Malaysia announces new ringgit peg

Thu, 03 Sep 1998 | Source: AFP

KUALA LUMPUR (Agencies): The Malaysian central bank fixed the ringgit's exchange rate at 3.80 to the dollar with immediate effect on Wednesday.

The announcement by Bank Negara Malaysia came a day after the central bank and the government unveiled sweeping foreign currency controls.

"Definitely it is a suitable level. Anything above 4.000 is too high," a forex dealer with a local bank told AFP.

"Nobody knows how long the peg will be at this rate. Definitely it will be at this level for some time but they (the central bank) will adjust it from time to time, he added.

The ringgit had hit 3.9600 in Tuesday's trade in Singapore as the forex controls were announced. Trading on the ringgit was suspended in the city-state Wednesday.

"It is not too bullish and neither is it too low. We all kind of expected it to fall within that region," an economist with a local research house said of the fixed exchange rate.

The Malaysian unit has fallen some 40 percent against the dollar in the past year.

"Even with a weaker ringgit, export growth in Malaysia is not strong and is not likely to be strong but it helps as we do not want to price ourselves out of the market entirely," the economist said.

"It is not just a simple case of when the currency drops, exports will grow. It depends on the demand and what we produce."

The ringgit peg is "certainly within that boundary of competitiveness," she said, cautioning at the same time against expectations of a huge export boost with the new peg.

Malaysia announced on Tuesday drastic plans to revert to fixed exchange rates as part of new currency controls adopted following last week's resignations of the central bank governor and his deputy.

Economists said the measures would bring short-term benefits as money flows back into the country ahead of a September 30 deadline.

Economists and analysts said on Wednesday other Asian countries are unlikely to copy Malaysia in imposing rigid exchange controls,

"We see the likelihood of the Malaysian measures being duplicated elsewhere in Asia as being extremely slim," economic consultants IDEA said in a commentary.

Analysts noted that three economies in Asia -- Thailand, Indonesia and South Korea -- are already effectively run by the International Monetary Fund anyway.

"The IMF is totally opposed to restrictions on capital flows. The IMF mandarins (in Bangkok, Jakarta and Seoul) aren't going to allow this sort of nonsense to happen while they're controlling the purse strings," the chief economist at a U.S. firm in Singapore said.

Meanwhile the International Monetary Fund said on Tuesday foreign exchange controls imposed by Malaysia might undermine investor confidence, putting the fragile economy in greater peril.

In a carefully worded statement, the Washington-based lending agency said it would have to review the government's new measures, but added: "In general, the IMF believes that any restriction imposed on the movement of capital is not conducive to building investor confidence."

Last year the international community, led by the IMF, put together bailouts worth more than US$100 billion for the three countries hardest-hit by the Asian economic crisis -- Thailand, Indonesia and South Korea.

Malaysia has firmly resisted turning to the IMF for financial assistance.

After toeing the IMF line for months by keeping its monetary and fiscal regimes tight, Malaysia has more recently eased. It has cut interest rates and spurred infrastructure building to stimulate the economy.

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