w w w . x e .s . c x

The twists and turns of ringgit policyAll agree that when change happens on the exchange rate front, it will be unexpected
By S JAYASANKARAN IN KUALA LUMPUR
Published December 13, 2004
___________________________________________
On the whole, a cheap, and pegged, ringgit…keeps the system stable
and gives Malaysian exporters an enhanced competitiveness that’s been
translated into eight straight years of balance of payment surpluses.
___________________________________________
HOW things change.
Way back in the late 1980s then finance minister, Daim Zainuddin once
commented acidly on Malaysia’s management of its foreign reserves in
the early 1980s. Then, apparently, the central bank, prodded by finance minister Tengku Razaleigh Hamzah, spent billions of ringgit to keep Malaysia’s currency on par with the Singapore dollar for, presumably, reasons of machismo.
Now the ringgit is at 2.3 odd units to its Singaporean counterpart and 3.80 to the greenback – from 2.50 for the longest time – and nobody, least of all the central bank or the finance minister, seems to think it’s demeaning or that it’s been debased.
Actually, it has. Just ask all the tens of thousands of parents with
children studying overseas: the Malaysians who travel abroad; the
importers who have to buy stuff from other countries. But the whole is greater than the sum of its parts and, on the whole, a cheap, and pegged, ringgit suits the central bank just fine. It keeps the system stable and gives Malaysian exporters an enhanced competitiveness that’s been translated into eight straight years of balance of payment surpluses.
Those surpluses, according to strict economic theory,indicate that the
ringgit’s value is prima facie misaligned, that it is somehow undervalued against the currencies of its major trading partners. But economic theory,as Henry Ford might have said, is mostly bunk.
Don’t expect any sort of realignment of the ringgit any time soon.
First, never mind all those economists saying that the ringgit may be
20-30 per cent undervalued against the major currencies. On the contrary, sneer at them. On a real effective exchange rate basis, the central bank estimates that it’s only about 3 per cent out of kilter. JP Morgan thinks it’s about 7 per cent undervalued but that’s hardly 20 per cent.
Second, the central bank doesn’t break a sweat sterilising all the
foreign exchange inflows from foreign traders and fund managers long on the ringgit.
Sterilisation occurs when the central bank reborrows ringgit from the
banks – which sell the foreign exchange it gets from said traders and
fund managers back to Bank Negara – to prevent disruptions to Malaysia’s money supply.
Now that can be a costly business. Not for Bank Negara. It pays 2.7 per cent on the ringgit it borrows from the banking system but can earn as much as 4 per cent on its US$61 billion in reserves if it invests in long-dated US Treasuries.
Private economists estimate that the central bank sterilised more than RM130 billion (S$56.7 billion) as at end-November but that’s no big deal for any central bank having reserves of more than RM220 billion.
Third, inflation isn’t an immediate threat despite high commodity price pressures. That isn’t really because of careful planning, it’s more like a fortuitous consequence stemming from a contraction in fiscal spending. That deflationary shock to demand helps even out imported inflation and puts no pressure on Bank Negara to begin thinking about things like exchange rate revaluation.
Finally, Malaysia’s electronics exports have been sliding. It’s
reflected in statistics that show that the country’s share of Asia’s electronics exports is expected to fall to 13 per cent this year compared to almost 20 per cent in 1999.
From a central bank perspective, that’s a compelling reason to keep
hanging on to the US dollar’s secular decline, to stay extra-competitive.
The peg will go someday but it will be later rather than sooner. It’s
not all good either. It detracts from bestowing the benefits of greater policy flexibility to government and it could be hurting investment.
The data isn’t clear on this but some private economists contend that
investors could be delaying plant and machinery upgrades because of its increased costs stemming from the appreciation of the Euro and the yen. What is clear is that gross fixed investment is down nearly 30 per cent from its peak in 1997.
The only thing everyone is sure of is that when change happens on the
exchange rate front, it will be unexpected. This was epitomised in
August 1998 when the government issued its National Economic Recovery Plan. There it dismissed any notions of fixed exchange rates.
A month later, Dr Mahathir Mohamad changed the rules.