Tue, Feb 06, 2007 - Page 11 News List

Malaysia draws a line to curb ringgit: Goldman

PROTECTIVE MOVE Bank Negara Malaysia hopes the market will take the hint and allow it to avoid imposing capital controls that would send foreign investors fleeing

BLOOMBERG

Malaysia's central bank will sell the ringgit to prevent the currency rising past 3.5 per US dollar for the next three months, drawing "a line in the sand" to protect exporters' earnings, Goldman Sachs Group Inc said.

Bank Negara Malaysia wants to avoid imposing the kind of capital controls that have caused foreign investors to shun Thailand, said Adam Le Mesurier, an economist at Goldman in Singapore.

The central bank, which has allowed the ringgit to gain 7.8 percent since ending a fixed exchange rate in 2005, said it hasn't set a predetermined level for the currency.

"The immediate neighbors of Thailand are hyper-sensitive to sending negative signals to foreign investors," Le Mesurier said.

Instead, the central bank has "drawn a line in the sand and hopes the market takes the hint."

The ringgit has risen 0.8 percent this year, the second-best performer of 15 Asia-Pacific currencies after the Thai baht, as foreign investment led an acceleration in economic growth and lifted the benchmark stock index to the highest in a decade.

The ringgit's rally has stalled at 3.5 for the past two weeks and Malaysian Prime Minister Abdullah Ahmad Badawi said on Jan. 27 that currency swings threaten to hurt profit at exporters. The ringgit traded at 3.5005 per dollar as of 6:12pm in Kuala Lumpur.

Goldman forecasts the currency will strengthen to 3.45 in 12 months after remaining little changed for three months, Le Mesurier and fellow economist Mark Tan wrote in a report published last Friday.

"Every day they're buying dollars at 3.5 and increasingly in larger amounts," Le Mesurier said in an interview the same day.

"Their primary issue is to control the pace of gains as they're starting to think it's getting out of control," he said.

Malaysia defended the ringgit from appreciating in 2004 by soaking up speculative foreign capital inflows, the central bank wrote in a report published March 2005.

Governor Zeti Akhtar Aziz wrote in the report that the returns from managing reserves exceeded the costs involved in such operations.

Bank Negara doesn't have a "predetermined rate" for the currency, Zeti told reporters in Kuala Lumpur yesterday.

Still, she said "the central bank will do everything that is necessary in terms of maintaining orderly market conditions."

Malaysia's foreign-exchange reserves rose 17 percent to US$82.7 billion on Jan. 15 from the end of 2005.

The government introduced the ringgit peg at 3.8 per dollar in September 1998 after currencies across Asia collapsed, causing banks to default on their overseas debts.

Then prime minister Mahathir Mohamad attacked hedge funds for their role, describing investor George Soros as a "moron."

Abdullah ended the seven-year peg on July 21, 2005, and wants to attract overseas investors.

The economy may expand 6 percent this year, the Malaysian National News Agency quoted Second Finance Minister Nor Mohamed Yakcop as saying.

It grew about 5.8 percent last year, the agency said.

Nor said on Dec. 19 that the government wouldn't follow Thailand in restricting foreign investors.

Thailand imposed penalties for withdrawing funds invested within a year and capped foreigners' stakes in Thai companies, causing global bond funds to shun its market and prompting multinationals to reconsider expansion.

"Prime Minister Abdullah has been very professional in his dealing with local and foreign investors," said Arjuna Mahendran, a strategist at Credit Suisse in Singapore. "I certainly wouldn't want to see in Malaysia what Thailand did."

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