Musical chairs du jour:
Malaysia May Scrap Dollar Peg Before China: William Pesek Jr.
Jan. 14 (Bloomberg) -- Currency speculators -- financial barbarians, some might say -- are again at Malaysia's gate. Only this time, they're not exploiting weaknesses in Asia's 10th biggest economy, but its strength.
Foreign money is rushing here amid speculation Malaysia will scrap its six-year-old currency peg to the U.S. dollar. The hope is to profit from a one-off jump in the value of the ringgit, which many analysts think is roughly 20 percent undervalued.
Will the bet pay off? It may indeed now that Prime Minister Abdullah Ahmad Badawi seems to be dropping hints that a change in currency regimes may be afoot.
``It's become a matter of when, not if, the peg will be done away with,'' says Nik Azhar Abdullah, chief investment at Avenue Asset Management Services Sdn. here in Kuala Lumpur.
It began late last year when the prime minister said any decision on changing the ringgit peg won't depend on China's currency policy -- a reversal from his earlier remarks. The plot thickened this week, when he mentioned that Malaysia is seeking ways to reduce its reliance on the dollar for trade.
Show of Confidence
Malaysia should indeed free the ringgit's 3.8 peg to the dollar. It would show officials have confidence in the state of the economy and the financial system. It also would be a sign Malaysia has come full circle since the dark days of the 1997-1998 Asian crisis. The timing is right, too.
``It's best to make a change from a position of strength and we're in one right now,'' says Kelvin Miranda, who manages $180 million at Asian Asset Management Sdn.
That point is buttressed by a report from the Malaysian Institute of Economic Research. ``If the dollar keeps faltering, and the ringgit under-valuation widens,'' the independent think tank said, ``the risk of having a highly disruptive ringgit correction will increase the longer we wait to do something about the peg.''
There's ample economic justification. Inflation accelerated to 2.2 percent in November, the fastest in almost five years, amid solid consumer demand and higher global oil prices. The dollar's declines, which lower the ringgit's value, also are placing upward pressure on inflation. Letting the ringgit rise would alleviate it.
Still, the government is expected to move gradually. For one thing, the ringgit peg has been a highly successful policy, the centerpiece of Malaysia's post-crisis recovery. For another, the dollar's slide is making Malaysian exports more competitive in the short run.
Tinge of Nationalism
There's also a tinge of nationalism at play here. When Abdullah's predecessor, Mahathir Mohamad, pegged the ringgit in 1998, the International Monetary Fund derided it as an ``extremely retrograde step.'' By December 2002, the IMF was calling the peg a ``stability anchor'' of a rebounding economy. Every day the peg remains, one could argue, is a day Malaysia can say it's going its own way economically.
Once a change it made, Malaysia won't let the ringgit float freely right away. The odds favor it adopting a Singapore-like system in which the ringgit is managed in a trading range dictated by a basket of currencies.
The desire for a change is hardly universal. The peg restored stability after a traumatic period when Malaysians learned how ruthless markets could be in the age of globalization. In a world of uncertainties -- volatile oil prices, record U.S. current account and budget deficits and China trying to slow growth -- an economic anchor isn't a bad thing to have.
Anchor? Or Shield?
Yet the policy has outlived its usefulness. It shields Malaysian companies from the need to compete as aggressively on a global basis as they might otherwise, impeding strategy and innovation. Malaysia has lots of both, and a firmer ringgit may catalyze the nation's executives.
Abdullah is doing the right thing by separating Malaysia's decision from China. Malaysia's financial system is in far better shape than China's. Nor does it face China's challenge of creating jobs for hundreds of millions being displaced by the transition from socialism to capitalism.
Governments and manufacturers the world over are crying foul over the yuan, claiming it makes Chinese exports artificially cheap. Anger may only increase after news China's monthly trade surplus hit a nine-year high in December.
``This, alongside the soaring U.S. trade deficit, will heighten pressure on Beijing to permit some flexibility in its exchange rate in 2005,'' says David Cohen, Singapore-based economist at Action Economics.
`Best Policy'
U.S. Commerce Secretary Donald Evans is in China this week to press the point. ``Market-determined exchange rates are the key to a well-functioning financial system,'' Evans said in Beijing. ``This is the best policy for large economies, including China's.''
Evans is right, yet his argument suffers from a cart-before- the-horse mentality endemic of the Bush administration. Only when China feels its financial system is stable enough will it let the yuan trade freely, not before. That explains why China is moving glacially -- and why Beijing won't be bullied by Washington.
The same can't be said of Malaysia, and officials here should be looking at a dollar-peg exit strategy. It's not about politics or fairness -- as it is with China -- but economic maturity. That's why speculators may be right that Malaysia's dollar peg will go before China's. |
