The question: to repeg or not to repeg the ringgit? (21.6.15)

(Picture: The Heat Online)

(Picture: The Heat Online)

The ringgit is currently the worst performing currency in Asia. On June 8, the Malaysian currency plunged to a nine-year low against the US dollar before reversing its course later in the day.

Many analysts are of the view that the ringgit’s slide is not only due to the country’s economic health, but also because of the 1Malaysia Development Bhd’s (1MDB) fiasco. The debt-ridden investment arm is said to have run into difficulty in finding cash to service its loans.

Recently, Deputy Finance Minister Datuk Ahmad Maslan said Bank Negara Malaysia (BNM) had listed former prime minister Tun Dr Mahathir Mohamad as one of three key reasons for the depreciation of the ringgit. BNM refuted the claim, saying that the ringgit’s performance was caused by global and domestic economic developments.

With the ringgit now hovering around 3.70 to the US dollar, there are calls to repeg the ringgit to the US dollar. This mechanism was introduced in September 1998 during the Asian financial crisis which saw the ringgit slide to a record low of 4.40 to the dollar in the early part of that year. The ringgit was maintained at 3.80 to the dollar for almost seven years before BNM announced the removal of the peg.

BNM governor Tan Sri Zeti Akhtar (pic) says weakness of the ringgit should be temporary while Mahathir feels that a repeg is one way to stabilise the currency.

Affin Hwang Investment Bank economist Alan Tan says the Malaysia ringgit doesn’t need  a repeg. “I seriously don’t think there is a need for a need for central bank to reintroduce (pegging the ringgit to the dollar) because the strengthening of the dollar is due to the US monetary policy and the country’s economic growth,” says Tan.

He explains that this is because Malaysia’s economic fundamentals are a lot stronger compared with its position during the Asian financial crisis. “The banking systems and even the banks’ non-performing loans are also in a healthier position. Therefore, even if we see capital outflows, it would be limited because Malaysia still demonstrates good fundamentals,” he says.

Tan expects the ringgit to strengthen to 3.68 to the US dollar by the end of year. “We think that the ringgit will likely remain volatile because of the movement in the US dollar.”

He attributes the dollar’s strength, which has also caused major currencies in the region to be affected, to the US Federal Reserve’s imminent hike of interest rates.

Despite the economic fundamentals still remaining strong in Malaysia with a healthy current account surplus and trade surplus, there are concerns over domestic issues and Malaysia is facing a downgrade in its credit rating by Fitch. This has led to the lack of confidence among foreign investors. The ringgit has weakened to the US dollar by about 6.08% year-to-date.

Tan explains that this is because the ringgit is currently not reflecting the country’s economic fundamentals.

“Because of the domestic concerns in the short term, we may continue to see downward pressure. If the market expectation is for ringgit to weaken further, then obviously this would lead to a spiralling effect where we may see some capital outflows.”

However, he is confident that the amount of capital outflows after this would be small as most of the “hot money” has left the country earlier.

He is also optimistic that Fitch’s potential downgrade would not greatly affect the ringgit as the other two credit rating agencies, namely Standard & Poor’s and Moody’s, had given Malaysia a favourable rating.

Another financial analyst, speaking on the condition of anonymity, tells The Heat Online that the ringgit’s decline is caused by the uncertainties over 1MDB and the escalating spat between Mahathir and Najib, which she says is unprecedented.

“All these things are worrying investors, particularly the political development which is entering new ground involving a former premier and the current prime minister. Once investors lose confidence, it does not matter how strong Malaysia’s economic fundamentals are. There will be a flight of capital because they don’t like uncertainty. Therefore, until the political climate is stabilised, the ringgit will continue to be weighed down.”

Source: The Heat Online

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