Malaysia's second finance minister Nor Mohamed Yakcop reiterated his country's commitment to a fixed rate exchange regime in an exclusive interview with Emerging Markets.
While other countries in the region, notably China, are under pressure to reform their currency regimes, Yakcop said that Malaysia will maintain its fixed rate system, pegging the ringgit at 3.8 to the US dollar. The minister, however, stressed that both the country's exchange rate regime and the level at which the ringgit is pegged to the dollar are driven by "pragmatic and practical issues."
"We never have had and never will have an ideological preference for a fixed or floating exchange rate regime and certainly no ideological commitment to 3.8 [ringgit to the dollar]," he said. "The issue of exchange rates is a practical and pragmatic one." He added, though, that for the time being, there is "no compelling argument to say that we should change the rate from 3.8."
Outsiders, though, are becoming more vocal on the issue. Earlier this week, ADB's chief economist Ifzal Ali urged the Malaysians to adopt a more flexible exchange rate. He said that Malaysia could relax its exchange rate without any of the unfavourable consequences.
Yakcop said that Malaysia could consider a change if there was realignment in exchange rates regionally and globally and if these shifts proved to be permanent. One of those shifts could be a revaluation of the Chinese renminbi, though the impact of such a move will be studied closely first, said the minister.
"If and when it [revaluation of the renminbi] happens, we will have to look at what it means for regional currencies and its effect on economic development, growth rates and trade," said Yakcop. "No doubt China will be an important factor but it may not be the single factor that we will look at," he added.
Malaysia imposed a fixed rate regime in 1998 following the Asian financial crisis. The currency peg brought stability to the country and gave confidence to the authorities to undertake key financial reforms.
Speculation had mounted recently, however, that Malaysia would reform its currency regime because the fall in the value of the US dollar was making imports more expensive. But Yakcop said that import inflation is less of a concern "now that we are in a period of dollar strengthening."
The official added that Malaysia's big challenge is to maintain economic momentum. Last year GDP grew by 7.1%, and though the growth rate will probably not be as strong in 2005, Yakcop is confident of a 5-6% rise this year.
The country's other economic fundamentals are also in good shape. The budget deficit is forecast to hit 3.8% of GDP. Last year it was 4.1- 4.3% of GDP, below the target set of 4.5%. Malaysia's debt ratios are also expected to improve. In a report last month, ratings agency Moody's said that the government's debt-to-GDP ratio, which reached 48.4% in 2004, should begin to fall as the budget deficit continues to improve.