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AsiaWeek: Time To Pull The Peg
By Assif Shameen

20/5/2001 7:19 am Sun

[Semakin lama ringgit dikekalkan semakin melemah daya saing negara kerana matawang serantau lebih murah. Ini akan menggugat pasaran ekspot dan saham negara. Kebimbangan ringgit dinilai semula menyebabkan bukan sahaja pelabur luar semakin mengeluarkan dana dari Malaysia - malah pengekspot tempatan menyimpan hasil dalam bentuk dolar di pesisiran luar negara. Rezab antarabangsa sudah semakin berkurang dan mungkin kritikal bulan Disember nanti. Mahathir masih berdegil mengekalkan nilai ringgit kerana itu adalah moral politik beliau. Itu lebih penting dari nasib pengekspot negara yang sudah mula menggugurkan beribu-ribu pekerja. Jika paras rezab negara berada di bawah 3 bulan Mahathir akan terpaksa mengalah juga - tetapi ramai yang sudah sengsara itu tidak akan dapat melupakan segala-galanya kerana terlalu lambat mereka dibela. Jika mereka mengajar Mahathir dalam pilihanraya nanti alamat tamatlah riwayat hidup kerajaan BN atau Umno.
- Editor
] business/0,8782,110147,00.html


VOL.27 NO.21

Issue 25th May, 2001

Time To Pull The Peg

Capital flight, slowing foreign investment, blunted export and business competitiveness - Assif Shameen totes up the price Malaysia is paying for keeping the ringgit pegged to the dollar

Malaysia wants Mark Mobius, and he knows it. The fund manager practically lives and works in a Gulfstream V private jet as he scours the world for places to put $10 billion of his clients' money. Two weeks ago, Malaysia made a bid for more foreign funds by lifting a 10% tax on the repatriation of stock market profits, one of the controversial capital-control measures it imposed in 1998. Instead of rushing in, foreigners took the opportunity to cash out. Mobius just never came in. "It's still too early to invest in Malaysia," he says. "It has too many problems such as corporate governance, crony capitalism, restructuring - and probably a devaluation."

The consequences of the country's 1998 move to peg its currency to the U.S. dollar are coming home to roost. In the past six months, regional currencies have depreciated by 11% to 18%. Only the Malaysian ringgit has stayed rock-solid at 3.80 to the greenback. That makes doing business in Malaysia more expensive compared with its neighbors, blunting export competitiveness, discouraging foreign investment and fueling capital flight. "The main concern is dwindling foreign exchange reserves," says Manu Bhaskaran of SG Securities Asia. Some $500 million a week is flooding out of the Malaysian financial system for safe havens like Singapore and Hong Kong. By mid-April, Malaysia's foreign currency reserves had fallen by nearly a fourth to $26.3 billion - from a peak of $34.5 billion a year ago.

A vicious cycle is building. Foreign investors are loath to buy Malaysian assets that they figure they'll be able to pick up more cheaply after a devaluation. Exporters are holding back on converting their dollar-denominated export earnings into the local currency. And even ordinary citizens are joining in as rumors circulate that the rate may be adjusted to 4.20 ringgit to the dollar. "We're selling 50% more U.S. dollars now than we normally do," says a money changer in downtown Kuala Lumpur. A worried Mahathir lashed out in frustration last week. "We know this is happening, but we will not devalue the ringgit just because speculators expect us to do it," he warned. "We will not repeg. Our [currency's] value and goods are still competitive."

But several financial houses, including SG Securities and UBS, think that by December, foreign reserves might fall to nearly $20 billion - not enough to cover three months of imports. U.S. investment bank Merrill Lynch forecasts a repegging to 4 ringgit to a dollar, while others expect an exchange rate as low as 4.50 ringgit. "Malaysia's choice is simple," says the chief of a European bank in Singapore, who declines to be identified for fear of being shut out of Malaysian bond issues. "It can repeg or it can adjust GDP growth sharply downward over the next few years [because of loss of competitiveness]. Malaysia has traditionally preferred growth over everything else. I'd be surprised if they change that position just to defend the peg."

For now, Mahathir fervently hopes he won't have to choose between his cherished 3.80-to-the-dollar peg and 8%-or-better annual economic growth. For one thing, there is no guarantee that a cheaper ringgit will restore competitiveness. Other Asian currencies can continue to depreciate, and the ringgit may have to be repegged again and again. Politics figures here, too. Mahathir had defied conventional economic wisdom in devising the peg, which he proudly credits for protecting the economy from global volatility. A revision would be a tacit admission of failure. Says an economist at another Singapore bank: "The peg has become such an important part of the political equation that a repegging will be a political, not an economic, decision."

The harsh realities of global economics will likely leave Mahathir with no choice but to swallow his pride. Asian countries, like Thailand, with free-floating currencies are reaping the benefits of export competitiveness and large foreign reserves. The ringgit-dollar peg did help shield Malaysia from the turmoil of the Asian financial crisis, but it also delayed the corporate restructuring needed if the country is to be competitive. The challenge for Mahathir will be to find a way to explain to the Malaysian public why it makes sense to devalue the currency - and why it took him so long to admit the need to do so.