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Government’s Decision Not To Peg Ringgit Is Appropriate

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KUALA LUMPUR – The government’s decision not to peg the Ringgit against the
US Dollar to stem its decline is appropriate to the current circumstances,
said an economist.

Although the Ringgit had depreciated much more than other currencies, the
situation was still under control, said senior lecturer at Universiti Utara
Malaysia’s School of International Studies Dr Nurhaizal Azam Arif, adding that
the environment was different in 1997 when the actions of currency speculators
had caused the Ringgit to tumble.

He said the nation’s economic fundamentals were still at healthy levels and,
furthermore, in June international rating agency Fitch Ratings had upgraded the
outlook of Malaysia’s sovereign rating to “stable” from “negative” and affirmed
its long-term foreign currency issuer default rating at A- and local currency at
A.

“This year, Malaysia was hit by falling fuel prices, the IMDB (1Malaysia
Development Bhd) crisis, China’s weaker economy and rumours of a hike in
interest rates by the US Federal Reserve. This is why the Ringgit performed
badly in comparison to other Asian currencies.

“The fall in fuel prices resulted in lower oil- and gas-based incomes while
China’s sluggish economy has caused many investors to take their money to the US
to take advantage of a possible rate hike there,” he told Bernama.

PROS AND CONS OF PEGGING THE RINGGIT

During Malaysia’s Economic Update 2015 forum on “Outside-In-Perspective:
Economic Outlook for Malaysia”, which was held last year, Performance Management
and Delivery Unit Chief Executive Officer Datuk Seri Idris Jala said between Jan
1 and Sept 18 this year, the Ringgit had declined 16.7 per cent against the
greenback.

However, he added, Malaysia’s economic health was robust in comparison with
many other peer nations and that its key economic indicators continued to
underline the country’s solid fundamentals.

Fitch Ratings as well as Standard and Poor’s Ratings Services and Moody’s
Investors Service, which had also participated in the forum, concluded that the
country’s fundamentals, including the financials, were still good although there
were other issues that needed to be addressed.

Last month, Prime Minister Datuk Seri Najib Razak said the government would
not introduce capital controls nor peg the Ringgit to the US Rollar as
Malaysia’s economic fundamentals remained sound as reflected in the real Gross
Domestic Product (GDP) growth of 4.9 per cent in the second quarter of 2015.

Nurhaizal Azam, meanwhile, explained that the exchange rate regime
consisted of two types – fixed and floating. The pegging mechanism, he said came
under the fixed exchange rate regime. If Bank Negara Malaysia (BNM) pegs the
Ringgit against the US Dollar, the central bank will maintain the value of
the Ringgit at the rate so pegged (or fixed) by selling and purchasing
currencies in the foreign exchange market.

In the floating exchange rate regime, the value of the currency is
determined by the private market through supply and demand.

According to Nurhaizal Azam, who also lectures in international business,
pegging the Ringgit would have its own advantages and disadvantages.

A main advantage would be the Ringgit’s stabilisation, which would put a
stop to currency speculation activities.

“The spin-offs from this will include stabilisation of prices (of goods and
services) which will benefit consumers. It will also be easier to boost
international trade and foreign investments because investors are no longer
exposed to the Ringgit’s fluctuation risk,” he said.

Meanwhile, a major disadvantage of pegging the Ringgit was that Bank Negara
Malaysia (BNM) would have to undertake more costly and tedious exercises to
ensure that the value of the nation’s currency remained at the fixed rate.

“You can’t just peg a currency and leave it to its own devices. BNM will be
compelled to shore up its foreign reserves to ensure that it has enough reserves
to sell or buy the Ringgit should its value appreciate or decline in the market.
These exercises effectively keep the market value of the Ringgit to the pegged
exchange rate.

“There will be times when it is difficult for the central bank to control
the Ringgit and this may result in negative implications, like what had happened
in Thailand in 1997 when it pegged the Baht. Eventually, the Thai central bank
had to abandon the peg and float the baht because it couldn’t contain the
currency’s decline, causing panic and triggering the Asian financial crisis,” he
explained.

Although a pegged Ringgit could curb inflationary pressure, he said the
effect would only be temporary because even a stable Ringgit could trigger
inflation as imports and spending rise.

ENCOURAGE FDIs

While Nurhaizal Azam firmly supports the Malaysian government’s move to
continue to subject the Ringgit to the floating exchange regime, he said there
were various initiatives the government and the people could take to help boost
the value of the Ringgit.

He said the government and local investment agencies should step up efforts
to promote Malaysia as an attractive destination for foreign direct investments
(FDIs), based on its growing economy and domestic demand.

He said besides efforts to enhance tourism revenue, the government should
also focus on increasing the foreign student population in Malaysia to boost the
inflow of foreign exchange. Foreign students, he added, could do their bit to
strengthen the Ringgit as they stayed in the country for a prolonged period and
were consistent spenders.

“Malaysia has to offer something very extraordinary in order to compete with
regional partners like Thailand, Vietnam and Indonesia, which are currently the
favoured destinations in ASEAN for FDIs. Employment costs may be higher in
Malaysia but if it can prove that it has an edge over the others in terms of
productivity, skills, talent, attitude and working spirit, then it will succeed
in attracting investors.

“More foreign investments mean higher inflow of foreign exchange and a
firmer Ringgit. An additional bonus will be the creation of new job
opportunities. Making Malaysia more attractive to foreign investors is the joint
responsibility of all the people, who must go all out to make it happen,” he
said.

CURB RINGGIT OUTFLOW

Measures to curb the Ringgit’s outflow include encouraging Malaysian
travellers to spend their vacations at local destinations rather than abroad,
said Nurhaizal Azam.

He said the government should also place restrictions on the intake of
foreign labour as, currently, the level of remittances made by Malaysia’s
foreign workforce to their countries of origin was very high.

Nurhaizal Azam added that suppliers of imported goods and services should
look for local substitutes which would, in turn, help spur the growth of local
industries.

He said whether the Ringgit was in declining or strengthening mode, the
government has the capacity to formulate and implement appropriate policies and
strategies to rectify the situation.

“If the Ringgit’s slide is in line with that of other Asian/ASEAN
currencies, the existing floating exchange rate regime can still be
maintained,” he said, adding that if the Ringgit was more badly affected than
the neighbouring currencies, then the government and BNM would have to review
their policies as there could be other factors influencing the Ringgit’s
performance.

“If there are irregularities, then some form of (capital) control will have
to be enforced. There might be a need to peg (the Ringgit) or control the
outflow,” he said. – BERNAMA

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