Pegging the ringgit is far more complex than we think

While pegging the ringgit at a lower rate (RM5: US$1) is meaningless, a higher rate (RM3.50: US$1) is only possible if we have strong fundamentals to support it.

COMMENT

By Tk Chua

I have read a few times now statements made by BNM governor Dr Zeti Akhtar Aziz, the Minister Abdul Wahid Omar, and our Finance Minister and PM Najib Tun Razak that the Malaysian ringgit will not be pegged to another currency for now. Neither is there a plan to impose capital controls.

For many Malaysians, seeing the value of the ringgit evaporating, the statements by our “custodians” of the ringgit are not really a welcome relief. I think many Malaysians have long yearned for the ringgit to recover and stabilise at a more “decent” level. In the minds of many Malaysians, if we ever peg our ringgit, the rate should be higher than the present level.

Unfortunately, the ringgit exchange rate is not something that can be decided by a “decree”, i.e. that can be unilaterally decided by the government. If it is so simple, I think the government would not have allowed the ringgit to depreciate to this pathetic level as seen today.

As far as I know, pegging the ringgit requires strong fundamentals. In other words, the economic strength must be present to support the pegged exchanged rate, failing which the peg will give way in no time.

Hence, many of us could be mistaken if we think a quick peg by the Malaysian authorities would return the “value” and “stability” of our ringgit. More crucially, I think the Malaysian authorities are in no position to peg the ringgit right now, not that they are exercising their option not to peg it.

As I see it, pegging the ringgit at a lower rate (say RM5: US$1) is meaningless, at least in our present circumstances. But if we wish to peg it at a higher rate (say RM3.50: US$1), the fundamentals must be present to support it.

Do we have the strong fundamentals right now to support a higher pegged exchange rate? Exchange rates are determined by numerous complex factors that have often left the most experienced economists baffled. So I will just list a few factors which may be relevant for all of us to look at. It is really up to you.

First, our inflation is relative high, more so with GST and subsidy rationalisation. High inflation is not good for the exchange rate. Typically countries with higher inflation will suffer depreciation in their currency in relation to the currencies of their trading partners.

Second, our interest rates are low because we value borrowers more than savers. Low interest rates tend to decrease exchange rates, ceteris paribus.

Third, we still enjoy current account surplus in the BOP, but the surplus is narrowing, due in part to poor commodity prices and weaker economies of our trading partners. Balance in the current account reflects demand and supply of foreign currencies and ringgit and hence the exchange rates of ringgit.

Fourth, high public debt is a concern. It causes default risks and heightens potential inflation. It discourages capital inflows and encourages capital flight. All this is not good for the exchange rate.

Fifth, the terms of trade are against Malaysia’s favour due to continued weakness in commodity prices.

Sixth, political and economic stability is most important. A country with positive attributes will attract investment and capital inflow while those perceived to be risky will suffer reverse flow. In extreme cases, political turmoil could cause a loss of confidence in a currency, rendering the value to much lower than the equilibrium rate.

We are Malaysians; we read news and events unfolding each day in our country. It is for you to assess the factors and make a judgement call.

TK Chua is an FMT reader