KUALA LUMPUR: Bank Negara will not peg the ringgit and institute capital controls for the country even though the ringgit has fallen against the US dollar to its lowest levels in 17 years.
Governor Tan Sri Dr Zeti Akhtar Aziz said that while the drop in the ringgit was unsettling, the central bank is confident that the ringgit would rebound and reflect its fundamentals once the United States raised its interest rates.
“I want to categorically emphasise that we do not expect to peg the currency. The fact that we have a flexible exchange rate regime helps our country to adapt because if the exchange rate doesn’t adjust, then prices and demand has to adjust. I want to add that we are not implementing capital controls as well,” she told the media after announcing gross domestic product numbers for the second quarter.
Questions over the possible introduction of a ringgit peg and capital controls have been raised, as the ringgit has depreciated rapidly against the US dollar and other currencies.
Government officials have denied plans for such a move.
Zeti said volatility is expected to continue until there is certainty in policy direction to be taken in the major economies like the US and Europe.
She said like before the US tapered its quantitative easing, the markets were volatile but once it happened, the markets stabilised.
“I believe once the external environment improves and once we solve all our domestic issues, then the currency will better reflect its fundamentals,” she said.
Bank Negara said the ringgit from Sept 1 last year to Aug 11 was down 20.1% against the US dollar, only better than the Australian dollar, which has fallen 21.6% against the greenback.
It said the dollar’s strength was on the back of improving economic conditions in the US.
Another reason for the ringgit’s fall has been declining commodity prices and specific domestic factors. Currencies of commodity producing countries have been hurt and the ringgit’s 20.1% decline was in the middle of falls seen in the currencies of such countries.
She said the impact of the ringgit’s decline was manageable and that the diversified nature of the Malaysian economy would help to withstand the risks and challenges from a weakened currency.
“While the drop in the exchange rate depreciation is unsettling, the impact on growth and inflation will be contained and mitigated by resilient domestic and external fundamentals,” she said.
Businesses with high import content are likely to face higher costs, but export-oriented companies will benefit from the lower ringgit against the dollar.
Household spending is expected to be modestly impacted by the lower ringgit, but lower domestic fuel prices are expected to help cushion some of that impact.
Inflation is also expected to be pressured lower as low commodity prices, including fuel, will ease inflation forces.
“Financial intermediation will continue to support the economy. In our assessment, the Malaysian economy is projected to remain resilient in the face of this challenging environment and is expected to continue to remain on a steady growth path,” said Zeti.
Zeti said the exchange rate was like a shock absorber for the economy, as the ringgit’s value would adjust over time.
She said the drop in reserves below US$100bil had happened before, but rebounded once conditions stabilised.
The export sector could ensure that the external balance remains in surplus. While the oil and gas sector has hurt the ringgit with the decline in the commodity’s price, she said 80% of the economy comprised of the services and manufacturing sectors.
“This is important, as these sectors continue to grow strongly and support our economy,” she said, adding that the developed capital and financial markets in Malaysia were able to absorb the volatility.
Zeti said the country could withstand the current pressure on reserves and the ringgit’s value as it had done so for one-and-a-half years during the Asian financial crisis.
“Those were extreme circumstances and we are not in the same circumstances. We are not immune to external developments but we have demonstrated that we are able to rebound quickly from any setbacks and I have the same confidence, even more so than previously, because of our fundamentals and high degree of resilience that we are able to bounce back quickly from any setback we might experience,” she said.
Zeti said Malaysia was on a steady growth path of between 4% and 6% and expects to remain in that growth range for the remaining part of the year.
“We are one of the better-performing economies. The fact that we have been living through this highly challenging environment and experiencing a growth of 4.9% during the quarter, there is no disruption in financial intermediation,” she said.
