The Malaysian government moved firmly this week to try and head off growing recent speculation over the future of the country's currency peg. Yet despite Prime Minister Abdullah Ahmed Badawi stating that there would be no change, opposition leaders and some economists continued to press for a move towards free-floating exchange rates.
Malaysia's dollar peg was introduced following the Asian financial crisis of 1997. Back then, instability around the Thai baht had spread to other regional currency markets, causing a damaging run on the Malaysian ringgit.
In response, the government introduced the currency peg, fixing an exchange rate of 3.80 ringgit to the US dollar in September 1998, a level at which it has stayed ever since.
Yet now the pressure is on for a change, with some analysts and opposition figures pointing to the example in neighbouring countries. In Singapore and Thailand, Malaysia's largest trading partners, the currencies are allowed to fluctuate, and they have strengthened in the three years to December 2004. In that period, the Singapore dollar and the Thai baht both gained 13% against the dollar.
It is an argument that somewhat divides opinions. Certainly, the US is highly in favour of Asian economies - particularly China - returning to a free-floating exchange rate system. The argument is that the peg leads to countries accumulating ever larger foreign exchange reserves and damages their own economy's international competitiveness.
In Malaysia's case, the ringgit is also widely viewed by economists as undervalued. This exposes it potentially to upward pressure from speculators, with the likelihood of this increasing particularly if China revalues its own currency. At the same time, import costs are hurting some Malaysian businesses. This is particularly so since the dollar has been depreciating in recent years, making imports from the European Union, for example, more expensive. However, this also works to exporters advantage in selling abroad.
Beijing also fixes its currency, the yuan, within a narrow band against the dollar. This has helped to regulate the cost of Chinese products in Malaysia, holding them within a steady price change limit. But economists fear that if China reviews the peg and the yuan appreciates, imports from China will become more expensive and Malaysia will be forced to make adjustments to its own currency in a hurry.
"If China were to do it first, there will be massive capital inflows into Malaysia," Mohamed Ariff, the head of the Malaysian Institute of Economic Research, said in an article in The Star newspaper on May 30. He then added that this inflow would profit from "large ringgit appreciation".
Some also suggest that the currency peg was in any case introduced as an emergency measure to deal with the 1997 crisis, not a permanent option.
Yet the government remains unconvinced, with most analysts also seeing a move on the peg as unlikely before Beijing makes its decision, because Malaysia could lose out in export markets where it competes with China.
Thus, Prime Minister Abdullah Ahmad Badawi - who is also minister of finance - said on May 30 that there would be no change in the peg.
"So many people have been asking for it," he told reporters. However, "The peg stays on."
Yet Badawi did also add that it was not up to the Chinese when or whether Malaysia would adjust the peg. "I never said we will wait for China," the prime minister told reporters.
Supporters of an abandoning of the peg do sometimes concede that such a move might cause tremors in the market, but estimate that such short-term difficulties would be offset by longer-term gains.
It is also thought that given the scale of China's economy, if it were to free float first, it would be better able to meet any shocks than the smaller Malaysian economy.
This view is also backed up by Ariff.
"China, with its huge domestic market to fall back on, can afford to make a mistake, but not Malaysia with a small domestic economy," he wrote in the Star.
Nonetheless, the government is not for turning, it seems. The debate therefore looks likely to continue, with many keenly watching the Chinese to see what likelihood there is of a devaluation or free floating of the yuan. If that happens, it may well be that other Asian currencies will have to follow suit, despite any lingering reluctance.
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