Inflation, recovery may spur ringgit revaluation
Inflation, recovery may spur ringgit revaluation
By M. Jegathesan
KUALA LUMPUR (AFP): As Malaysia gingerly moves towards
economic recovery, pundits say it is time to strengthen its
currency, the ringgit, to head off inflation which may be fueled
by high import costs.
The economy is already experiencing a rise in consumer demand
with a surge in motor vehicle sales and an impressive trade
surplus.
Motor vehicles sales, which surged 76 percent to 288,547 units
in 1999, are predicted to grow 21 percent to 350,000 units this
year due to low interest rates and an easier credit policy.
Malaysia's trade surplus surged 23.8 percent in 1999 from the
previous year, driven by exports of electronic products.
The country's current account surplus was 72.3 billion ringgit
(US$19 billion), up almost 14 billion ringgit from 1998,
government statistics showed.
But economists predict inflation to emerge in the second half
of the year due to the high costs of imports and an undervalued
ringgit.
Sani Hamid, analyst with Singapore-based Standard and Poor's
MMS International, told AFP that one way to offset inflation was
to revalue the ringgit.
"Increasing interest rates will probably risk dampening the
two engines of growth -- domestic investments and consumption.
One way out is to revalue the ringgit," he said.
Malaysia imposed controversial capital controls in September
1998 and pegged the ringgit at 3.80 to the U.S. dollar.
Prior to the Asian financial crisis in July 1997, the ringgit
stood at about 2.50 to the dollar.
Malaysia blamed currency speculators for the economic crisis
into which it was plunged in 1997, along with most of Asia.
Sani said a review in the value of the ringgit would help
offset inflation and then "hopefully" Malaysia would not need to
raise interest rates.
"Now is a good time to revalue when there is no inflationary
pressure. The ringgit is perceived to be undervalued by about 10
percent," he said.
Malaysia's annual inflation rate was 2.8 percent last year
with price increases recorded in all sectors except clothing and
footwear.
Food, rent, fuel and power accounted for almost 77 percent of
the rise in the Consumer Price Index.
Sani said "the optimal time" to revalue the currency would be
when there is stability in regional economies and when external
rates are not increasing.
But the fear is inflation would make an ugly appearance as
growth gains momentum.
"The pace (the economy grows at) could mean more imports and
inflation creeping in. This would push the government to revalue
the ringgit at maybe 3.40 or 3.20 to the dollar," he said.
Ramon Navaratnam, a former deputy secretary-general of the
treasury department, said Malaysia should remain "open-minded"
about the issue to revalue the ringgit.
Looking at the health of the economy, he said, Malaysia could
afford to take a relaxed view of exchange controls.
"We should seriously consider strengthening the ringgit
between a band of 3.50 to 3.70," he said, adding that "if we
don't, imports will become dearer".
But Navaratnam, now a corporate adviser to construction giant
Sungei Way group, said legislation to reinforce the currency
should remain in the event the ringgit is attacked again.
"This prerequisite is necessary because the international
financial market has not been reformed due to strong western
interests," he said.