Can the ringgit peg remain sustainable?<\/p>\n
By Simon Cameron-Moore<\/p>\n
KUALA LUMPUR (Reuters): Malaysia has delivered a fiscal
\nstimulus at the right time, but analysts are unsure whether it
\ncan induce enough growth to save the ringgit peg if a weak yen
\nsparks competitive depreciations round the region.<\/p>\n
Satisfaction with the peg, fixed at 3.8 per dollar in 1998 to
\nstaunch capital outflows during Asian crisis, is riding high.<\/p>\n
Prime Minister Mahathir Mohamad can rightly boast the economy
\nhas fared better than any of the southeast Asian nations which
\nopted for free-float International Monetary Fund prescriptions.<\/p>\n
But after the question of what happens when 75-year-old
\nMahathir finally steps aside, the ringgit peg's sustainability is
\nseen by fund managers as Malaysia's next biggest risk factor.<\/p>\n
On Tuesday, as he unveiled a near US$800 million stimulus
\npackage, Mahathir declared the ringgit peg will be kept to ensure
\na continued environment of predictability and certainty.<\/p>\n
But even Malaysia's independent-minded policy makers will
\nstruggle to duck a squeeze likely to be exerted soon by global
\neconomic forces.<\/p>\n
A $5.5 billion fall in Malaysia's international currency
\nreserves in the nine months through February, down to $28.99
\nbillion, has drawn a lot of comment from analysts, saying that at
\nthis rate of erosion the peg will need adjusting in late 2001.<\/p>\n
Malaysia could opt for a sovereign bond issue to raise funds
\nand give its international currency reserves a little filip.<\/p>\n
But others believe the pressure on the economy will trigger a
\nreadjustment before the reserve levels become alarming.<\/p>\n
\"Our scenario is not for a balance of payments crisis. The
\nbigger threat is likely to come from export competitiveness if
\nyen weakness is here to stay and regional currencies are dragged
\ndown,\" Vincent Low, Merrill Lynch's Singapore-based regional
\neconomist, told Reuters.<\/p>\n
A U.S. slowdown, twinned with a wobbly yen spells trouble
\nahead, which domestic spending can only partially deflect.<\/p>\n
Pump-priming helps domestic demand, and in Malaysia public
\nconsumption only accounts for only around 12 percent of GDP,
\nwhile the value of exports exceeds that of GDP.<\/p>\n
Around 40 percent of exports are telecommunications equipment
\nand semiconductors, and new orders from the U.S., Malaysia's main
\nmarket, have dried up.<\/p>\n
Throw Japan's problems into the mix, with widespread
\npredictions of a weaker yen, and the danger of Asian currencies
\nsliding into a cycle of depreciations becomes a real risk.<\/p>\n
Tuesday's fiscal package aims to add 1.1 percent to GDP
\ngrowth, which analysts had earlier expected to slow to five to
\nsix percent this year after 2000's runaway 8.5 percent expansion.<\/p>\n
It certainly will boost this year's growth, but maybe not as
\nmuch as the government thinks, analysts say.<\/p>\n
The cut announced in Employee Provident Fund contributions was
\nexpected to result in higher consumer spending, which would
\ndeliver nearly half the growth expected from the fiscal booster.<\/p>\n
But, with the economy slowing, Malaysians may prefer the
\nsafety of fixed deposits rather than going on a spending spree.<\/p>\n
\"It seems ambitious. There's nothing to say consumers won't
\nput their money in a savings account,\" Arjuna Mahendran, head of
\nresearch at SG Securities, told Reuters.<\/p>\n
With a savings rate of 40 percent last year, Finance Minister
\nDaim Zainuddin says he doesn't want Malaysians saving more, so a
\ncritical element of the package was to get banks to increase
\nlending by 8 percent.<\/p>\n
\"The whole thing hinges on that. It will be a very positive
\nspin off if consumer access to finance becomes easier,\" Mahendran
\nsaid.<\/p>\n
As for the planned spending on projects, the government will
\nhave to make sure the money filters down to sub-contractors if
\nthe public-sector multiplier effect is to be maximized, he said.<\/p>\n
\"The more they spend on development projects the more that is
\nlikely to leak into imports thereby diluting the stimulatory
\nimpact,\" UBS Warburg said in a note to clients on Wednesday.<\/p>\n
Malaysia can easily pay for its booster, helped by reserves
\naccumulated from budget surpluses run up pre-1997.<\/p>\n
The fiscal deficit was targeted to fall to 4.9 percent of GDP
\nthis year, but now it looks like overshooting slightly.<\/p>\n
\"It's only a modest increase in the deficit,\" Merrill's Low
\nsaid, pointing to low interest rates and a liquid banking system
\nas other reasons the \"fisc\" can be taken care of comfortably.<\/p>",
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