Bank Negara knows best about the management of the Ringgit. It should not be pegged.
However, I am curious about how pegging the Ringgit in 1998 helped in the economic recovery of Malaysia. I say this because even the International Monetary Fund (IMF) and the World Bank agreed that Malaysia did the right thing.
Admittedly, the financial situation then was worse than now. And our reserves then was not as big as now. Still, we overcame the financial and economic problems caused by the depreciation of the Ringgit through pegging the Ringgit at RM3.80 per USD.
When the Ringgit is pegged would it cause the outflow of foreign investments in Malaysia? From the little that I know about finance, outflows of foreign investment is due to the expectation of further depreciation of the Ringgit or shares. When the Ringgit was pegged there would not be further depreciation against the USD. Assured of the value of their investments, the need to divest was removed.
Let’s say an investor invested 1 million USD at the time when the Ringgit was stronger – say RM 3.80 per 1USD. Effectively his investment would be worth 3.8 million Ringgit in Malaysia. This value would be sustained when the Ringgit is pegged.
But if the Ringgit depreciates to 4.5 to 1USD, he would get only 844,000 USD from his 1 million Dollar investment should he divest. Fearing further depreciation he would change the Ringgit into USD and get out with 844,000 USD. He would have lost 156,000 USD.
A merchant importing in USD would have to change RM4,500,000 to get 1 million USD if the Ringgit depreciates to 4.50 Ringgit to 1 USD. Obviously when the Ringgit depreciates, the cost of I million imports in USD would be RM4,500,000.
On the other hand, if the Ringgit is pegged at 3.80 the cost of import would be only 3.8 million Ringgit per 1 million USD. A pegged Ringgit would save 700,000 Ringgit in the cost of import.
When the Ringgit depreciates the cost of production would be lower if there is no pay revision upwards. On the other hand, the cost of imported raw materials and components would increase and negate the gain from lower wages. Logistical cost would also increase, again reducing the gain from production cost. A depreciated Ringgit does not necessarily reduce cost of production.
Assuming that the Ringgit remains pegged at RM3.80 per USD, the cost in Ringgit would not change. Budget estimates would be sustainable.
Wherever an importer wishes to buy something in U.S. Dollar, the Central Bank should have enough USD to sell at the pegged rate i.e. RM3.80 per USD.
In 1998 the Central Bank had less reserves. We did not know whether the reserves were held in cash, and if in cash, in what currency. Still, we were able to change Ringgit into USD so as to pay in USD. Now the Central Bank has more reserves in USD, I believe. Earnings in USD should be deposited with the Central Bank, in exchange for Ringgits. There should be no shortage of USD when needed.
There were problems of course. But we were able to set up subcommittees to deal with them in 1998. This included the recapitalisation of banks and businesses.
The fact remains that the pegging was successful. As mentioned above the IMF and World Bank admitted that Malaysia did the right thing and helped other countries to overcome the serious devaluation of their currencies also. We were even able to deal with CLOB, the stock market set up by Singapore.
I am just curious. We have more savings and reserves now compared to 1997- 8. Yet I am told that if we peg, we may go bankrupt?
And neither have they suggested any possible solutions?
