrajaya, Malaysia's administrative capital. "Although we have a fixed exchange rate, we can fix it at any level we want."
 
The currencies of Malaysia's neighbors and largest trading partners, which are allowed to fluctuate, have strengthened in the past three years.
 
The Singapore dollar has advanced 12.3 percent versus the U.S. dollar, the Thai baht is up 12.5 percent and the Indonesian rupiah has gained 5.7 percent.
 
"The current peg will remain," Izzuddin Dali, secretary general of treasury at the Malaysian Ministry of Finance, said last week. "The government is certainly monitoring it very closely." Asked whether there would be a change this year, he said, "We do not know yet."
 
Tenaga Nasional, a Malaysian state-controlled electric utility, stands to gain from a stronger ringgit. Tenaga has 16.1 billion ringgit in foreign-currency debt and a 10 percent increase in the currency's value would save the company 1.5 billion ringgit in principal and interest payments, the chief executive, Che Khalib Mohamad Noh, told reporters in December.

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