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Saturday, June 18, 2005

Malaysia says ringgit peg "not cast in stone"
By Liau Y-Sing

Malaysia kept currency speculators guessing on June 17, saying its fixed exchange rate was not cast in stone.

"There's a time to float and time to fix. Both regimes produce winners and losers," Second Finance Minister Nor Mohamed Yakcop told Reuters. "It's not cast in stone."

Nor Mohamed, who played a hand in pegging the ringgit at the height of Asia's financial crisis in 1998, and the central bank have walked a fine line in commenting on the peg, with huge sums of speculative capital hanging on their every word.

A tide of foreign money drove down government bond yields and pushed the domestic stock market to 4 1/2-year highs late last year but then retreated, leaving the local bourse languishing.

Most economists believe the ringgit is undervalued and expect it to be revalued over the next year or so to ease import costs. At 3.8 to the dollar, the cheap ringgit has made vital capital imports like planes and defence equipment very expensive and begun to hurt some domestic borrowers of foreign currency.

But economists expect Malaysia to wait until China revalues the yuan to ensure its exports remain competitive. Malaysia not only competes with China for export markets, China itself is a major buyer of Malaysian goods, such as palm oil.

Citigroup, the world's biggest financial services company, declared its views on the yuan and the ringgit this week, telling a briefing in Kuala Lumpur that China may loosen its currency peg in three months, perhaps spurring Malaysia to act by end-2005.

"I think there's no compelling reason for Malaysia to move first ahead of China. Our view has always been that it's an 'after you' view," Sim Moh Siong, Citigroup vice-president for Asia Pacific economic research, told a briefing on June 16.

Malaysia's second finance minister also gave a bullish outlook for the economy, despite concerns about a global economic slowdown, and said the government was "very positive" of meeting its 5%-6% economic growth forecast for 2005.

"Manufacturing and service sectors are expected to continue to do well. We don't see major downside at all," Nor Mohamed said.

Inflation also remains under control, he added, when asked about a pick-up in prices. Inflation hit 3.1% in the year through May, its sharpest rise in more than six years, as high oil prices forced the government to cut fuel-price subsidies.

"Inflation of course is...creeping up from 1.5% to 2.5% but certainly will be under control -- nothing to worry about," he said. -- Reuters

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