Comment
Re-pegging
the Malaysian Ringgit.
April 24, 2001
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When PM Mahathir suggested that the ringgit could be devalued was he trying to send a signal to the manufacturing sector, not to worry about potential loss of competitiveness? If so, he had missed the other more immediate and important consequence. He has shaken the confidence in the ringgit (box 1). Unfortunately, for Malaysia, the latest numbers (decline in USD 900 million in reserves in April so far) may be pointing that a vicious reinforcing loop (see Box 2 and Box 3 below) may have began for Malaysia. If you judge that the currency is going to be markedly weaker, wouldn't you leave your money overseas? As usual, wealth is distributed in a pareto law fashion. The minority controls the majority of a country wealth, and it is the rich that has the means to park funds outside the country.
The easiest way to break this loop is Box 1. It had helped all Asian economies climbed out of the last crisis. Problem is, it is looking like a wishful bet. So, the issue becomes one of how long can Malaysia hold out. It seems that from the US to Argentina, everywhere the game is about buying time for spontaneous recovery. Malaysia
could run out of time, and it would have no choice but to re-peg the
ringgit (box 2) more cheaply and probably
this time to a basket of currencies. As
regular readers know: No reinforcing loop can go on indefinitely.
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