KL may have to review currency peg: MIER

KL may have to review currency peg: MIER

Agence France-Presse, Kuala Lumpur

Malaysia may have to review its six-year-old currency peg against the dollar as the ringgit is about 15-20 percent undervalued and import bills are rising, a private think-tank said on Tuesday.

Mohamed Ariff Abdul Kareem, executive director of the Malaysian Institute of Economic Research (MIER), said pegging the ringgit against a basket of currencies would be more viable as it would allow greater flexibility and lead to a more stable exchange rate.

The ringgit's peg of 3.80 to the dollar, fixed as part of capital controls since 1998, "does not reflect the true strength and the strong fundamentals of the Malaysian economy currently," he was quoted as saying by Bernama news agency.

As of Jan.13, the ringgit has weakened nearly 18 percent against the euro over the past year, 10.2 percent against the yen and also depreciated against regional currencies, he said.

"Judging by the shrinking dollar during the last 12 months, the ringgit is seen to be 15 to 20 percent undervalued," Mohamed Ariff said.

While the peg had served its purpose to battle a recession during the Asian 1997/98 financial crisis, he said economic conditions had changed dramatically since then and Malaysia must not stick to the peg "for the sake of having it."

At the same time, he said he does not expect any policy shift "unless there is a breaking point" that may force the government to consider a peg review.

The three possible "breaking points" would be if the euro fell to 1.40-1.50 against the dollar, if the yen fell below 100 or if the Chinese yuan is revalued, he said.

"The trump card is actually held by China. If we revalue our ringgit and China does not, it will affect our exports abroad," he said.

Mohamed Ariff said there is no such thing as an ideal exchange rate regime and a "managed float" is probably the best option for Malaysia now.

In a report, MIER said the weak ringgit is a boon to exports and certain sectors such as palmoil but there are concerns over rising import bills for other industries such as national car makers like Proton and Perodua.

If the ringgit is kept undervalued for too long manufacturers may become complacent and rely on the cheap currency to do their work for them.

Some analysts have said it is time for the government to remove the peg given the weakening dollar and Trade Minister Rafidah Aziz has said a review may be called for if Malaysia's competitiveness is threatened.

Prime Minister Abdullah Ahmad Badawi, who is also finance minister, last week reiterated there were no plans to change for now but made it clear the government was willing to review the peg if the situation merits it.