KL's reforms bring cheer to economy

KL's reforms bring cheer to economy

Eileen NG, Associated Press/Kuala Lumpur

Malaysia's decision to scrap its seven-year-old fixed currency regime will bring cheer to the slowing economy and put the country back into the sights of foreign investors, economists said on Friday.

The lightning move late on Thursday to drop the 3.80 ringgit peg to the dollar and embrace a managed float system - made in lockstep with China's yuan revaluation - adds another feather in the cap for Prime Minister Abdullah Ahmad Badawi, who has made major economic changes in his second year of power, analysts said.

Since succeeding Mahathir Mohamad in October 2003, Abdullah has scored points with foreign investors by reversing key policies of his predecessor including suspending large infrastructure projects to rein in a serious budget deficit, loosening foreign exchange rules and improving government transparency.

Mahathir defied many economists prescriptions by introducing the ringgit peg and other capital controls in 1998 to protect Malaysia's economy during the Asian financial crisis. Malaysia survived the crisis better than many, and Mahathir claimed to have been vindicated.

While the other controls have gradually been eased in recent years, the government doggedly defended the currency peg even as recently as last month.

The new currency regime, "is a boost to the economy because Malaysia is moving toward free market policies," said SBB Securities economist Manokaran Mottain.

"Foreign perception on Malaysia will improve further," he said. "It's one up for Abdullah. He has clearly established his mark on the economy."

Among the chief likely benefits of the unpegged currency are:

- Malaysian investments abroad may accelerate given the ringgit's stronger purchasing power.

- a further rise in the ringgit's value could attract capital inflows into the stock markets.

- a higher-valued ringgit will dilute the impact of high oil prices and lower import costs, easing inflationary pressure; this will bring immediate respite to the airline, food and beverage, automotive and media sectors as well as utility firms and corporations with heavy overseas borrowings.

The move comes at a time of economic slowdown, with gross domestic product growth expected to dip to between 5 percent and 6 percent this year from 7.1 percent in 2004.

"We are thrilled with the announcement," said Tony Fernandes, chief executive of the region's top budget carrier AirAsia. "We would benefit from it as would many other Malaysian companies with exposure to the U.S. dollar."

He said the ringgit revaluation could cut operation costs by up to 10 percent due to cheaper oil prices and lower borrowing costs for AirAsia, which has embarked on a fleet expansion this year.

But other industries- including the export-driven electronics, oil and gas and plantation sectors - stand to be losers under the new regime.

Manufacturers who have benefited from the dollar's decline by making their export products cheaper are worried a sharp appreciation in the ringgit may dent Malaysia's competitiveness.

"One big issue here is our (export) competitiveness. We expect the ringgit to strengthen but we hope it will be gradual," said Federation of Malaysian Manufacturers' vice president Paul Low.

Manufacturers would be compelled to step up automation and revamp their business processes to become more competitive, he said.

Economists said the central bank would likely intervene to prevent any radical swings in the ringgit's value. The bank has refused to disclose the trading band, saying it will be determined by economic fundamentals.

The ringgit, which is widely seen as undervalued by 5 percent- 7 percent, has so far Friday risen by only 0.5 percent to around 3.78 against the dollar.

Junior Finance Minister Nor Mohamed Yakcop, who helped draw up the 1998 capital controls, acknowledged there will be losers.

But "there will be many more winners than losers," he said.