Malaysia urged to review exchange rate regime

 

MALAYSIA should consider a change in its exchange rate regime when deliberating a new economic growth model, says a leading Asian economist.

Manu Bhaskaran, from Centennial Group Holdings in Singapore, said it is timely for Malaysia to review the main determinants of the appropriate exchange rate regime.

The monetary authorities in Malaysia adopted a managed-float exchange rate system, trading against an undisclosed basket of currencies since it removed the ringgit's RM3.80 peg against the US dollar in 2005.

The exchange rate regime plays a critical role in an economy such as Malaysia.

"Where trade accounts for more than 200 per cent of gross domestic product (GDP) and there are substantial flows of people, capital and tourists in and out of the country, the exchange rate is probably the single most important relative price in the economy," he said at the National Economic Outlook Conference 2010-2011 in Kuala Lumpur yesterday.

"It has to provide Malaysia with some degree of flexibility in absorbing rising risks of shocks and it has to accommodate the likely changes in regional exchange rates as well."

Bhaskaran expects the next one or two years to see substantial turbulence as excess liquidity surges into emerging markets and creates difficulties in exchange rate management.

China is also likely to shift to a new exchange rate regime which will see its yuan appreciate steadily over time and that is likely to allow other Asian currencies room to appreciate.

He added that the exchange rate regime should provide the incentive to move up the value chain.

"A too weak exchange rate provides a crutch to lower value activities and does not encourage the move-up in the value chain," he said.

With growing competition from China, India, Vietnam and other emerging economies, Malaysia has to accelerate its move-up the value chain.

"Of course, creating such an incentive structure should not be placed entirely on the exchange rate, reforming the institutional structures and addressing other issues such as as the high level of unskilled and cheap foreign labour in the economy are also important," Bhaskaran added.