Although Bank Negara has repeatedly announced that the ringgit peg against the US dollar will remain, the economy market however chooses not to believe in this certainty thus causing an economic paralysis, an economist said recently.

Chan Huan Chiang, an associate research fellow at the Malaysian Institute of Economic Research (MIER) said that the uncertainty was caused by the market's response to speculative statements on the peg.

He said theories that the government was the cause of the uncertainty was inaccurate but rather the fault lies with those who constantly speculate that the ringgit will be de-pegged (or un-pegged) in the near future.

"They choose not to believe in this certainty," referring to the government's commitment to stick with the peg, introduced in 1998 by former prime minister Dr Mahathir Mohamad during a global economic crisis.

The ringgit is currently pegged at RM3.80 to US$1.00.

Economists have said the ringgit is undervalued , especially against other major currencies, such as the pound sterling and euro, as the dollar value has declined tremendously since 1998.

They have advised the ringgit be de-pegged - sooner rather than later - for it to be able to gradually adapt to its new found strength and avoid 'jolting' the economy.

The ringgit's current actual value is said to be at RM3.40 to the US dollar, while it is likely to increase in time to RM2.50 - its value before the global economic crisis eight years ago.

Weak alternative

Chan offered an alternative to the current situation but did not show any strong conviction that it was feasible.

"The only option is to float but this would mean that we go back to the 1997 status in which Bank Negara has to manage the exchange rate, something that has been very difficult to do given the empirical experience across many economies of the world," he added.

To float the ringgit is to find a level in its relationship to other currencies solely in response to the law of supply and demand.

Meanwhile, Khoo Kay Peng from the Socio-Economic Development and Research (Sedar) Institute agreed with Chan's statement that speculators were causing the uncertainty.

"There is a lot of hot money (from foreign funds into the stock market) in the country's economy. It comes with the intention to hold up ringgit assets. However this can be easily liquidated," said Khoo when contacted today.

These 'hot funds' are not pumped into 'real' investments such as in the manufacturing, services as well as the oil and gas industry. The speculators act to fuel uncertainty in the de-peg debate in order to protect their financial interests.

Khoo, Sedar's research director, submitted that the economy, as a whole, is not dependant entirely on currency exchange but also on macro-level market economy policies.

The International Monetary Fund (IMF) has also urged Malaysia to move towards greater flexibility in exchange rate in order to manage risks associated with increasing capital inflows.

It has noted that the ringgit is currently undervalued by three to five percent.

The government has however denied there are low foreign investments, while Bank Negara Governor Zeti Akhtar Aziz said today that the peg did not deter investors as some RM18 billion in foreign funds came into the country last year.

This is expected to be sustained this year.