Malaysia: Off the Dollar Leash
By Assif Shameen
It may be remembered as the final chapter in the Asian financial crisis. Within minutes of China's announcement that it was revaluing the yuan and abandoning its peg to the U.S. dollar, Malaysia's central bank said it, too, would no longer tie its currency to the greenback.
The Malaysian ringgit will now be pegged to a basket of currencies including the U.S. dollar, the euro, the Japanese yen, and the Singapore, Australian, and Canadian dollars. "It's a long-expected move, and it takes Malaysia back to pre-peg days of 1998," says Manu Bhaskaran, an economist who heads U.S.-based consultancy Centennial Group's Singapore office.
Why follow China's lead? As Malaysia's economy has recovered from the tough times of the crisis -- GDP grew by 7% last year -- the country has gradually lifted most of the exchange controls imposed after the collapse of the Thai baht and other currencies eight years ago.
But Kuala Lumpur had been reluctant to abandon the dollar peg and allow the ringgit to strengthen without a similar move from China, since a stronger currency could hurt Malaysia's export competitiveness when compared with its giant neighbor to the north.
Now it's likely that currencies across the region will head in the same direction. Though Malaysia was the only other country in the region with a real peg to the dollar, central banks in other countries typically intervene in the markets to keep their currencies from strengthening too much.
But around the region, other currencies have started rising in tandem with the yuan and the ringgit. Within an hour of the two announcements, the Singapore dollar jumped nearly 3%. The Monetary Authority of Singapore announced late Thursday that it would allow the Singapore dollar to strengthen, which economists and currency traders say will mean an additional 3% to 5% appreciation.
The Thai baht, Indonesia's rupiah, the Korean won, the new Taiwan dollar, and the Indian rupee all rose from 0.8% to 2.6%. "I think this evening's moves are just the beginning," says Bhaskaran. "We will see a very gradual appreciation in Asian currencies over the next six months to a year."
That's good news for the region. Stronger currencies should help cool down inflation, since the move will make oil and other dollar-denominated imports less expensive. That, in turn, means the countries might be able to avoid raising interest rates -- and choking off economic growth -- to control inflation.
The downside is that stronger currencies might hurt exports. But a cheaper dollar should help make Southeast Asia's factories more efficient and their exports more competitive. Many managers have put off importing expensive capital goods such as power generators, telecom equipment, and heavy machinery. Now, those imports will be less expensive.
China's revaluation may look like a small step. But for many of its neighbors around the region, it's a step that will help them stay on the recovery track.
Shameen is a reporter for BusinessWeek in Singapore