KL may adopt managed float system by June 2005
KL may adopt managed float system by June 2005
Eileen Ng, Agence France-Presse, Kuala Lumpur
Malaysia may abandon its six-year-old peg of 3.80 ringgit to the dollar and revert to a managed float system by June 2005 if China loosens its own fixed currency regime, economists said on Thursday.
Widespread speculation of a shift by Prime Minister Abdullah Ahmad Badawi in exchange rate policy fueled a sharp rise on the stock market, which shot up 2.2 percent on Wednesday, to breach the crucial 900-point psychological barrier.
Foreign fund buying on Thursday pushed the market to a near year-high of 918.95 points before profit-taking trimmed gains to 0.31 percent at 904.48 points.
Economists said rising anticipation that China may revamp its currency peg and allow the yuan to rise in value following its first interest rate hike in nine years last month reignited talk that Malaysia may follow suit as its economy had recovered strongly and exports are at a record high.
The peg, fixed in September 1998 to stem capital flight during the Asian financial crisis, has served its purpose and the ringgit should be allowed to climb, they said.
Singapore-based DBS Bank Ltd. senior economist Wong Chee Seng said a yuan revaluation or band-widening would have an "avalanche effect" on regional currencies including the ringgit.
"We think there is a high probability over the next six months that Malaysia will abandon the peg regime on favor of a managed exchange rate regime based on a weighted basket of currencies," Wong said.
A stronger ringgit will revive domestic investment, help control inflation and speed up the consolidation of the government's balance sheet, he added.
Abdullah, who is also finance minister, last month said the government was in close touch with China's monetary authorities and closely monitoring developments there. Central bank officials were not available for comment on the issue.
Malaysia is treading cautiously to ensure any change to the peg will not affect its economic competitiveness as growth is projected to slow down to 6.0 percent in 2005 from 7.0 percent this year. It projects exports to hit 514 billion ringgit (US$135 billion) in 2005.
The government has said it would review the peg if there was a swing of 20 percent either way in regional currencies, or if the euro and yen strengthened beyond 1.40 and 100 to the dollar respectively.
Late Thursday, the euro was continuing its record run against the dollar, trading at within sight of 1.31 levels, while the yen was at 7-month highs of around 104 to the U.S. unit.
UBS in a report cited the dollar's weakness and expectations that China will free up its yuan system in predicting the removal of the peg by the first half of 2005. Speculative capital flows, it added, may "test the (central) Bank Negara's resolve to maintain the peg."
SBB Securities economist Manokaran Mottain said de-pegging the ringgit could cause some volatility in the short-term but the benefits far outweighed the cost.
"With our build-up of international reserves, strong growth and exports, it is the best time now for us to move towards a flexible regime," he said.
"It's been too long for an advanced developing country to have a fixed peg. A managed float system is the best compromise for now because it won't upset the manufacturers nor the economic recovery process."
Most economists put the ringgit's fair value at between 3.30 and 3.70 ringgit.
Singapore's second top bank, United Overseas Bank (UOB) said there was speculation that the yuan could climb by three to five percent within the next six months.
Although there was little domestic pressure, it said Malaysia could tap its economic strength to change the peg which would endorse Abdullah's market-friendly leadership.
At the same time, however, UOB said "current capital restrictions are likely to stay as most Asian central banks have put in place some sort of forex restrictions to ward off speculators' activities."