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Sunday, January 23, 2005
The Peg, The Peg::Change Imminent?



Talks regarding review of the Malaysian currency peg of RM3.80 to the USD has been going on for a long time. Almost a year ago, in Jan 2004, the executive director of the Malaysian Institute of Economic Research (MIER), said pegging the ringgit against a basket of currencies would be more viable as it would allow greater flexibility and lead to a more stable exchange rate. At that time, the ringgit had weakened nearly 18% against the euro, 10.2% against the yen and had also depreciated against regional currencies. Pak Lah had responded then by saying that there were no immediate plans to change then but made it clear the government was willing to review the peg if the situation merits it.
The weak ringgit is a boon to exports but made imports expensive especially those paid in yen or euro. Parents with children studying overseas also had to come out with more ringgit to pay for their studies and living expenses. Foreign funds coming into the country were also drying up.
The reluctance to review the peg appears to be tied up with what China would be doing regarding her own currency peg. If China does not review her own peg, Malaysian exports will become less attractive and our exports would suffer. So it appears that China is holding the trump card and Malaysia would have to watch China very carefully.
MIER expects that a review would come about if any of these 3 breaking points is reached ::
1.the euro fell to 1.40-1.50 against the dollar,
2.the yen fell below 100 or
3.the Chinese yuan is revalued
none of this has yet taken place.
Recently, the man who imposed the peg, the Tun, has joined a growing number of critics pushing for a review of the peg and even said that the time is ripe now. The Tun said, "From the onset, we have said that although we have a fixed exchange rate, we can fix it at any level we want. That is the most important thing... the freedom to fix the exchange rate." He added, adding: "I feel the time has come for us to review because we have lost a lot as the value of our currency has fallen."
What the Tun had said was rebuffed by Pak Lah and the Bank Negara Governor. They insisted that there will be no review in the immediate future and that changes to the peg would only occur when they are required to be made and only when these changes were for the benefit of the people. All great sounding stuff but tells nothing about when or what will be happening soon.
But despite these denials that there will be changes soon, Barclays Capital noted in a research paper that foreign cash has been pouring into Malaysia, hiking its foreign reserves by 19 percent or USD10.7 billion in the fourth quarter of last year alone. All this money is being parked to await benefits from a repegging. So despite the uncertainty, it appears that speculators are betting that Malaysia will bow to growing pressure to review its currency peg to the shrinking US dollar. And many analysts believe that not only are they right but the government should make a change soon. Barclays forecasts a change in the pegged rate of 3.80 ringgit to the dollar around mid-year, while some economists have urged more immediate action. MIER said recently that the "window of opportunity" for change from a position of strength was shrinking. So based on these pressures the probability of a review is imminent. And knowing that this is Boleh Land, we may wake up one day after the CNY and find that the greenback is only worth RM3.20 or less.
What can joe public and the exporters and importers of goods do in these trying times? Don't commit to purchase foreign imported goods especially those needing payments in USD? Sell off investments held in USD? Sell off as much as possible inventories presently held? i'm no economist, just an ordinary joe trying to make sens out of the whole peg issue. Any economic expert out there willing to lend a hand at understanding the issue?


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