Move by Bank Negara not to peg ringgit seen as pragmatic

KUALA LUMPUR: Bank Negara’s move not to peg the ringgit despite the Malaysian currency’s present weakness is bold and pragmatic, given the well-capitalised banking system.

A weak ringgit is not necessarily a bad thing, as the weak currency by theory will make Malaysia more competitive and encourage exports.

The ringgit closed last Friday at 4.3980/3995 versus the greenback versus 4.3935/3945 on Thursday. Earlier this month, it fell to 4.36 which was the lowest level in the past two years.

The prognosis is that it is better to allow the ringgit to stay floated based on market demand and supply coupled with some controls, as what Malaysia is doing.

Pegging a currency is not possible except with capital controls.

If the exchange rate is fixed but the currency flows freely, the country cannot retain enough foreign reserves to maintain economic stability. It can become bankrupt.

In contrast, during the 1997-1998 Asian financial crisis, the ringgit came under speculative attack and nosedived to 5.20 against the greenback.

The government rightly imposed capital controls and pegged the ringgit at RM3.80 to the dollar.

However, the current scenario is different as the banking system is well-capitalised and highly liquid with a strong asset quality, and neither is the ringgit under speculative attack.

If capital controls to stop foreign currency outflow are imposed, it will kill foreign investor confidence and all foreign funds will pull out, something that should not be done as the economy is beginning to recover.