THE ringgit is undervalued by some 10% against the US dollar and other major currencies, but any attempt to de-peg the local currency from the greenback may affect the competitiveness of Malaysian exporters, said Malaysian Institute of Economic Research (Mier) executive director Dr Mohamed Ariff.
Ariff told reporters on the sidelines of the Mier national economic briefing in Kuala Lumpur yesterday that the current peg of RM3.80 to one US dollar, in place since September 1998, would likely remain “for some time.”
“It’s a political decision but you don’t change something that is working,” Ariff said, adding that the relatively cheaper Malaysian goods overseas were boosting sales for some local exporters and “we may want to enjoy it for a little while.”
Nevertheless, he said, the undervaluation of the ringgit against the US dollar posed a risk of “serious exchange rate misalignment” and the two currencies moving in opposite directions could limit Malaysia’s monetary policy options. “We may lose some leeway,” he said.
Ariff said the problem should also be seen from the larger perspective of Malaysia’s competitors in the region. He said China, for instance, had a currency that was 20% undervalued, giving it a competitive edge over other countries.
“We’ll be disadvantaged if we float the ringgit while the yuan is still pegged to the dollar,” he said, predicting that should China float its currency, it could cause a chain reaction through Hong Kong, Taiwan and Malaysia.
Ariff said that in the longer term, the ringgit peg would not be sustainable and urged the government to examine its options.
“Although I don’t see any need to rush into any kind of change in regime, (the peg) is not a long-term solution and the government will have to come up with something else, “ he said.
But Ariff said if any change was to be made, it should be done from a position of strength, like the current ringgit undervaluation. “We had an opportunity to make the change in 2000 but it was lost in 2001. There is also an opportunity presently,” he said.
In response to a question at the briefing on the use of the euro for invoicing, as advocated by certain government leaders, Ariff said that while the peg was in place, there would always be a policy bias in favour of the US dollar in all foreign transactions.
“I don’t see strong prospects of transactions happening in euro or any other currency (at the moment).”