Silly To Peg

Tony has left a new comment on your post "Wither Dollar": Can you explain what Muhyuddin Yassin meant when he said pegging the Ringgit would cushion off the impact of the weakening USD against other currencies? First the USD was not weakening but strengthening. Secondly what happens should the USD fall say 30%. RGT would be 3 to the SGD, 8 to the Pound, 7 to the Euro?
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Latest News: Najib in his first task as Finance Minister came out quickly to say there will be no pegging, now or in the future. All things being equal, that is what the Finance Minister should be doing - see a stupid issue boiling, quickly come out and stamp it out.
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Comments: I think what Muhyiddin is trying to say is the volatility vis-a-vis the USD, with a general downtrend in USD. To say that pegging it would cushion ill effects is a shallow argument. Why do we still have the mentality that we can only compete on currency distortions. If we have this kind of policy continuously, we will end up NEVER moving our industries up the value chain. Why are we so afraid to compete? I don't even hear Indonesia contemplating that, nor Thailand, so what gives?

There is a time and place to put the peg in, when there are drastic outflow of capital which the central bank could not control, such as following the events of 97 implosion. The original Ringgit peg in Sep98-Jul05 helped the Malaysian government to buy time for it to restructure bad debts in the economy. Are we seeing such calamities now? Firstly, we are not part of the subprime, CDO, CDS problems. Secondly, our banks have almost no exposure to those instruments. This is so different to the 97 problem where hot foreign money was wreaking havoc on reckless lending and pumping up liquidity no end - then we were part of the problem. We are not now.

I mean the ringgit is still not transactable overseas yet. We are supposedly nursing our financial reputation back with a strong balance sheet, why take an overdose of sleeping pills now? There are tons of economies bigger than us who are not perturbed, and what is more galling is that there are even more smaller economies than us who are not perturbed! Whatcha' talkin' about Willis?!!

Why even put up such an idea now? It infantile and almost absurd because the central bank has tried to build back the reputation of Malaysia for the last 8 years, and has nursed our balance sheet back to health, then remove the peg. If we even voice out haphazardly that we should consider the peg now - in the eyes of global investors it amounts to more uncertainty. This country does not know what it is doing, suka-suka put in peg, suka-suka pull the peg, suka-suka lagi reinstate the peg. In the eyest of investors everywhere, people will put a discount when investing in Malaysia. The Dells, HPs, Unilevers will have to present budgets with a gaping "deviations" in potential currency gains/losses in budgeting even.

Global MNCs can understand the peg for 97, not now certainly. What are Muhyiddin and Mahathir so afraid of. That our ringgit will be too strong at 3.0 to the dollar? Global currencies had been appreciating en-bloc for the last 3 years against the USD, why no opinion when we were close to 3.1 to the USD, and thats all the way from 3.8. From 3.8 to 3.1 you don't scream ... why scream when its at 3.4?? Even if it goes to 3.0 over the next 6 months, it will be a global appreciation against the USD alone. The ringgit will probably maintain its status quo with other currencies. So, why the fear. Every other nation does not fear having a stronger currency against the USD, why should Malaysia?

Volatility, is it about lessening volatility? How volatile can it be? Can someone track the volatility of the ringgit over the last 2 weeks, is it that bad?

There is a risk that this move will be seen in a political context, as a precursor to drastic domestic political action by the government, and the peg itself would minimized the event’s cascading negative effects. That might be a plausible reason, but would be very unwise and desperate.

Put it another way. Pegging is like being wheeled into ICU, you are very sick and you want time to recuperate. There will always be volatility in international currency markets. What you can do, is what Zeti has been doing well, shore up your balance sheet and prevent excesses, promote growth with minimal inflation. Once you do that, you will always come out better in times of global crises. Don't go and hide under the tempurung, go and lift weights instead. If you are not sick but healthy, you should not be worried about 'viruses'. Unless you are are planning to do something 'sickening'.

Tony, if USD drops 30%, the ringgit would be at 2.4 la. If the global currencies all appreciate against the USD. It would make US exports more affordable, make them buying foreign goods a lot more expensive, thus reducing their trade deficit. Them buying less would affect those countries who are major trading partners. A rapid drop in USD value would put the US economy into high inflationary mode, and at the same time boost their equity markets. Commodities will all get more expensive. Central banks all booking losses on their foreign reserves and Treasuries. Its really not that bad a thing, the Americans just need to learn to buy less.

On further clarification by Tony, he has a strong point here in that if we peg at 3.4 to the USD NOW... what will you do if after the pegging, the USD falls 30%. That would mean the ringgit would be effectively 3 to the Singapore dollar, 8 ringgit to the British pound, 6.5 to the Euro ... what then Muhyiddin and Mahathir? Break the peg again... or re-peg to a new level. We are not playing wash the clothes and take them out to dry, no need to peg here or peg there. Hate to say it but people calling for the peg now do not not have strong or valid arguments to support their call... and I am being very nice here!!!

Final word, don't do it, it will be disastrous and unnecessary.

p/s photos: Linda Chung Ka Yan