Najib reiterates commitment to free-market policies

Kuala Lumpur

AS investor anxiety over political uncertainties and the tumbling ringgit continued to fuel concerns that Malaysia could opt for capital controls, Prime Minister Najib Razak reiterated his administration's commitment to free-market policies. Also the finance minister, Mr Najib emphasised the central bank's independence and control over monetary policy.

"The government remains steadfast in maintaining the integrity and openness of its markets, and will not impose capital controls, nor will it implement a peg for the ringgit to the US dollar," he said in a media statement on Thursday.

"As the global economy and financial markets are facing adjustments, it will have implications on the domestic financial markets and our exchange rate. The flexibility of our exchange rate is thus important to absorb these global adjustments and volatility."

Mr Najib stressed that the present environment was "significantly different" compared with the Asian financial crisis of 1997/98 when former prime minister Mahathir Mohamad opted for capital controls and a fixed peg of RM3.80 to the US dollar to stem further damage to the economy. Only towards the end of 2005 was the peg lifted and capital controls gradually eased.

Now at around 4.10 or near a 17-year low against the US dollar, the ringgit has devalued by some 30 per cent over the past 12 months. The pace of erosion has accelerated in the past two weeks.

However, bigger companies are now more prepared, according to Standard & Poor's. The international ratings agency said that the weakening ringgit would not significantly affect the companies that it rates because of their "moderate leverage, sound liquidity and generally conservative financial policies".

Compared with Indonesian firms, S&P observed that the rated Malaysian companies have avoided major mismatches between the currencies of their debt and revenues.

Notwithstanding S&P's assessment, the shrinking ringgit remains a major concern, and Mr Najib said that Putrajaya has been keeping a close watch on current developments including currency movements.

At a press conference in Putrajaya on Thursday, Mr Najib attributed the ringgit's plunge to the "overwhelming strengthening" of the US dollar - a situation now exacerbated by China's recent devaluation of the yuan to boost its exports.

Most analysts consider 3.7-3.8 to be closer to the ringgit's fundamental level, but said that it is being "punished" because of "unresolved political issues". They said that another significant difference in this currency crisis is the impact that debt and scandal-ridden 1MDB and Mr Najib have exerted on the ringgit.

Mr Najib recently admitted to receiving nearly US$700 million in his personal bank accounts in Ambank in 2013, ahead of the last general election in May after it was reported by The Wall Street Journal and whistle-blowing website Sarawak Report.

The beleaguered leader refused to reveal the source of the donation, but maintained that it was a political donation and within accepted norm. He has also resisted calls to step down, pending (now stalled) investigations into 1MDB or into his accounts.

Analysts said that his actions - including political manoeuvres aimed at blocking further investigations as well as a probe by the central bank - have resulted in a growing trust deficit in his administration. Investors are cashing out, and more downside pressure on the ringgit is expected.

Although the economy remained fairly resilient in the first half, economists warned that the second half will be tougher given that consumption - a major growth engine - could weaken because of the smaller ringgit and bearish sentiments.