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."