KL under pressure on peg policy

KL under pressure on peg policy

M. Jegathesan, Agence France-Presse/Kuala Lumpur

Malaysia's seven-year peg of its currency, the ringgit, to the
U.S. dollar is coming under increasing pressure for a review amid
fears of rising inflation and speculation that the yuan will be
revalued, economists said.

Even the architect of the policy, former premier Mahathir
Mohamad, is calling for a change to ensure Malaysia's economy
remains competitive.

Economists expect a review of the peg of 3.80 ringgit to the
dollar, fixed since September 1998, to be made in the second half
of the year and that Malaysia should benchmark its ringgit to a
basket of currencies.

"There is pressure on the government to review the ringgit peg
due to fears of an imported inflation," Suhaimi Saidi, an
economist with the local research house AmSecurities, told AFP.

Speculation that China may adjust its own currency peg to the
dollar and allow the yuan to rise has also lent strength to the
belief that Malaysia might follow suit, economists said.

Mahathir, who imposed the peg as part of capital controls to
shield the economy from the 1997-98 Asian financial crisis, has
recently joined others in calling for a review of the system as a
sharp decline in the dollar's value has made Malaysian imports
costlier.

But Mahathir said the value of the ringgit should be decided
by the government and not by external parties.

"We have to determine it ourselves and not leave it to market
forces as it will be exposed to manipulation," he said on
Tuesday.

Suhaimi said the ringgit was estimated to be undervalued by
about five to 10 percent, judging from the weakening of the
greenback.

"It could be revalued between 3.42 to 3.60 per U.S. dollar,"
he said.

Standard Chartered bank economist Joseph Tan, who is based in
neighboring Singapore, said the time was ripe for Malaysia to
review the ringgit peg, given its position of strength.

"The fundamentals of Malaysia's economy are strong enough to
withstand such a shift," he was quoted as saying by the Business
Times newspaper over the weekend.

Tan said Malaysia should shift to a managed float of the
ringgit against a basket of currencies from its top trading
partners.

But it was necessary for Kuala Lumpur to impose a temporary
exit tax to safeguard the financial system from the sudden drain
of liquidity, he said.

Tan said the ringgit was about 15 percent undervalued versus
the regional currencies, adding that the ringgit could be
revalued between 3.30 and 3.50 per U.S. dollar.

Prime Minister Abdullah Ahmad Badawi, however, has said that
Malaysia would keep its controversial ringgit currency peg of
3.80 to the U.S. dollar as the arrangement still benefits the
country.

"The government's current position is that the peg will
remain," he said.

But the government has said it would review the peg if there
were to be a swing of 20 percent either way in regional
currencies.