KL in a tight spot over currency revamp

KL in a tight spot over currency revamp

Associated Press, Kuala Lumpur

Speculators betting on a revaluation of the Malaysian ringgit peg to the dollar may be in for a long wait amid mixed signals in recent weeks over the seven-year-old fixed exchange rate policy.

Most analysts agree that the ringgit, fixed at 3.80 to the dollar since 1998 after the Asian financial crisis, is undervalued by around 10 percent and should be allowed to strengthen.

But the question is whether Prime Minister Abdullah Ahmad Badawi will risk upsetting the currency regime in what could prove an unpopular move.

"The general sense we get is that Malaysia is seriously considering doing away with the peg regime but is holding back due to political inertia," said Ramya Ramachandran, economist with Singapore-based IDEAglobal.

"We still assign a 60 percent chance of a de-peg this year."

A strengthened ringgit would make exports -- the mainstay of the country's economy -- more expensive and expose businesses for at least the short term to volatile currency, something that the government is reluctant to allow, especially in an uncertain economic climate.

Gross domestic product growth this year is expected to ease to 5-6 percent, down sharply from 7.1 percent in 2004. Also, the government is tightening its belt on public spending to cut its budget deficit.

Economists say speculation since late last year about currency reform has led to an influx of foreign investment in ringgit- denominated assets as investors flock to the market hoping for a quick profit.

Credit Suisse First Boston's senior regional economist Sailesh Jha said portfolio flows as a percentage of GDP have surged to 8 percent last year from 2.8 percent in 2003.

But inflationary pressures were still benign and the central bank has adequate reserves to cope with any capital flight in case of a ringgit re-peg.

Some economists believed Malaysia's decision on the ringgit is tied to China's foreign exchange policy. If the yuan is loosened, Malaysia is expected to follow suit to ensure it remains competitive in the export markets for electrical and electronic products.