SINGAPORE, Jan. 12 (UPI) -- The advantages for keeping the Malaysian ringgit peg to the U.S. dollar far outweigh the disadvantages and no imminent change in policy will take place soon even though exchange rate policy is clearly under close consideration.
Late last week, Trade and Industry Minister Rafidah Aziz send a shiver through the market when she said the country may want to review its ringgit peg if the dollar's persistent weakness affects the longer term value of its currency or the country's competitiveness.
But Rafidah also said Malaysia's fixed exchange rate regime was "a necessity" to ensure stability and subsequently hinted that the value of the peg itself could be the one changed, not the peg system itself.
But in a conflicting signal for investors, Prime Minister Abdullah Ahmad Badawi late Friday said there was no plan to repeg given the current confidence in the system.
The ringgit was fixed at 3.80 to the dollar in September 1998 while the government imposed capital controls to curb capital flight in the wake of the Asian financial crisis. The capital controls were later lifted but the peg remained and is still viewed as a flagship policy and legacy of Prime Minister Mahathir Mohamad.
Interestingly the architect of the peg and capital controls was non-other than the newly appointed second finance minister, Nor Mohamed Yackop, who will de-facto run economic policy as Abdullah, who is also the Finance Minister, has little experience on that front.
Economists believe his appointment bodes well for fiscal consolidation, given Nor Mohamed qualification. His recommendation at the height of the late 90's financial crisis helped the economy to ride it through without resorting to the IMF for financial aid. At the time, the measures were seen as extremely controversial, but critics, including the International Monetary Fund, have since eaten humble pie as they indeed helped put the Malaysian economy on a recovery path.
Nor Mohamed was later given the responsibility of restructuring corporate Malaysia.
"Nor Mohamed is not known to have close ties to any politicians and so should not be burden by such ties to fulfill Abdullah's pledge to reduce unnecessary government spending. We now feel more confident that fiscal consolidation is gathering momentum and expect the fiscal deficit to shrink to about 4.0-4.5 percent of GDP in 2004 from a likely 6.3 percent in 2003," says CSFB economist Tse Chern Chia.
Most economists believe the ringgit peg will stay this year, though the chance of a re-pegging will increase if China's foreign exchange policy on the yuan changes.
"We do not think that her comments suggest that the government is planning to change the peg soon. We believe that the disadvantages of a ringgit de-peg or a re-peg outweighs its benefits and we do not expect either in 2004," said Tse. "But a change in China's fixed exchange rate could sharply increase the probability of an adjustment to the peg, but as a house we think that a change in China's current exchange rate regime is unlikely this year," he added.
The dollar has lost 3 percent against the Japanese yen since the start of December and 5 percent since end-September. But in real effective exchange rate terms, the ringgit has depreciated only 2.9 percent since the capital controls where imposed compared with an average appreciation of 3.3 percent for Asian countries over the same period.
Last year, the Malaysian authorities had indicated a change to the peg would only be considered if the regional currencies moved more than +/-20 percent against it. From this point of view there has not yet been such a move in regional currencies against the ringgit.
Given its healthy economic performance and substantial trade surpluses, Malaysia can tolerate the depreciation of the dollar, economists said. There are no sign of dollar hoarding on the part of exporters, so there is little reason to believe that a balance-of-payments crisis is imminent. Meanwhile, Malaysia's foreign exchange reserves have steadily risen throughout last year and reached $44.9 billion at the end of December
"We estimate that the ringgit is about 7-10 percent under-valued currently, which implies a fair value of about 3.4-3.6 ringgit to the dollar. This means the ringgit is not severely undervalued," Tse said.
Economists said the main advantage in a re-pegging would be to lower the debt service burden of the country and attract more capital back to Malaysia as investors bet on a stronger currency.
But the weaker dollar has helped improve the competitiveness of Malaysian exports making them cheaper, at a time when the export performance of the country has lagged behind some of its competitors in the region.
"I see no reason why they should re-peg or de-peg. They exports are underperforming the rest of the region, especially in the electronic sector as this industry has hollowed out in part of the country. Clearly they have a competitiveness problem, so the weakening of the dollar can only help them on that that front," notes Dominique Dwor-Frecaut, economist at Barclays Capital.
Some economists point that the government could decide to change the peg once the general elections are out of the way (they're expected to take place at the end of the first quarter, though a date has yet to be announced).
"For the next 12 months, there will be no imminent market pressures and the ringgit peg is supported by a sizeable surplus in balance of payments and strong economic fundamentals. But we do not rule out a change of the exchange rate regime from a position of strength after the elections," said Aileen Wong, economist at Deutsche Bank in a recent report.
