Mon, May 16, 2005 - Page 11 News List

Malaysia considers the revaluation of the ringgit

AFP , KUALA LUMPUR

A money changer works inside his cubicle while an electronic board displays exchange rates in Kuala Lumpur this week. Malaysia's seven-year ringgit peg to the dollar is coming under increasing pressure for a review amid fears of rising inflation and speculation that the yuan will be revalued, economists said.

PHOTO: AFP

Malaysia's seven-year peg of its currency, the ringgit, to the US dollar is coming under increasing pressure for a review amid fears of rising inflation and speculation that the yuan will be revalued, economists said.

Even the architect of the policy, former premier Mahathir Mohamad, is calling for a change to ensure Malaysia's economy remains competitive.

Economists expect a review of the peg of 3.80 ringgit to the US dollar, fixed since September 1998, to be made in the second half of the year and that Malaysia should benchmark its ringgit to a basket of currencies.

"There is pressure on the government to review the ringgit peg due to fears of an imported inflation," Suhaimi Saidi, an economist with the local research house AmSecurities, told reporters.

Speculation that China may adjust its own currency peg to the US dollar and allow the yuan to rise has also lent strength to the belief that Malaysia might follow suit, economists said.

Mahathir, who imposed the peg as part of capital controls to shield the economy from the 1997-98 Asian financial crisis, has recently joined others in calling for a review of the system as a sharp decline in the US dollar's value has made Malaysian imports costlier.

But Mahathir said the value of the ringgit should be decided by the government and not by external parties.

"We have to determine it ourselves and not leave it to market forces as it will be exposed to manipulation," he said Tuesday.

Suhaimi said the ringgit was estimated to be undervalued by about five to 10 percent, judging from the weakening of the greenback.

"It could be revalued between 3.42 to 3.60 per US dollar," he said.

Standard Chartered bank economist Joseph Tan, who is based in neighboring Singapore, said the time was ripe for Malaysia to review the ringgit peg, given its position of strength.

"The fundamentals of Malaysia's economy are strong enough to withstand such a shift," he was quoted as saying by the Business Times newspaper.

Tan said Malaysia should shift to a managed float of the ringgit against a basket of currencies from its top trading partners.

But it was necessary for Kuala Lumpur to impose a temporary exit tax to safeguard the financial system from the sudden drain of liquidity, he said.

Tan said the ringgit was about 15 percent undervalued versus the regional currencies, adding that the ringgit could be revalued between 3.30 and 3.50 per US dollar.

Prime Minister Abdullah Ahmad Badawi, however, has said that Malaysia would keep its controversial ringgit currency peg of 3.80 to the US dollar as the arrangement still benefits the country.

"The government's current position is that the peg will remain," he said.

But the government has said it would review the peg if there were to be a swing of 20 percent either way in regional currencies.

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