Tue, 08 Feb 2000

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.