Managed Float Assured

Malaysia

Economic News

22 Jul 2010
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The Malaysian government has unequivocally clarified that it will not be repegging the ringgit to the dollar. The announcement reaffirms long-term confidence in the currency's value and in open but stable markets.



On September 22, Finance Minister and Deputy Prime Minister Najib Abdul Razak told the press that the country would not be looking to reintroduce the ringgit's peg to the US dollar.



"I wish to categorically state that we have no intention to re-peg the ringgit, now or in the future," said Najib, in one of his first statements since being appointed as minister of finance on September 19. "We are confident about the position of the ringgit that it reflects the true value of the currency," he stated, adding that the government is "committed to allow the open market to determine the value of the ringgit".



Najib's clarification of the leadership's stance on the issue came after calls from some quarters - including former Prime Minister Mahathir Mohamad - for the country to consider repegging the ringgit to bolster it against the instability currently sweeping global financial markets.



Bank Negara, Malaysia's central bank, introduced the peg in September 1998, during Mahathir's government, in response to the ringgit's 50% drop against the greenback during the Asian economic crisis in 1997 and its aftermath. The rate was set at 3.80 to the dollar.



However, following the economy's strong rebound, Bank Negara depegged the ringgit in July 2005, opting instead for a managed float regime, under which the exchange rate is being set broadly by the market, but the bank is willing to intervene to preserve stability against a basket of key currencies. The ringgit rose to a decade-long high of 3.16 to the dollar in March this year, but dropped 6% from July 15, when the dollar bottomed out against the euro, to September 22.



The currency fell to 3.42 on the day of Najib's announcement and then to 3.45 as of September 29. The fall has been precipitated by several factors, domestic and global, not least the greenback's recent resurgence. Malaysia's inflation rate hit 8.5% in July as the government cut fuel subsidies and international commodity prices spiked. The subsequent drop in the oil price has had an impact both on the country's petroleum industry and the palm oil sector. Meanwhile, the capital markets and currency have reflected concerns over the political future after the arrest of opposition leader Anwar Ibrahim and the release of conflicting reports about the timeline for Prime Minister Abdullah Ahmad Badawi's handover of power to others in the ruling party, the United Malays National Organisation (UMNO).



The recent turmoil in the global financial system, which has seen the US government take control of several key financial institutions, while others have folded, have added to uncertainty and shaken many emerging markets as credit availability has tightened and investors have become more risk-averse.



However, Najib remains upbeat, reflecting the government's overall outlook. The IMF expects growth this year to reach 5% (and 5.25% next year), while a more conservative government forecast is 4.6% - very respectable, given the international circumstances. While there have been a difficult few months for Malaysia, this is certainly no re-run of 1997. The banking system is robust, long-term investor confidence remains and the country is far from politically unstable. Indeed, Najib's appointment is part of the plan for a smooth handover of power.



The authorities are also reluctant to return to a peg as it might seem to be taking a step backwards towards greater state manipulation of the currency and capital controls and away from an open, free-market stance that has helped Malaysia grow in recent years. Furthermore, artificial boosting of the ringgit could be counterproductive by overpricing the country's exports, a key growth driver.



By sticking to the ringgit's float, the government has indicated that it sees a liberal currency regime and market forces as central to the economy's long-term prospects.

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