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Life after the peg in
Malaysia
By Anil Netto
PENANG - The removal of the ringgit-US
dollar peg after seven years is being closely
watched as analysts try to gauge its impact on the
real economy, which is facing several challenges.
Inflation has been running at the highest level in
six years, manufacturing output has eased sharply
and export growth has moderated - though the
sizeable current account surplus (13.4% of GDP in
2004) is likely to remain.
Malaysia
removed its peg to the US dollar on July 21 in
favor of a managed float, which will guide the
ringgit against a basket of currencies of its main
trading partners, immediately after China lifted a
similar peg. The managed float could further
increase Malaysia's external reserves, which have
surged over the last couple of years as Bank
Negara intervened by buying dollars to stem an
appreciation of the ringgit. By July 29, 2005,
reserves had reached US$78.7 billion (or nine
months of retained imports, which is total imports
minus re-exports) - up from $75.2 billion on July
15 (or 8.6 months of retained imports). Bank
Negara Malaysia said two-thirds of the inflow
during this fortnight had occurred on the day
following the announcement of the un-pegging.
The central bank will have to tackle the
inflationary impact of ringgit released into the
system at a time when the country has just
announced yet another round of fuel price hikes,
on July 31, barely two months after the last round
of fuel price hikes. M1 money supply growth has
been increasing within a band of 10-15%
year-on-year for each month since January 2005
whereas GDP growth for the year is projected at
just over 5%.
Inflation is already
galloping. It is expected to edge up to 3.3% this
year from 1.4% last year, and reach 3.4% next year
- relatively high levels given the way the
Consumer Price Index is calculated in Malaysia. "I
believe Malaysia can probably tolerate an
inflation rate of up to 5%," Malaysian Institute
of Economic Research (MIER) executive director
Professor Dr Mohamed Ariff Kaseem was quoted as
saying. "Anything above 5% will be quite painful."
But because imported inflation will be reduced
somewhat, Bank Negara should be able to keep
interest rates fairly low to keep the domestic
economy humming.
Most analysts are looking
at a 5-10% appreciation of the ringgit by year-end
and currency speculation is likely to be limited,
given that international trading of the ringgit is
still barred and that attention is now focused on
China. A lot of hot money had already come into
the country from the last quarter of 2004 in
anticipation of a ringgit appreciation as
investors snapped up Malaysian bills and bonds,
hoping to profit from a revaluation. By mid July
2005, the ringgit had appreciated 9.3% against the
pound and 9.2% against the yen since January 2005.
The lifting of the peg is likely to have a
favorable impact for Malaysian manufacturers that
use imported components, making their products
cheaper. Companies and certain giant
state-controlled firms with foreign currency debts
will benefit from lower-interest servicing costs
in ringgit terms. Other firms will find it cheaper
to seek loans from abroad.
Rating Agency
Malaysia Bhd (RAM), the country's leading rating
agency, has indicated that the key beneficiaries
of the lifting of the peg include "the food and
beverage sector (Nestle), power (Tenaga Nasional
Berhad), media (The Star, Media Prima), and
healthcare (KPJ Heathcare, Pantai Holdings)". But
it could negatively affect export-based firms with
revenue in US dollars, including firms involved in
semiconductors, timber, plantations, glove
manufacturing, and air freight - though some had
hedged their forward currency exposure. In some
cases, the adverse impact would be eased by lower
costs for imported raw materials such as
fertilizers in the plantation sector. Overall, the
agency noted that the impact was not sufficient to
warrant any rating action.
Malaysia's
exports could lose some competitiveness as they
become more expensive, and labor costs could begin
to look less attractive to foreign investors in
comparison to that in neighboring countries. The
lifting of the peg comes at a time when
manufacturing output has eased sharply while
export growth has moderated though the sizeable
current account surplus is likely to remain.
Though Malaysia's Industrial Production Index rose
3.4% year-on-year in June 2005, it fell 4% from
the preceding month. An economist here told Asia
Times Online that the central bank will most
likely be keeping an eagle eye on the yuan to make
sure that the ringgit does not step too far out of
line with it. China is regarded as a major export
competitor and Bank Negara will want to ensure
that Malaysia's exports remain competitive.
Though some analysts argue that the
country is ready for a free float of the ringgit,
Bank Negara is likely to intervene to prevent too
abrupt an increase in its value, opting instead
for a gradual, less turbulent, rise. Yeah Kim
Leng, RAM's consulting services general manager,
told Asia Times Online that the managed float
would allow exporters time to come to terms with
the ringgit appreciation and maintain their
competitiveness. "It will ensure that the ringgit
appreciation is absorbed by the real sector,
giving time to adjust to a stronger currency,"
said Yeah. He sees the ringgit heading to 3.5-3.6
against the US dollar by year-end.
Yeah
added that the peg to the US dollar had increased
the risk for an economy that was growing at a
moderate to fast rate. He noted that global trade
imbalances and the huge US current account deficit
have underpinned global economic growth. "It would
be better to peg [the ringgit] to a currency with
greater stability," he said. The lifting of the
peg to the dollar would also overcome the
perception of friction caused by trade imbalances
while removing the perception of an undervalued
ringgit, he noted.
The lifting of the peg
last month reflected increased confidence on the
part of the Abdullah Badawi-led Malaysian
government, whose fiscal discipline has eased the
federal government's deficit as a percentage of
GDP to around 4% this year from a high of 5.8% in
2000. The peg, along with capital controls,
imposed in 1998 in the aftermath of the Asian
financial crisis, earned mixed to positive
reviews. Analysts say it was difficult to measure
just how successful the peg was in curbing
currency speculation and promoting economic
recovery. For one thing, the 1998 economic
collapse in Malaysia was less severe - and its
pre-crisis problems less serious - than in
Indonesia and Thailand. The timing of the
introduction of the peg in September 1998 also
coincided with reduced currency volatility across
the region shortly after.
Though the
ringgit peg allowed the Malaysian government to
reduce interest rates, rates also fell across the
region. For instance, analysts point out that
Thailand's interest rate fell below Malaysia's in
September 1998, the month the ringgit peg was
introduced. The Malaysian authorities set the peg
at 3.8 ringgit to a dollar at the beginning of
that month - after the ringgit had been trading at
just over 4 per US dollar - in an attempt to raise
the value of the currency. But other regional
currencies also rose from mid-September 1998, when
the United States lowered its interest rates. That
said, the peg did provide welcome stability for
the business community, which was shaken by a year
of currency volatility during the Asian financial
crisis.
Anil Netto is a
freelance journalist based in Malaysia, covering
political and social issues. A former accountant,
he is currently joint coordinator of Charter
2000-Aliran, a network promoting press freedom in
Malaysia.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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