WILL there or won't there be a review of the ringgit peg in the immediate future?
That is the million-ringgit question for many economists, analysts, investors and businessmen alike.
Despite the Government's insistence that it does not have any immediate plan to review the ringgit's fixed exchange rate of RM3.80 to the US dollar, speculation is rife that a revaluation is in the works.
Standard Chartered Bank global research economist Joseph Tan is sticking to his forecast that a possible period for the revaluation of the ringgit peg would be in the second quarter of the year.
“This is because we expect a similar change to the Chinese peg some time at the end of the first quarter, a widening of the US dollar-Chinese yuan trading band by +/-3%,” he said.
The result, according to Tan, will be a currency appreciation across Asia-Pacific – a domino effect that will lead to an even worse misalignment between the ringgit and other regional currencies.
“The slide is hard to predict but it could hit the 20% mark for most currencies. We can expect a lot more volatility unless there is a very sound strategy to revalue the ringgit,” Tan said.
Since the start of 2002, the ringgit has lost an average of 15% versus Asian regional currencies.
Tan said that given the rising importance of Asian intra-regional trade as a percentage of total trade, it was increasingly crucial that Malaysia kept in step with the rest of the region.
“It is better to adjust the ringgit peg voluntarily at a time of strength rather than be forced off it at a later stage,” he added.
Tan said the Government could be delaying the revaluation of the ringgit to prevent speculators from having a windfall.
“I think that is the main fear, in addition to managing the speculative flows. The central bank will need to take time to deliberate on how best to minimise the damage to the financial system,” he said.
He believes that the ringgit should be allowed to appreciate to encourage profit-taking, unwinding of positions and some outflow of funds.
“One possibility, which will provide a win-win situation, will be to impose an exit tax of some form to manage the outflow of funds. This will stop an exodus of funds as investments mature,” Tan said.
He said the conditions were now right for Malaysia to consider a de-pegging rather than a re-pegging and a move to a managed float for the US dollar-ringgit perhaps in line with the current nominal effective exchange rate (NEER)-based exchange rate system in Singapore.
NEER refers to the change in the value of the ringgit as represented by a basket of its trading partners' currencies and weighted according to total trade.
“A re-peg is not a long-term solution if the ringgit moves further out of line with regional currencies. If Asia were to slow down in late 2005, greater foreign exchange flexibility would be even more important to help cushion the blow,” Tan said.
In addition, a NEER-based managed float would help preserve financial and economic stability while providing greater stability for the economy at a time of dynamic changes in global economic fundamentals.
Having said that, Tan is looking at the ringgit stabilising in a RM3.30 and RM3.50 range to US$1.
Rating agency Fitch has also signalled recently that a 10% appreciation in the ringgit would not hurt the Malaysian economy and could even boost credit ratings.
Tan has a fairly strong outlook for the Malaysian economy this year.
“The global resource consumption rate is still high, and this is conducive for a resource-exporting country like Malaysia. A growth of 5.8% should be achievable,” he added.
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