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Malaysia abandons ringgit peg to boost slowing economy

Malaysia's decision to scrap its seven-year-old fixed-currency regime will bring cheer to the slowing economy and put the country back into the sights of foreign investors, economists said yesterday.

The lightning move late on Thursday to drop the 3.80 ringgit peg to the US dollar and embrace a managed float system -- made in lockstep with China's yuan revaluation -- adds another feather in the cap for Prime Minister Abdullah Ahmad Badawi, who has made major economic changes in his second year of power, analysts said.

Since succeeding Mahathir Mohamad in October 2003, Abdullah has scored points with foreign investors by reversing key policies of his predecessor including suspending large infrastructure projects to rein in a serious budget deficit, loosening foreign-exchange rules and improving government transparency.

Mahathir defied many economists' prescriptions by introducing the ringgit peg and other capital controls in 1998 to protect Malaysia's economy during the Asian financial crisis. Malaysia survived the crisis better than many, and Mahathir claimed to have been vindicated.

While the other controls have gradually been eased in recent years, the government doggedly defended the currency peg even as recently as last month.

The new currency regime, "is a boost to the economy because Malaysia is moving toward free-market policies," said SBB Securities economist Manokaran Mottain.

"Foreign perception on Malaysia will improve further. It's one up for Abdullah. He has clearly established his mark on the economy," he said.

The move comes at a time of economic slowdown, with GDP growth expected to dip to between 5 percent and 6 percent this year from 7.1 percent last year.
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