Is Malaysian ringgit due to fall from its peg?
International Herald Tribune
June 29, 2005
Wayne Arnold 

KUALA LUMPUR If gambling were not against his religion, Nor Mohamed Yakcop could probably make a decent living playing high-stakes Texas hold'em in Las Vegas.
 
As special economic adviser to the prime minister at the time, Mahathir bin Mohamad, during the Asian financial crisis in 1998, Nor was the architect of Malaysia's ringgit peg, the policy of fixing the value of the currency against the dollar, in the same manner as China fixes its yuan exchange rate.
 
Ever since, the ringgit has remained at 3.8 to the dollar despite an export-led economic recovery that has even the government conceding that the ringgit is undervalued. So when Mahathir's successor, Abdullah Ahmad Badawi, appointed Nor last year to run the Ministry of Finance, many economists and investors suspected that Nor was being brought in to revise the peg, or even abandon it.
 
But Nor has kept them guessing, offering only a policy-making poker face. He will say only that revaluation is not out of the question.
 
"It is not something that is cast in stone," he said.
 
"At this point in time it seems it is still serving a useful purpose. But that doesn't mean we should take it for granted."
 
Apart from the yuan and the Hong Kong dollar, the ringgit is the only Asian currency whose value is pegged to the dollar. Central banks in other Asian countries, from Japan to Singapore, seek to minimize drastic changes in the value of their currencies, and in recent years they have tried to keep currencies from appreciating in order to maintain their export competitiveness, but the marketplace ultimately decides their value.
 
Few economists doubt that Nor will have to move.
 
While the peg keeps Malaysia's exports from losing competitiveness as the dollar declines, keeping the currency artificially undervalued is inflating the costs of imports, jeopardizing growth.
 
Yet after a surge of speculation at the beginning of the year, investors have lately begun to have doubts, pulling more than $200 million out of Malaysia's stock market in March and April.
 
"They've lost hope that there will be a ringgit revaluation," said Gan Kim Khoon, executive director at AmResearch in Kuala Lumpur.
 
What may force Nor's hand, economists say, is a move by China to revalue the yuan. That would allow Malaysia and other Asian exporters to let their currencies rise without making their exports more expensive relative to China's. The trick for Nor, they say, will be anticipating China by revaluing the ringgit just before it revalues the yuan. Too soon and Malaysian exports will suffer; too late and a flood of speculative funds will rush into Malaysia, risking higher inflation.
 
Fixing the ringgit's value was just part of a controversial package of controls on the flow of money into and out of Malaysia designed to insulate the country from the financial crisis, controversial because it flouted the advice being given at the time by the International Monetary Fund.
 
Malaysia has since lifted most of its capital controls. Only the peg remains, having gained in the interim a measure of respectability. "On balance, it's been beneficial," said Arjuna Mahendran, chief economist and strategist at Credit Suisse Research in Singapore. In addition to keeping Malaysia's exports price competitive, the peg has provided stability for businesses.
 
"The downside is that they frightened a lot of portfolio investors," Mahendran said. Economists say that despite the stability the peg offered to exporters, it discouraged investment in Malaysia's capital markets, leaving them stunted compared to others in the region.
 
Still, there are those who contend that the peg remains essential to Malaysia's financial and economic health. Exporters and Malaysia's trade minister, Rafidah Aziz, are the most outspoken supporters of the peg.
 
With the global economic outlook dimming, many say now is not a good time to tinker with the peg. Electronics exporters are likely to be the worst affected if the ringgit were to rise, as are agricultural producers such as Malaysia's influential palm oil producers. Revaluing the ringgit could also hurt farmers, which would run counter to the prime minister's stated policy of improving the lot of the rural sector.
 
But the case for revaluing the ringgit is growing by the month in the form of rising foreign currency reserves. Since 1997, Malaysia's foreign reserves have more than tripled, to $75.2 billion. Keeping the ringgit fixed when so much money is flooding into the country requires expensive foreign exchange operations by the central bank. To help ease the pressure upward on the ringgit, Malaysia has also lifted requirements that exporters convert their earnings abroad into ringgit and now allows Malaysian residents to hold deposits in foreign currencies.
 
Despite these efforts, the undervalued ringgit is accelerating inflation, now at its highest level since 1999.
 
Inflation is raising the cost of imported machinery and other equipment, to the point that many manufacturers are calling for a change in the ringgit's value. "Nine months ago they were happy about the peg," said Chua Hak Bin, an economist at DBS Bank in Singapore. "But now they'd prefer to see the peg go. They need to expand capacity."
 
Once China revalues its yuan, supporters of revaluation say, Malaysia will have no choice but to revalue. If Malaysia waits until after China to revalue its currency, currency speculators will pour money into Malaysia to cash in on the inevitable rise in its currency, a flood of funds that will create even more inflationary pressure.

Copyright © 2006 the International Herald Tribune