Malaysia Advocating Switch To Euro

SINGAPORE (United Press International via COMTEX) -- Malaysia, whose currency the ringgit has been pegged to the U.S. dollar since 1998, has become an unlikely advocate for the Euro.

Of late, the oil producing Malaysia has been advocating a review of international oil prices, currently denominated in dollars, to protect oil producers from the uncertainties of the currency market.

And Prime Minister Mahathir Mohamed has also been urging the private sector to use the Euro in their export trade believing the dollar was likely to depreciate further. Malaysia's largest trading company Petronas is estimated to have already lost about $159 million in profit because of the depreciating dollar, and Mahathir indicated last month the country was "earning 25 percent less" in revenue as a result of the weakening dollar.

The Malaysian statesman has never forgiven currency traders for bringing the country down to its knees in 1997-1998. During the Asian financial crisis, speculators send the ringgit from 2.5 against the dollar to 4.8, while the Kuala Lumpur Composite Index plunged from over 1,000 points to less than 300 points. Between the devaluation and the practical collapse of the Kuala Lumpur Stock Market, some $200 billion in market capitalization was lost.

In September 1998, the government finally fixed the ringgit at 3.8 per dollar, while imposing selective capital and exchange rate controls, including the imposition of a 'twelve-month rule' whereby repatriation of portfolio funds was prohibited until it had been parked for one full year in the Malaysian capital market.

The decisions appalled international investors and was much decried, but they brought back economic stability to the country, and while capital controls have now largely been rolled back, the peg has remained unchanged despite constant speculations it would be removed or changed.

Despite the peg, Mahathir has always been advocating emerging market countries should be less reliant on the greenback.

Indeed, he has tried to push the idea of using a gold dinar for settlement of the international trade balance between Islamic countries to lessen their dependence on the dollar.

Although gold can be volatile, it is less so than the dollar, and has an intrinsic value which paper money does not carry, he argues.

In the last month, Mahathir has also been advocating oil sales should be redominated in Euro equivalent in view of the dollar's current depreciation. The Euro has gained nearly 14 percent against the dollar since the start of the year.

In a speech to the 8th Annual Asia Oil & Gas conference in Kuala Lumpur Monday, he said "it is only fair for oil producers to be protected from the uncertainties of the currency market, especially its susceptibility to manipulation by rogue currency traders."

However, he also said pricing quotes should revert to the dollar if the euro weakens again.

Mahathir said his proposal was "a kind of hedging," adding that although Malaysia was against hedge funds which manipulated currencies to devalue or revalue them, "unmanipulated changes in value due to real and unavoidable causes should be hedged against."

Economists are divided on whether the recent "pronouncements" on the Euro could be a hint that Malaysia will finally remove the peg.

"It could be a precursor to removing the peg before Mahathir leaves. But we (the bank) haven't made a call on this yet," said Steve Brice, chief economist for South East Asia at Standard Chartered.

"No, I don't think it is a prelude to abandoning the peg. With Mahathir's going there is going to be a political transition, and the last thing they will want to do is create some instability with the peg. They need a stable anchor," argued Rajeev Malik, economist at JP Morgan.

Over the weekend, Mahathir expressed fear a power struggle may emerge in his United Malays National Organization (Umno) party after he steps down in October.

"I don't think there would be anyone who will challenge Abdullah Ahmad Badawi (his designated successor), but until the issue of who becomes the Deputy President of Umno is resolved, there will be a power struggle for the number two post," he was quoted saying by a local daily.

But Brice points that from a macro-economic perspective it would make sense for Malaysia to remove the peg now, "when they are in a position of strength and there is no pressure on the currency."

"In fact, the ringgit would probably marginally appreciate," Brice said.

All this emphasis on the euro is obviously music to the ears of the Europeans and the European Commission has welcomed suggestion for the private sector to use the euro in export trade. The EC's Ambassador to Malaysia Thierry Rommel told the local press it would be right to adopt the euro now due to the excessive depreciation of the U.S. dollar.

"With the ringgit pegged to the US dollar, Malaysia is 100 percent vulnerable to the fluctuations of the dollar and the ringgit is completely in the hands of the U.S. dollar," the ambassador said, suggesting a diversification into a basket of other international currencies was the best alternative.



This Site Served by TheHostPros