Ringgit peg talk reflects woes

(Reuters) Talk of repegging the Malaysian ringgit reflects political uncertainty at the heart of government rather than any genuine desire to reimpose controls which were lifted in 2005, analysts said.

The proposal was made at the weekend by former Prime Minister Mahathir Mohamad, an opponent of current incumbent Abdullah Ahmad Badawi. Dr Tun Mahathir was then backed up by External Trade Minister International Trade and Industry Minister Muhyiddin Yassin.

Mr Muhyiddin too has called for Datuk Seri Abdullah to quit and the statements came ahead of a briefing for Malaysia's new Finance Minister Najib Razak on Monday, which ministry officials and central bank Governor Zeti Akhtar Aziz will attend.

There will be a press conference, which could be held as early as midday.

It was Dr Mahathir who defied the International Monetary Fund in response to the Asian financial crisis of 1997 and 1998 when he imposed capital controls and pegged the currency at 3.80 to the dollar.

The ringgit shifted in 2005 to a managed float against a basket of currencies and it rose on Monday to 3.4200 to the dollar from 3.4610 at the close of Asian trade on Friday.

'For this to have come from Mahathir suggests some resemblance to concerns over the impact of the late-1990's capital outflows,' said Mr Dwyfor Evans, currency strategist at State Street Bank & Trust.

'State Street real money flow indicators suggest very strong outflows from Malaysia in recent months, largely a function of political noise. Talk of a re-peg in the ringgit suggests that the political establishment has not fully learnt the lessons of 10 years ago,' he said.

Malaysia was widely criticised for imposing capital controls instead of liberalising its economy in response to the Asian financial crisis a decade ago.

Malaysia's government has been on the back foot since March when it recorded its worst election result in 50 years since independence from Britain. It is being pressured by a resurgent opposition led by Datuk Seri Anwar Ibrahim, a former finance minister and deputy prime minister.

The government has flip-flopped on sensitive economic issues.

Earlier this year it slashed fuel subsidies in an effort to rein in the country's budget deficit, which is set to hit 4.8 per cent of gross domestic product this year. Then it partly reversed the cuts in order to appease voters hit by surging inflation.

'In practical terms, it (repegging) is not that dramatic a departure from (the central bank) intervening,' said Mr David Cohen, analyst at Action Economics in Singapore.

'I would suspect it is partly political, (as is) anything Mahathir does,' he said.