Commentary: Unpegging the ringgit is a sign of Malaysia's strength
Bloomberg News
July 28, 2005
William Pesek Jr. 

KUALA LUMPUR Malaysia received little attention when it followed China's lead by scrapping the ringgit's peg to the U.S. dollar. That's just fine by officials here in Kuala Lumpur.
 
Staying below the radar serves two purposes. One, it helps Malaysia avoid the speculative frenzy that has focused on China since its decision last Thursday to revalue the yuan. Two, it's a reminder of how much Malaysia's leadership has changed since the Asian crisis years.
 
No other economic news was going to trump China's first currency change in a decade. Even if the U.S. Federal Reserve had announced a rate change that day, it probably would have taken second place to events in China.
 
So Malaysians have little to fear from the relative lack of excitement over its move to unpeg the ringgit. Yet the step is important, and timely.
 
A vestige of the Asian crisis, the ringgit's peg had outlived its usefulness. Because it brought stability and predictability to the economy, however, the government was reluctant to scrap it. The fact that the ringgit was undervalued also helped bolster exports.
 
Scrapping the peg and letting the ringgit rise should be seen as a sign of confidence and maturity. It indicates that Malaysia's financial system has completed a sweeping change and is again ready to face the judgment of global markets.
 
Malaysia's rapidly developing middle class and expectations for 5 percent to 6 percent economic growth this year after a 7.1 percent rate in 2004 are pulling investors back to a place many fled in the late 1990s.
 
The economy's recovery and speculation that the currency would appreciate spurred investors to buy 11.1 billion ringgit, or $2.93 billion, of Malaysian assets in the fourth quarter of 2004 and a further 4.3 billion ringgit in the first quarter. There's no reason that trend will not continue, pushing down bond yields and bolstering stocks.
 
Bond investors in particular should be cheered by a firmer ringgit, as it will allow the central bank to combat inflation. In June, inflation accelerated at the fastest pace in more than six years, fitting with an Asiawide trend fueled by surging oil prices. Now, the central bank will be able to set interest rates in line with domestic trends.
 
On the negative side, expectations of further changes in currency policy could increase. Currency speculators, the crowd that prompted Mahathir bin Mohamad to peg the ringgit in 1998 - are again at Malaysia's gate. The good news is that this time they're exploiting not weaknesses in its economy, but its strengths.
 
Another plus for Malaysia is that the hedge funds that attacked the ringgit in 1998 - and those clamoring to profit from today's currency trends - are probably more focused on China. Malaysia will see its share of hot-money flows, though China may grapple with far more.
 
Economic historians can debate whether Mahathir was right to impose the peg and capital controls. For investors, it's Malaysia's future that matters. And on this score, there's ample reason for optimism.
 
Mahathir's successor as prime minister, Abdullah Ahmad Badawi, is a quieter sort, who prefers steady, behind-the-scenes policy making to banner headlines.
 
Abdullah's success in paring the deficit bolstered the country's debt ratings, making it cheaper for companies like Telekom Malaysia to borrow overseas.
 
The ringgit move is another plus.
 
"As the exchange rate appreciates, that could improve the government debt ratio, and we also think that it could be good for domestic demand, which could raise the level of economic growth," says Steven Hess, an analyst at Moody's Investors Service. "We view the move as a positive."

Abdullah also has been pushing Malaysia's economy toward the next phase of development. He is cracking down on corruption, demanding greater transparency, improving ties with neighbors like Singapore and reviewing deals between politically connected business people and the government.
 
Education reforms are being stepped up, as are efforts to make the government more efficient when dealing with the business world. These steps are meant to attract foreign investment at a time when so much of it is flowing to China.
 
Admittedly, Mahathir was more fun for journalists to cover; his periodic outbursts against capitalism and Jews brought terrible publicity to Malaysia's economy and financial markets. It's hard not to think that the less-controversial Abdullah is exactly what Malaysia needs right now.
 
He may help the nation become the economic power it should be. The forward-looking nature of Abdullah's policies can be seen in his emphasis on Islamic finance. The fast-growing market may bring Malaysia closer to becoming a global financial hub.
 
Part of that progression consists in letting markets decide the value of the ringgit. Malaysia is not about to let the ringgit float freely, and that's a shame, for the economy is ready for it. Although the dollar peg is gone, the ringgit will trade in a managed float system.
 
Yet investors shouldn't miss the message Malaysia sent in scrapping its peg: The economy has come full circle from the Asian crisis and it's time to look this way anew.

Copyright © 2007 the International Herald Tribune