Malaysia scraps dollar peg, ringgit now under managed float: official

KUALA LUMPUR, July 21 (AFP) – Malaysia has scrapped the ringgit currency’s seven-year-old peg to the dollar and will move to a managed float, central bank governor Zeti Akhtar said Thursday shortly after China revalued the yuan. KUALA LUMPUR, July 21 (AFP) – Malaysia has scrapped the ringgit currency’s seven-year-old peg to the dollar and will move to a managed float, central bank governor Zeti Akhtar said Thursday shortly after China revalued the yuan. “We announce we are moving to a managed float with immediate effect,” Zeti told reporters. “It will be against a basket of currencies. It will have a positive effect on the economy.”

Zeti declined to give an estimate of the new value of the ringgit, which was widely seen as undervalued at its peg of 3.80 to the dollar, nor indicate which currencies would be included in the basket.

Prime Minister Abdullah Ahmad Badawi said that although the ringgit’s value would now be decided “by market fundamentals” he did not think the exchange rate would shift dramatically.

“Of course we want to make sure that the exchange rate will be stable and that there will not be too much volatility. I believe that it will be for the good of the market and the economy and for all sectors,” he told reporters.

“I don’t think (the new value) is going to be far from the present exchange rate,” he added.

Abdullah vowed that Malaysia was prepared for any attack by speculators, who triggered the peg’s introduction during the 1997-98 Asian financial crisis.

“We are ready for anything,” he said.

China on Thursday revalued its currency for the first time in about a decade, pegging the yuan to the dollar at 8.11 while also scrapping the fixed link with the dollar in favour of a basket of currencies.

The yuan, or renminbi, was previously fixed in a narrow range around 8.28 to the dollar, which the US and Europe Union claimed undervalued the Chinese currency and gave its exports an unfair competitive advantage.

Abdullah, who earlier this month was forced to dismiss speculation that Malaysia and China were working on a pact to adjust their currencies, said it was spurred into action by breaking events.

“The situation in the region suddenly moved in a very fundamental way and we therefore decided to make a decision on the exchange rate,” he said.

AmResearch executive director Gan Kim Khoon said he expected the ringgit to move in a very narrow band in line with the yuan.

“I think the ringgit will probably appreciate by about the same magnitude as China, which is around two percent, which means it will move from 3.8 (to the dollar) to 3.7,” he said.

“At the end of the day I don’t think Bank Negara will allow the ringgit to strengthen much, it will just take the cue from China.”

Gan said the managed float would allow the central bank to intervene in the foreign exchange market to make sure the currency trades within an acceptable band.

“When you unpeg the system you have to do it slowly otherwise it will be quite a shock to the system,” he said.

The central bank said in a statement that it did not expect the ringgit’s value to change significantly from the current rate of 3.8 to the dollar.

“Bank Negara Malaysia will monitor the exchange rate against a currency basket to ensure that the exchange rate remains close to its fair value,” it said.

“Given that the current valuation of the ringgit is consistent with our fundamentals… the exchange rate after shifting to this new system is not expected to deviate significantly from the current prevailing level.”

Malaysia’s former premier Mahathir Mohamad pegged the ringgit and imposed capital controls in 1998 to insulate the country from the fallout of the Asian crisis.

But speculation that China would adjust its own currency peg and allow the yuan to rise had in recent months put pressure on Malaysian authorities to prepare to follow suit.

Mahathir himself joined a growing chorus of calls for a review, saying sharp declines in the value of the dollar meant Malaysia’s imports had become costlier.

Manu Bhaskaran from the Centennial Group strategic advisory firm welcomed the scrapping of the ringgit as a speedy response to changing circumstances, and said the decision to move to a managed float was wise.

“It’s a good move for a small, highly open economy like Malaysia’s. A basket regime is the optimal path to follow,” he told AFP from Singapore.

“You still retain a certain element of control. You anchor financial market expectations for currencies. After a while the markets will learn what the basket is and this will roughly anchor expectations about the currency and keep the currency on a reasonably stable path.”