PETALING JAYA: Although the US dollar’s rise against the ringgit can be expected to continue, economists caution that the government should avoid pegging the ringgit against the dollar as it did in the past.
Universiti Malaya lecturer Nazari Ismail and Socio-Economic Research Centre executive director Lim Heng Guie were commenting on the rise of the dollar against the ringgit since the May 9 polls from RM4.04 to RM4.15 to the dollar.
Former prime minister Najib Razak had said the fact that the ringgit was still going down four months after he left office disproved claims that he caused the currency’s devaluation.
Najib also defended his decision against pegging the ringgit to the dollar after the price of oil dropped in 2014, despite facing pressure to do so.
Nazari said the ringgit’s drop was due to many factors, including those which were beyond Malaysia’s control such as the US’ interest rate hike and the financial crisis in Turkey which led to a loss in confidence in emerging markets.
He said although the new government had committed to institutional reforms which were important to investors, this had a lesser impact than the increase in US interest rates.
Although it was difficult to say how much more the dollar would rise against the ringgit, he added, this could be expected to continue as the US Federal Reserve had signalled more increases this year.
Lee, meanwhile, pointed to uncertainties over the US-China trade spat as well as the country’s new political landscape.
“It takes time for investors to digest the policy transition and the reboot of Malaysia.”
Both Nazari and Lee said the rising dollar would have a mixed impact with sectors such as tourism expected to enjoy better times, while businesses which rely on imported components could expect a higher cost of doing business.
Nazari advised the government against pegging the ringgit as it had in 1998, saying this would attract currency speculators and require Bank Negara Malaysia to have massive amounts of reserves in US dollars.
In June, Prime Minister Dr Mahathir Mohamad ruled out pegging the ringgit for the time being although he said the government would study this as an option if needed.
During the Asian Financial Crisis in 1998, Mahathir pegged the ringgit to the US dollar, a move which was credited with helping stabilise the Malaysian economy.
Nazari said the government should now focus on avoiding debt, especially to foreign lenders who lent Malaysia money in US dollars.
“Corporations which borrowed in US dollars are now going to suffer as their loans will be more costly to repay,” he added.
Lee said Malaysia, without the peg, had an exchange rate flexibility which allowed the country to weather previous episodes of sizeable capital outflows.
“There is no compelling reason to peg the ringgit. While pegging the ringgit provides a level of certainty, investors will view it negatively as a regressive policy, causing more capital outflows due to fear of capital controls.”