Malaysia to review fixed exchange rate

KUALA LUMPUR — Malaysia could review its fixed exchange rate regime next year if the economy performs as well as expected, according to an economist at the country’s leading independent economic think-tank.
Malaysia fixed its ringgit at 3.8 per dollar at the height of the Asian financial crisis four years ago, when Prime Minister Mahathir Mohamad slapped on capital controls and sacked former finance minister Anwar Ibrahim for disagreeing.
But the Malaysian Institute of Economic Research (MIER) executive director Mohamed Ariff said the ringgit peg, as it is commonly known, has done its job as a short-term fix.
"We should quit because it’s working, not because it’s not working," Ariff said.
Investors regard the durability of the ringgit peg as the main economic uncertainty overhanging Malaysia.
Just last week, the International Monetary Fund stirred the debate over the peg, with a report showing its directors were split over how long Malaysia should retain it.
Mahathir, who habitually bridles at outside interference, rebuffed the IMF’s advice.
But, Ariff said Malaysia will need to have a more flexible exchange rate regime to absorb external shocks, and policymakers should move back to the managed float followed before the crisis.
Ariff said 2003 would present an opportunity to re-examine the peg due to increased confidence in the economy.
MIER said this week that, after last year’s growth of less than one percent, Malaysia’s GDP was on course to notch four percent this year, 5.7 percent in 2003 and 6.3 percent the following year.
But Ariff said 2000, when the economy raced over eight percent, had presented an early chance to unhitch the peg.
"We did miss the boat in 2000, another one may be coming along," Ariff said.
But Mahathir, who is also finance minister, is satisfied with the stability it provides.
The IMF’s report said Malaysia was well positioned to benefit from an upturn in the global economy next year.
The IMF said the peg had provided an anchor of stability and there was no pressure on it for a realignment, but some directors urged Malaysia to prepare to move to a flexible exchange rate system while the economy was doing well, in order to increase the economy’s options in the medium term.
Click here for Mahathir's reaction
Mahathir has said Malaysia will only review the peg when there is a prolonged misalignment against the currencies of trading rivals.
The prime minister has already removed the big political uncertainty in Malaysia, by announcing he will step down at the end of next year after more than two decades in power.
Some analysts say the decision to come off the peg will ultimately be political, and many do not believe it will be taken while Mahathir is still in charge.
But Ariff said Malaysia should avoid being forced by markets to react.
"I don’t think we should wait until we are forced by circumstances to re-peg or de-peg," he said. "We should have an exit strategy."
He said the government should not regard the managed float as a failed system, as no system could have withstood the pressures of the Asian crisis. But he said there was no question of going back to the pre-crisis implied rate of 2.5 ringgit per dollar.
"We should consider going back to it (the managed float), but with some important changes," he said.
The MIER estimates the ringgit is five to six percent undervalued against regional rivals.
But persisting with the peg could end up undermining Malaysia’s industries.
"It may cause fundamental price distortions.
"If the ringgit is undervalued, this takes away pressure from companies to cut costs and increase productivity."
— Reuter