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Malaysia turns to 1998 currency peg architect as markets bleed

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Prime Minister Najib Razak is taking a page out of the playbook of mentor-turned-nemesis, former premier Mahathir Mohamad. To stem a decline in confidence in Malaysia, he's even tapping the expertise of Mr Mahathir's ringgit peg architect.

[KUALA LUMPUR] Prime Minister Najib Razak is taking a page out of the playbook of mentor-turned-nemesis, former premier Mahathir Mohamad. To stem a decline in confidence in Malaysia, he's even tapping the expertise of Mr Mahathir's ringgit peg architect.

As a plunge in global financial markets this week deepened the ringgit's slide and heightened comparisons with the Asian financial crisis, Mr Najib unveiled an economic task force, echoing Mr Mahathir's National Economic Action Council in 1998. Members of Mr Najib's committee include business leaders and former Second Finance Minister Nor Mohamed Yakcop, who helped Mr Mahathir design Malaysia's now-abandoned capital controls and currency peg.

The move underscores the growing pressure on Mr Najib to prevent a further loss of confidence as a political scandal and plunging commodity prices undermine an economy that by many measures has strengthened since the 1997-98 regional crisis. While Mr Najib has vowed Malaysia won't return to the capital controls or fixed currency regime that drew the ire of the International Monetary Fund 17 years ago, his government hasn't yet been able to halt the exodus of capital from its financial markets.

"What makes the current situation particularly worrying" is the risk of a sustained erosion in confidence, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. "The government is scrambling to come up with ways to stem the rot which, given Malaysia's history of unorthodox financial measures, is weighing further on sentiment." Businessman Brother Also on the task force is Mr Najib's brother Nazir Razak, chairman of one of the country's biggest lenders, who has criticized the current administration. Other members include Azman Mokhtar, managing director of state investment company Khazanah Nasional Bhd, and Malayan Banking Bhd. Chief Executive Officer Abdul Farid Alias.

"The act of establishing a task force comprising of 'old guards' and 'critics' helps bolster credibility insofar that economic crisis management is relegated to a more apolitical sphere and is taking centerstage with a visible and experienced task force," said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd.

Mr Najib is grappling with allegations of financial irregularities at state investment company 1Malaysia Development Bhd, and has deflected Mr Mahathir's calls to resign as the debt- ridden fund's woes contributed to investors souring on the country.

Foreign funds have dumped more than US$3 billion of the nation's shares this year and the currency has weakened beyond the peg set by Mr Mahathir in 1998. The country has Asia's worst- performing major currency this year.

Mr Nor and Mr Mahathir hatched a plan during the Asian financial crisis that would lead to the ringgit being pegged at 3.8 to the dollar in September 1998. That halted speculator bets that had caused it to plunge 31 per cent in 12 months against the US currency.

The IMF, which called Malaysia's response "a step back" at the time, later acknowledged it was a "stability anchor." The ringgit climbed 0.4 per cent to 4.2358 a dollar as of 8:57 am in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. It reached 4.2990 Wednesday, the lowest since July 1998 and has weakened more than 17 per cent in 2015.

"The ringgit is way undervalued, but it's not fundamentals driving it; there's some panic that's being traded in the market," said Gerald Ambrose, managing director of Aberdeen Asset Management Sdn in Kuala Lumpur. You can "wring your hands in the air or you can look at it as a good opportunity to buy assets at a significant discount to their fair value," he said.

Mr Najib said Wednesday that the newest task force will meet weekly to find ways to minimise the impact of "any arising economic issues." They will look at short- and medium-term strategies to strengthen the country, he said.

"Where the committee could likely make an impact is in reiterating the importance of sticking to the structural reform agenda, pushing areas where there are limited progress so far," said Euben Paracuelles, a senior economist at Nomura Holdings Inc. in Singapore. That may be better than "thinking about immediate policy fixes which institutions like Bank Negara Malaysia are in a better position to formulate." Malaysia has been struggling to boost confidence in its economy and finances since oil prices started slumping late last year. Other than allegations of irregularities at 1MDB, Mr Najib is facing accusations of impropriety after it was disclosed that political donations ended up in his private accounts in 2013. The accounts have since been closed.

Mr Nazir, 48, said in April the government needs to disclose more information about the liabilities of 1MDB to reassure investors in the currency and stock market even if it doesn't pose a risk for the banking system. He has also censured his brother's administration for suspending a newspaper which had questioned some of 1MDB's business deals.

He used Instagram to voice his opinion on the ringgit's decline, saying this month as the currency weakened beyond 4 per dollar that it's a "terrible time to be distracted by politics and so much negative international media coverage."

BLOOMBERG