FM 2: Ringgit not strong enough for peg review

  • Business
  • Saturday, 19 Mar 2005

THE ringgit, which is fixed against the US dollar, hasn't fallen enough versus other currencies in Asia to warrant changing the pegged exchange rate, Second Finance Minister Datuk Nor Mohamed Yakcop said in an interview.  

“Certainly, we have not made a decision to re-peg,'' Nor Mohamed said in Putrajaya on Thursday. While the ringgit is about 5%-7% “undervalued'' according to most estimates, “it's not significant enough to see the benefit'' of any change in the fixed currency rate.  

Speculators have increased bets Malaysia will alter the 6 1/2-year-old peg this year. Investors abroad bought US$2.9bil of ringgit-denominated assets in the last three months of 2004, the most in three quarters, amid speculation their value will gain once the currency is allowed to appreciate.  

Nothing had changed in the past few months to prompt a change in the peg, Nor Mohamed said.  

“It's dangerous to change the ringgit peg regime when you know there's still a lot of hot money in the economy,'' said Saifuddin Morat, an economist at Mayban Securities Sdn Bhd in Kuala Lumpur.  

Nor Mohamed was the architect of a plan implemented in 1998 by then Prime Minister Tun (then Datuk Seri) Dr Mahathir Mohamad to fix the ringgit at 3.8 per US dollar.  

Datuk Nor Mohamed Yakcop

While the link curbed speculation aimed at driving the currency lower and helped Malaysia weather the Asian financial crisis, it raised the cost of some imports as the US dollar fell against the euro and yen, contributing to inflation.  

“Even from the very beginning, Mahathir knew that nothing is actually cast in stone,'' Nor Mohamed said. “If the exchange rate goes haywire, goes out of whack, and we find that we are 20% out of whack with the regional currencies, we'll certainly look to change it, either way, up or down.''  

Malaysia may need to revalue its currency in the second half of 2005 if the inflation rate exceeds 2.5%, according to Suhaimi Ilias, an economist with Affin Securities Sdn Bhd in Kuala Lumpur. The consumer price index rose 2.4% in February.  

“An option is to revalue the ringgit to deal with the inflation side of things by offsetting the unavoidable rise in local prices with lower import costs,'' Suhaimi wrote in an e-mail.  

The International Monetary Fund said on March 14 the ringgit was undervalued and greater flexibility in the exchange rate would help Malaysia better manage the risk of market disruptions. The comments were made in a report reviewing the Malaysian economy.  

Robert Subbaraman, an economist at Lehman Brothers Holdings Inc, said in a report last week that he expected Malaysia to abandon its peg and let the ringgit trade against a basket of currencies of its trading partners.  

The peg means the ringgit has tracked the dollar's decline against the yen, euro and other major currencies in the past year.  

The US currency fell for a third year versus the euro and the yen in 2004 in part on concern the US will fail to attract sufficient capital to offset its record current account deficit.  

“The dollar is basically the world currency, so I think it will for some time be the currency for us to determine the value against,'' Nor Mohamed said.  

Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz said on Feb 17 the ringgit peg was “fundamentally sound.''  

On March 1, Zeti said economic growth in the fourth quarter was “steady and strong,'' and the exchange rate mechanism was “well supported by these fundamentals.'' – Bloomberg  

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