Monday, September 22, 2008

Re-pegging the Ringgit is Wrong.

I am dissapointed that this issue of re-peg of ringgit is even discussed. And I am most alarmed that Najib is even thinking about re-pegging the ringgit.

True, with USA Govt bailing out Lehman and AIG to the tune of unimaginable, USA Federal Reserve is going to print money like Robert Mugabe did. Yes USA dollar is going for a freefall, but not as fast as Zimbabwe did. So what will happen if you peg your currency with USD? You know the answer.

In pegged currency system, exchange rate might stay stable, but our foreign reserve would go up or down, depending on how much locals and foreigners are taking funds in or out of the country. So if foreigners are suddenly taking huge amount out because of our policy flip flop, we might be staring into a huge foreign reserve loss. Are we sure that is what we want to spend on our foreign reserve?

Pegging currency and imposing capital control doesnt doesnt stop capital flow. Firms that export overseas would simply adjust their invoicing and/or leave their export earnings in another country, e.g Singapore or Hong Kong.

Once we impose currency peg, the differential between buy and sell rate would widen cosiderably. The obvious loser is the ordinary folk who want to sell their foreign currency or who need to buy foreign currency. As in the past, soon as we impose peg and capital control, anyone who has money would dump their ringgit holding and buy foreign currency, for fear that the ringgit may become worthless. Bank Negara has to buy this dumped ringgit, and exchange with our precious foreign reserve.

Remember when Hong Kong in 97 doggedly pegged HKD to USD? How much of their foreign reserve did they spent? Doesnt matter, they have China with deep foreign reserve. But us?

What happen when exchange rate is fixed, yet the economic equilibrium fall lower?
Answer: Asset prices will fall, as did happen to Hong Kong in 98 - 99. Prices of real estate falls, as with other prices to meet the new lower prices elsewhere in dollar terms. So if our ringgit is fixed, yet our main export prices falls in real terms, ie palm oil, manufactured goods, etc, our companies will incur losses, which in the short term will affect the companies' share prices, which will be lower.

The economy will contract faster compare to if the ringgit is free floated. Either way, the economy will reach its equilibrium, either by lowering prices and contract in size (ie recession), or by maintaining the same ringgit term but the same value in Euro or USD.

Economists would unanimously say that contraction by recession is more painful for ordinary people.

from Malaysiakini

Najib bincang tambatan ringgit esok
Sep 21, 08 3:06pm
Timbalan Perdana Menteri, Datuk Seri Najib Tun Razak akan menghadiri taklimat 'luar biasa' di Kementerian Kewangan esok, yang akan turut membincangkan sama ada sistem tambatan ringgit akan dilaksanakan semula bagi mengurangkan impak kejatuhan nilai dolar Amerika Syarikat (AS) terhadap mata wang negara, kata Menteri Kewangan Kedua, Tan Sri Nor Mohamed Yakcop.

"Pelbagai perkara akan dibincangkan termasuk sistem tambatan ringgit dan kita juga akan memberi berita-berita tentang kedudukan terkini bagi memboleh Datuk Seri Najib membuat keputusan berhubung perkara-perkara yang sepatutnya," katanya.

Hari ini, akhbar melaporkan Tun Dr Mahathir Mohamad mencadangkan supaya sistem tambatan ringgit dilaksanakan semula bagi mengurangkan impak kejatuhan nilai dolar AS terhadap mata wang negara.

Mantan perdana menteri itu berkata, nilai mata wang AS yang semakin menyusut akhir-akhir ini, akan memberikan kesan buruk kepada ekonomi negara, demikian dilaporkan Bernama.

Pada 1997, kerajaan pernah melaksanakan sistem tambatan ringgit dengan menetapkan kadar tukaran ringgit pada RM3.80 bagi setiap dolar AS, sebagai langkah mengawal tukaran asing berpilih bagi mengelakkan ekonomi negara terus meleset.

Bagaimanapun, pada 21 Julai 2005, kerajaan memutuskan untuk memansuhkan tambatan ringgit dan nilainya kemudian ditentukan dengan mengapungkannya secara terurus berbanding sekumpulan mata wang asing terpilih.

Nor Mohamed berkata Kementerian Kewangan akan mengadakan taklimat luar biasa kepada Najib berhubung keadaan ekonomi dan kewangan negara serta situasi global di kementerian itu esok.

Taklimat lengkap

Menteri Kewangan Kedua, Tan Sri Nor Mohamed Yakcop berkata taklimat lengkap yang mengandungi semua aspek berhubung Kementerian Kewangan itu akan disampaikan kepada Najib yang juga Menteri Kewangan oleh pegawai-pegawai kementerian.

"Esok adalah kali pertama Najib menghadiri mesyuarat di Kementerian Kewangan sebagai Menteri Kewangan dan pihak kementerian telah mengatur satu taklimat luar biasa kepada beliau. Taklimat itu memang luar biasa dari segi keseluruhan dan kesempurnaan kerana ia lebih lengkap.

"Macam-macam isu akan dibentangkan pada taklimat itu termasuk berhubung keadaan ekonomi, kewangan serta cabaran-cabaran yang dihadapi di Malaysia dan di arena antarabangsa," katanya kepada pemberita selepas menyampaikan sumbangan Hari Raya anjuran Liga Muslim Pulau Pinang di Masjid Kapitan Keling di Pulau Pinang hari ini.

Sementara itu, ketika ditanya sama ada kerajaan akan menurun atau mengekalkan harga runcit petrol, Nor Mohamed berkata: "Perkara itu juga akan dibincangkan pada taklimat itu dan Datuk Seri Najib akan membuat keputusan".

Dalam perkembangan lain, beliau berkata dakwaan bahawa syarikat gergasi insurans American International Group (AIG) di negara ini akan ditutup adalah tidak benar.

"Saya difahamkan AIG di negara ini adalah satu syarikat berasingan dengan modal tersendiri. AIG di sini tidak terlibat atau menerima impak negatif dengan kedudukan AIG di luar negara," katanya.


from the star
Saturday September 20, 2008 MYT 6:02:46 PM
Re-peg the ringgit: Dr M
By SIRA HABIBU


ALOR STAR: Former Prime Minister Tun Dr Mahathir Mohamad said Malaysia should re-peg the ringgit to relieve pressure from the global economic crisis.

Stabilising the exchange rate would be one measure the Government could take immediately, suggested Dr Mahathir, also a former finance minister.

Malaysia has the capacity to determine the value of the ringgit because it has sufficient foreign currency and substantial savings, with the Employees Providence Fund alone holding more than RM200bil in its coffers.

“We shouldn’t float the currency. The country would lose money if the currency is vulnerable to external forces,” he said at a press conference after presenting a keynote address at a national-level seminar on Development of Higher Learning Institute on Saturday.

He was asked on what advice he had for newly appointed Finance Minister Datuk Seri Najib Tun Razak to cushion the impact of the economic slowdown in developed countries on Malaysia.

He said if Malaysia could strengthen the value of the ringgit by 10% (by pegging the ringgit to the US dollar), the import value should depreciate by 10%.

When the price of imported goods is reduced, the impact would immediately be felt by the rakyat (citizens), he said.

Dr Mahathir said when he was in power he had set up a panel about 10 years ago to tackle the economic slowdown that had affected the country when Asian currencies were attacked by rogue speculators.

He advised the authorities to set up a similar panel comprising professionals, including economists, to help ascertain the root causes of current financial problems, scrutinise all data that has an impact on the nation’s economy, and suggest ways to tackle the issue.

He said effective measures could be taken when there is an in-depth understanding of the nature of the problem.

Referring to Second Finance Minister Tan Sri Nor Mohamed Yakcop’s statement that Malaysia would not be greatly affected by the US financial crisis, Dr Mahathir said there would certainly be an impact as 20% of exports were for the United States.

“Although the trade balance is in our favour, it does not reflect the actual situation. We are enjoying a good trade balance because of the appreciating price of raw materials such as the petroleum, palm oil and rubber that we export.

“But the stock market is not doing well, with recent market capital losses amounting to more than RM100bil,” he said, adding the rakyat were under pressure by the increasing price of goods and construction materials.

4 comments:

Zahar said...

I don't think TDM meant pegging the currency as the sole response or action we need to take. Don't rely on newspaper reports as the sole source of information about how to handle a nation's economy.

nooryahaya said...

back in 98 he pegged the ringgit and impose capital control. multinational firms can move their money out regardless of restrictions. while billions of ringgit overseas (those indonesian and bangladesh workers for example) have MYR that become worthless overnight.

Dr Firdaus said...

The Peg in 1998 was a runaway success! It stabilise the economy and people had the confidence in selling again. But than again USD was strong then, it is now not so good. How about repegging it to the Euro?

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