The Malaysian Insight

ECONOMISTS have agreed with Bank Negara Malaysia’s decision not to peg the ringgit against the US dollar, despite the local currency is trading at a 24-year low against the greenback.

The US Federal Reserve’s move to raise interest rates saw the ringgit slide by 9% this year, in line with other emerging market currencies, meaning it is not an isolated case, economists said.

Given that most of Malaysia’s imports are no longer coming from the United States, pegging the ringgit will not amount to anything, they said.

Lim Kim Hwa, Penang Institute director and fellow in finance at University of Cambridge, said if the central bank decides to peg the currency, it has to be able to defend it.

“This means that the central bank must meet all demands for the US dollar at the pegged exchange rate,” he told The Malaysian Insight.

“If that demand cannot be met, a black market for the US dollar will develop, undermining the official peg.”

He said if the peg fails, Malaysia could be looking at its own version of “Black Wednesday”, when speculators “broke the pound” and cost Britain £3.14 billion.

On September 16, 1992, the UK government was forced to withdraw the pound from the European Exchange Rate Mechanism (ERM), after a failed attempt to keep its exchange rate above the lower limit required for the ERM participation.

“So if the ringgit is pegged at the current 4.5 rate, the peg is likely to be under pressure. If it is pegged at much lower, at say, 5.5, then imported inflation will be a problem,” said Lim.

“All in all, the US dollar is strengthening against all currencies, and this problem is not specific to the ringgit only. Hence, a peg would be too drastic a policy.”

Ringgit stronger against Asian currencies

Prof Rajah Rasiah of Universiti Malaya said the main reason for the falling ringgit is the interest rate hikes by the US Federal Reserve to contain inflation.

The Fed’s rates have reached 3.00-3.025% now and are expected to rise further to reach 4.5-4.75% next year.

While the interest hike will put continued pressure on the ringgit, Rasiah said is not enough reason to peg the local currency given that Malaysia has reduced reliance on US imports.

“Unlike until 2010, the Malaysian economy has gradually become less dependent on the US economy,” he said.

“China and Singapore have become Malaysia’s biggest export and import markets/sources, with the US coming in third, absorbing 12% of Malaysian exports and accounting for 8.2% of Malaysia’s imports in 2022.”

The ringgit has also strengthened against Asian currencies, he said.

“From January 1 to September 21, 2022, the ringgit on average appreciated against the yuan, Singapore dollar, the yen, the won, the baht and the rupiah,” he said.

“Since much of Malaysia’s food imports come from Thailand, Indonesia, India and the East Asian economies, pegging the ringgit to the dollar cannot be the solution. And if it is done, it could result in the overvaluation of the ringgit, thereby attracting more food imports from cheaper currency-based countries.

“Exchange rates facing the East Asian currencies are not volatile enough to suggest that they are erratic and have become a speculative tool of currency traders, as was the case during the 1997-98 Asian financial crisis.”

No liquidity or debt crisis

Economist Yeah Kim Leng of Sunway University said given that Malaysia is not facing a liquidity of debt crisis, a peg cannot be justified.

“Currently, the county is not faced with a shortage of liquidity or debt crisis. What we are facing is an unequal impact of the flailing currency, particularly on importers,” he said.

“For the importers, if they are not in a crisis and are still able to weather the exchange rate, it should be fine. It is part of the economic adjustment to external shocks.”

Lim said the stronger dollar is a global problem and needs a global solution.

“The world has to come out with a solution on how to deal with the strong dollar. It is causing turmoil in the financial markets,” he said.

“Pegging the ringgit will not stop the problem. There are other negative effects as you are interfering with the free flow of capital.

“It is also hard to determine what the optimal exchange rate (for the peg) is. It is best to leave it to market forces.”

Yesterday, Bank Negara said it will not impose capital control or peg the ringgit to maintain an open economy.

In 1998, during the Asian financial crisis, Malaysia had pegged the ringgit at 3.8 to the dollar and imposed capital controls. It was eventually removed in 2005.

Last week, Finance Minister Tengku Zafrul Abdul Aziz said Malaysia is not experiencing an economic crisis just because the ringgit is trading at a low level against the greenback.

He explained that the ringgit’s performance should be viewed holistically, not just in comparison with the dollar, as the local note has also strengthened against other currencies.

Yesterday, the ringgit slid marginally against the dollar due to a lack of buying momentum as demand for the greenback remained strong on the back of its safe-haven status.

At 9am, the ringgit fell to 4.5670/5710 against the greenback from 4.5660/5695 at Thursday’s close.

At yesterday’s close, it declined against the Japanese yen to 3.2139/2172 from 3.1890/1919 and went down versus the Singapore dollar to 3.2207/2238 from 3.2196/2225.

The ringgit appreciated against the British pound to 5.1447/1492 from 5.1564/1603 and rose vis-a-vis the euro to 4.4958/4997 from 4.5002/5037. – September 24, 2022.