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More power to the
ringgit
KUALA LUMPUR - Within an hour
of China's revaluation of the yuan, Malaysia
scrapped its ringgit's seven-year peg to the US
dollar and opted for a managed float system.
The governor of Bank Negara
Malaysia, the country's central bank, Dr Zeti Akhtar
Aziz, said the Malaysian government had been keeping
a close watch on the ringgit's performance
against a basket of currencies. The government felt
that the domestic currency was now very close to
its fair value, she told a news conference.
With the unpegging, the ringgit will no
longer have a pre-determined exchange rate. Bank
Negara will manage its value against the currency
basket, which the government won't disclose. Zeti
said the ringgit was not likely to deviate too
much from its peg of 3.80 to the greenback. The
ringgit rose half a percent against the dollar
when the market opened on Friday, the first day of
trading under the new managed float system.
Zeti said the managed float was adopted to
replace the US$-RM3.80 peg - which Malaysia
adopted in the wake of the Asian financial crisis
in 1997 - because of significant structural
changes in the region, including China's decision
to end the yuan's fixed rate regime.
The
central bank said it would monitor the exchange
rate against a currency basket to ensure that the
exchange rate remained close to its fair value.
"Promoting stability of the exchange rate
continues to be a primary objective of policy,"
Bank Negara said. Consequently, the stability of
the ringgit's exchange rate against regional
currencies would become increasingly important, it
said. "Such stability can best be achieved by
maintaining the value of the ringgit against a
trade-weighted index of Malaysia's major trading
partners," it said.
Prime Minister
Abdullah Ahmad Badawi, who is also the finance
minister, told a news conference that the ringgit
would be stable and he did not expect much
volatility. He said the move would be positive
"for the economy and the market". According to
government officials, the decision was linked to
China's move. The country's economic managers are
said to have discussed the matter with Abdullah
months ago and decided to unpeg the ringgit the
moment China revalued the yuan.
The
de-pegging of the Malaysian currency has sparked
enthusiasm among investors, with share prices on
Bursa Malaysia opening substantially stronger. The
Composite Index soared 16.16 points to 938.10 when
markets opened on Friday. Analysts said the
managed float was likely to encourage foreign
investors to expand their investments in the
domestic share market as well as pour funds into
ringgit-denominated assets.
Malaysia's
move to switch from dollar to a currency basket
comes six months after former prime minister
Mahathir Mohamad suggested it was time to review
the peg. In recent years, many economists have
complained that the ringgit had begun to look
significantly undervalued. "The Malaysians have
long realized the ringgit is undervalued and
significantly so," Simon Flint, head of emerging
Asian currency strategy at Merrill Lynch Singapore
Pte Ltd, told Bloomberg. He said the ringgit was
still significantly undervalued and markets would
push the currency to 3.50-3.60 per dollar in the
weeks ahead.
A stronger ringgit will allow
the central bank to combat inflation. Malaysia's
inflation last month accelerated at the fastest
pace in more than six years. Consumer prices rose
3.2% in June, the most since February 1999
following repeated hikes in fuel prices. An
appreciation of the ringgit now will make key
imports like fertilizer, chemicals and pesticides
cheaper.
National utility company Tenaga
Nasional Bhd (TNB) and those in the automotive and
media sectors may benefit from the revaluation.
But companies that rely on exports as their
primary income base, like chipmakers, may take a
hit. Entities like TNB Malaysia International
Shipping Corp Bhd and IOI Corp Bhd that have
massive foreign debt stand to gain as the
de-pegging lowers the cost of borrowing. The
import costs of auto companies like UMW Holdings
and Proton Holdings go down, as do the newsprint
expenses for print media companies.
Ringgit-denominated crude palm oil futures
on Bursa Malaysia Derivatives fell sharply on
fears that a ringgit appreciation would make
Malaysian palm oil less competitive. Some 90% of
Malaysia's annual palm oil production of 14
million tons is exported. While a stronger yuan
will help China buy more palm oil, traders feared
that a stronger ringgit would make rival
Indonesia's products more attractive. Indonesia is
the second-largest exporter of palm oil after
Malaysia.
As the dollar fell against other
Asian currencies recently, so did the ringgit. A
weaker ringgit has served Malaysia well. Exports
rose 21% to a record $126.5 billion in 2004 while
foreign exchange reserves doubled in two years to
$75.2 billion in June. The following days will
tell whether the loss of this export
competitiveness will be compensated by gains in
other spheres. Malaysia's debt ratings will remain
unchanged at A- despite the removal of the
currency peg, said both Standard & Poor's and
Fitch Ratings.
(Asia
Pulse) |
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