Sunday March 21, 2004

Is Malaysia's Abdullah as Good as He Looks?

By David DeRosa*

March 21 (Bloomberg) -- Malaysia's Prime Minister Abdullah Ahmad Badawi appears to be headed to a strong showing in this weekend's parliamentary election. Abdullah needs a good outcome to solidify his position after succeeding Prime Minister Mahathir bin Mohamad in October.
Abdullah is popular both at home and abroad in part because Malaysia is doing well economically. Gross domestic product grew 5.2 percent last year and is forecast to rise at even higher rates this year. Exports in January were the highest for that month in a decade.
Is Abdullah to get the credit for this? While Malaysian export industries are unquestionably doing better than they were in the recent past, this may be due not to Abdullah but to the foreign exchange policy he inherited from Mahathir.
Mahathir pegged the ringgit to the dollar in September of 1998. Mahathir did this not to boost exports but to eliminate the speculation against the ringgit that he said was a malign force against Malaysia.
Quite unexpectedly the dollar began to weaken against world currencies starting in January 2002. And because of the peg, the ringgit too has dropped. The other currency in Asia pegged to the dollar is the Chinese yuan, and it, too, has weakened against world currencies because of its tie to the U.S. currency.
This means that Malaysia, like China, has the wind blowing to the backs of its export industries. The fall of the dollar translates into Malaysian exports being made cost effective in overseas markets.
As a consequence, some part of Malaysia's economic turnaround since the crises of 1997 and 1998 is due to a competitive devaluation of the ringgit caused by the dollar peg. A bad foreign exchange policy, meaning the peg, has temporarily benefited Malaysia, and also Abdullah's political fortunes.
Fixed exchange regimes seldom last for long. What would happen to Malaysia's exports if the ringgit were de-pegged to the dollar? One would have to believe the ringgit would rise against all currencies, unless a case could be made (and that would be difficult) that the unit would have fallen all on its own absent the dollar peg.
Take away the peg and the ringgit ought to rise.
On the other hand, even if Malaysia keeps the ringgit pegged, the dollar might start to rise against the yen and the euro for reasons unique to the demand and supply for dollars.
Whatever the future holds for the ringgit, it must be understood that Abdullah is running on a record that was helped from the currency being pegged to a dollar at a time when the latter was in decline. Abdullah looks good because the dollar, and, by extension, the ringgit, looks bad.
How should investors view this? This is tricky business because the removal of the peg or a rebound in the dollar would be bad for Malaysian businesses.
Yet in the case where the peg is scrapped there might be a nice boost to the dollar value of investor's stocks and bonds by a revaluation of the ringgit. To some extent, an investment in Malaysia is a bet that the peg will be removed.
Investors are also interested in the election because it is a referendum on Mahathir, who served as prime minister for 22 years. A vote for Abdullah is, in a fashion, a vote condemning Mahathir, even though Mahathir picked Abdullah as his successor.
Since Abdullah took office, he has become a symbol of change for the better. He stands for less red tape, less corruption and less cronyism. Investors took note and have shown a healthy appetite for Malaysian stock and bonds --the Malaysian stock market closed Friday at a 46-month high ahead of Sunday's election.
Most of all, Abdullah appears to have convinced Malaysians he is serious about stamping out corruption. This drew praise from Mahathir, who on March 10 said: ``Corruption has been an ongoing thing. The present government seems to show much greater interest in eradicating corruption.'' Never mind that Mahathir had more than two decades to deal with corruption.
How permanent is Abdullah's zeal for reform? A cynic could argue that Abdullah spent his early months in office preparing his image for the election. He did so by branding himself as anti- Mahathir on issues like reform, corruption and market- friendliness.
Which, in and of itself, is quite a trick given that Abdullah is of the same party as Mahathir, the United Malays National Organization (``UNMO'').
Abdullah has managed to look as un-UNMO, meaning un- Mahathir, as possible while running as UNMO's candidate.
How long will that last? Even if Abdullah can be taken at his word that he wants to change the system, can the same be inferred of the UNMO party?

*David DeRosa, president of DeRosa Research & Trading, is an adjunct finance professor at the Yale School of Management and the author of "In Defense of Free Capital Markets." The opinions expressed are his own.

Parent site: "The World At Your Fingertips"