KUALA LUMPUR, Jan 23 (AFP) - Speculators are betting that Malaysia will bow to growing pressure to review its currency peg to the shrinking US dollar, and many analysts believe that not only are they right but the government should make a change soon.
Foreign cash has been pouring into Malaysia, hiking its foreign reserves by 19 percent or 10.7 billion dollars in the fourth quarter of last year alone, Barclays Capital noted in a research paper on Friday.
Comments by economists and even the man who imposed the peg -- former premier Mahathir Mohamad -- that the time is right for change "are likely to accelerate such speculative inflows," Barclays Capital said.
It forecast a change in the pegged rate of 3.80 to the dollar -- in place since 1998 -- around mid-year, while some economists have urged more immediate action.
Prime Minister Abdullah Ahmad Badawi responded to Mahathir's call last week by saying no change would be made at the moment, but signalled that the government is ready to be flexible.
"If there comes a time when changes are required to be made for the benefit of the people, we would consider making the changes then," said Abdullah, who is also finance minister.
Adding to the pressure on the government a respected local think-tank, the Malaysian Institute of Economic Research (MIER), said last week the "window of opportunity" for change from a position of strength was shrinking.
MIER has warned that a failure to act soon could lead to a highly disruptive ringgit correction.
"With the global economic prospects getting less encouraging in the next two years and the expectation that the dollar slide will go on further, it appears that right now is a good time for the monetary authorities to consider the dismantling of the peg," MIER executive director Mohamed Ariff said last week.
But perhaps the most notable push for a review came from Mahathir, who defied International Monetary Fund (IMF) prescriptions to peg the ringgit to the dollar and impose capital controls during the 1997/98 Asian financial crisis.
The IMF later acknowledged that Mahathir's action had helped Malaysia weather the storm better than many neighbouring countries.
But the former premier, who retired in October 2003 after 22 years in power, said the sharp decline in the value of the dollar meant it was now costlier for Malaysia to import products from Japan, Europe and elsewhere.
The weak dollar had caused the Malaysian ringgit to depreciate against major currencies, Mahathir said, adding: "I feel the time has come for us to review because we have lost a lot as the value of our currency has fallen."
Estimates of the ringgit's fair value by banks and research houses range from 3.30 to the dollar to 3.60, rather than the currently pegged 3.80.
Standard and Poor's said on Thursday it was "in Malaysia's best interests to act decisively to best manage expectations and concomitant speculative flows" after Mahathir's comments.
"Action in the near term would allow Malaysia to dictate the course and nature of the transition to a new regime," S and P's said in a statement.
With many economists believing change is inevitable, attention has focused on what form the change will take, with many seeing a re-peg to the dollar at an appreciated value or a managed float against a basket of currencies as more likely than a free float.
Speculation that China may adjust its own currency peg to the dollar and allow the yuan to rise has lent strength to the belief that Malaysia may follow suit, but Barclays Capital said any action by Kuala Lumpur was more likely to be driven by Malaysia's own priorities.
01/23/2005 13:16 GMT - AFP