Asia Times: Malaysia happy to be pegged down


	June 7, 2001	atimes.com

Southeast Asia

Malaysia happy to be pegged down
By Faud Rahman

KUALA LUMPUR - Malaysia has been accused of ignoring the obvious in strongly defending its peg on the ringgit. The government pegged its currency at 3.80 units per US dollar in September 1998 during the Asian financial crisis and imposed capital controls to stem the outflow of short-term capital.

The peg still dominates market talk today. It has come under speculative attacks and financial analysts from Hong Kong to Singapore have cautioned on air and in print on the dangers of continuing with the peg, saying Malaysia should rather rely on global market sentiment.

However, Malaysian authorities believe lifting the peg will put them back in the danger zone, exposing the country to further economic hardship. Exporters prefer predictability rather than uncertainty, they say.

As Bank Negara (central bank) Governor Zeti Akhtar Aziz said earlier this year, "The stability of the exchange rate is itself a competitive tool. For Malaysia, the peg against the US dollar has provided this stability and facilitated planning and pricing for manufacturers and traders. Competitiveness in the international market place is only assured through increased productivity, product innovation, intense marketing and improvements in product quality."

Although some people are hoarding US dollars in anticipation of good returns should the ringgit be repegged, the climate for the ringgit is actually favorable as the interest rate cuts in the United States and the stronger yen have eased pressure on it. Policy makers in Kuala Lumpur are hoping the new government in Japan will be able to introduce measures to revive the sluggish economy to support an even stronger yen, which will further ease pressure on the ringgit. This will also depend, though, very much on developments concerning neighboring currencies.

During the 1997 Asian crisis, Malaysia survived the worst of economic turbulence by pegging the currency, so it is likely to stick to the same formula, even though exports are decreasing and foreign direct investment is losing ground. And with Prime Minister Mahathir Mohamad taking over the fiance portfolio, there is unlikely to be any deviation from the set course.

Mahathir said on Tuesday he will take over as finance minister for the time being, filling the post left vacant by the resignation of Daim Zainuddin. Mahathir also said he will assume the duties of special functions minister at the helm of the National Economic Action Council, a body created to steer Malaysia's economy following the financial crisis.

Widely considered to be Malaysia's second most-powerful man, Daim resigned last week, ending months of speculation about his future but doing little to quell rumors that he had fallen out with Mahathir. It was the second time Mahathir has appointed himself finance minister. The first was in 1998 when Mahathir fired his then-deputy Anwar Ibrahim. Mahathir held the finance post for several months before appointing Daim, himself a former finance minister, in 1999.

In the stock market, foreign fund managers appear to be liquidating their positions, causing the outflow of funds. Bank Negara has denied this course has been prompted by local factors, saying it is rather the managers' response to global developments. Nevertheless, since the ringgit is less vulnerable to speculative attacks, the need for further mechanisms to curb outflows is not high in the fiscal agenda.

Some market observers feel the ringgit should be reset at 4.00 or 4.20 to the dollar. But policy makers say there is no need to do this as the country's fundamentals have strengthened. Aziz says, "In determining a sustainable exchange rate, what is important is that the exchange rate be in line with the fundamentals of the economy. The current pegged rate of RM3.8 to the US dollar reflects our underlying fundamentals."

Malaysia has strengthened its position in terms of foreign indebtedness, that is, improved the maturity structure of the country's debt, which gives support to its external exposure. In addition, the banking system is solid, capitalization has improved, inflation is low and reserves are steady at $27 billion.

The argument persists though that what was effective previously will not necessarily be relevant today. Many feel the ringgit should be allowed to float, not necessarily a free float but a managed one, or a crawling peg within set levels.

Certainly, there is no definitive answer as to what is the best currency regime. The question now is not whether Malaysia should find an alternative exchange regime, but whether it can sustain market confidence and further enhance its current policy to stimulate the economy. Malaysia has to tread cautiously on its path to globalization.

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