The time was September, 1998, the place Kuala Lumpur, Malaysia. The Asian financial crisis was in full throttle, and the Malaysian ringgit, along with most other regional currencies, was falling fast. Finally, after the ringgit had plunged 60%, Prime Minister Mahathir Mohamad made a radical decision. He imposed a full menu of capital controls that prevented investors from taking money out of the country. Then he pegged the ringgit at 3.8 to the U.S. dollar.
Mahathir's action infuriated foreign governments and investors; many of the latter declared they would never set foot in Malaysia again. Those threats have long since dissolved along with most of the capital controls. But one vestige of 1998 remains -- the ringgit's peg to the dollar. Now that, too, may be about to fall. On Jan. 19, Mahathir himself, now retired, said it might be time to let go of the peg. Analysts expect his successor, Abdullah Badawi, to either let the ringgit float freely or trade against a basket of Asian currencies sometime in the next few months. "The ringgit peg has outlived its utility," says Dominique Dwor-Frecaut, an economist at Barclays Capital in Singapore. "The question is not if it will go but when it will go. It has come to a point where letting go is clearly a political decision."
Few in Malaysia doubt that the hard peg is an anachronism. Mahathir fixed the peg to keep the ringgit from weakening further. Now, with Malaysia growing briskly, the ringgit is probably undervalued by 10% to 15%. The peg is hurting Malaysia's economy by making imports more expensive and stoking inflation. And rumors that the peg is history have triggered a rush of capital into the country by speculators hoping to profit from the rise. The benchmark Kuala Lumpur Composite Index is up 47% in the past 24 months and recently touched a seven-year high before falling back. Malaysia's foreign reserves, which hit a low of $18 billion in 1998, are now nearly $67 billion. Malaysian real estate is hot, too, with prices of high-end housing in Kuala Lumpur up 20% in the past year.
The relative weakness of the ringgit, which has been sinking in value in tandem with its sister currency, the dollar, is also causing pain for business. Economists expect inflation to pick up -- it's likely to hit 3% this year. Prices are jumping not just for imported goods but also for fuel since the government has been reducing subsidies to lower its budget deficit. "One way to deal with inflation is through exchange rates," says Sanjay Mathur, Southeast Asia economist for UBS (UBS) in Singapore. "If Malaysia were to have a flexible exchange rate, it would be easier to pursue an independent monetary policy."
Analysts say that since Mahathir's surprise comment there is anecdotal evidence that companies have put off buying new equipment from overseas. Tenaga Nasional, the state-controlled utility, recently disclosed that it was delaying a decision to refinance its loans because it might save 7% to 10% on its interest payments if it seeks refinancing after the ringgit begins to float. "This is holding back the whole economy," says Chua Hak Bin, a regional economist at DBS Bank in Singapore.
Some say there is a case for keeping the peg. For one thing, Malaysia is a net exporter of oil and gas, which is priced in dollars, so Malaysia will lose revenues if it revalues the ringgit. Malaysia is also a big exporter of electronic goods, which will be more expensive to importers if the currency is revalued. Finally, Malaysia competes with low-cost China for foreign direct investment. A more expensive currency will make the country less attractive as a cheap production center.
Officials insist that any problems that arise from repegging or floating the ringgit can easily be dealt with. "There is no ideological love for the peg," Nor Mohamed Yakcop, Malaysia's Second Finance Minister, told reporters in January. "It's practical, it's pragmatic. If there is any change, we'll adjust." On Jan. 20, Prime Minister Badawi also insisted that "the peg is not cast in stone."
So when will the government make its move? Badawi isn't saying. "There is no timetable," he told reporters. Meanwhile, the pressure continues to build: Better buy that flat in Kuala Lumpur before it's too late.
By Assif Shameen in Singapore