Malaysia is well placed to ward off risks from the inflow of short-term hot money, as it is buttressed by reserves amounting to US$106 billion, compared to the US$20 billion during the 1997/98 financial crisis.

"There is no immediate threat at the moment. However, if the situation gets unmanageable, then Bank Negara Malaysia can impose some safeguards to prevent excessive speculation activities against the ringgit," Affin Investment Bank economist Alan Tan Chew Leong told Bernama.

Since the unpegging of the ringgit in 2005, the local unit has been on a gradual trend of appreciation, reflecting the strong fundamentals of the economy.

The ringgit was pegged at RM3.80 to the greenback in September 1998 to cushion it against rogue currency speculators and insulate the economy against the backdrop of the Asian financial crisis.

Before the crisis, which began with an attack on the Thai baht in July 1997, the ringgit was trading at a high of RM2.42 but fell sharply against the dollar following excessive speculation.

It depreciated to RM5.20 at one time in 1998, prompting the government to impose sweeping capital controls and peg the ringgit.

On Sept 1, 1998, Malaysia became the first Asian country affected by the economic crisis to announce the imposition of foreign exchange controls in a bold attempt to lay the groundwork for a recovery programme.

Following the experience of the Asian financial crisis, Bank Negara developed a surveillance system to deter the inflow of hot money into the country for speculative purposes.

Some 'not necessarily hot money'

Tan said at that time, the conditions were manageable as some of the inflow into Malaysia was not necessarily hot money, belonging to speculative short term capital flows, that would enter and leave in a big way.

"(Instead) We were seeing long-term portfolio investment coming into the country's domestic capital market due to favourable growth prospects for the Malaysian economy," he added.

"The economic fundamentals and financial institutions too are a lot stronger today as compared to 1997/98. Therefore, the country can better withstand capital inflow volatility," he added.

Tan also highlighted that as such, he did not expect the central bank to introduce any measures to curb capital inflow, in the near term.

"With domestic demand slowing and the inflation rate remaining low, we expect Bank Negara to hold its overnight policy rate (OPR) steady at 2.75 per cent throughout 2010 and probably into the first half of 2011.

"This will help limit further an appreciation of the ringgit," he said.

Meanwhile, the group chief economist of RAM Holdings, Yeah Kim Leng said the government could also take measures such as imposing administrative controls and an entry or exit taxes.

This, he explained, is based on the type and duration of investment, should the volume of inflow surge beyond the absorptive capacity of the financial system and threaten its stability.

"However, given the demonstrated ability of the Malaysian financial and capital markets to cope with recent episodes of heightened volatility, we agree with the Bank Negara governor, that such measures are not needed in the immediate future," he said.

More orderly inflow planned

Meanwhile, the group chief economist of Maybank Investment Bank Bhd, Suhaimi Ilias said Malaysia no longer has the capital control measures imposed in 1998 and foreign investors are now free to bring in money and take it out of the country.

So far, the extent of short-term capital inflow into Malaysia has been manageable and not excessive, he added.

"This explains why Bank Negara said, that there is no need to undertake drastic measures such as capital controls. The measures already undertaken are sufficient for now," he added.

Going forward, Suhaimi said Bank Negara could also make use of the Statutory Reserve Requirement (SRR) to mop up any excess liquidity arising from a hot money inflow.

The SRR so far has been left at the record low of 1.0 per cent despite the earlier upward adjustments in the OPR.

He said the first line of defence against excessive hot money inflow had already been implemented by Bank Negara, with the decision to maintain the OPR at 2.75 per cent in the last two monetary policy committee (MPC) meetings in September and November, following the three hikes of 25 basis points each.

In addition, Suhaimi said, Bank Negara's recent comments on the ringgit indicated that the central bank preferred to see a more gradual and orderly movement in the currency after appreciating as much as 11 per cent against the US dollar this year.

"The halt in OPR hikes and statement on the ringgit is to deter would-be speculators, trying to take advantage of or arbitrage on, the interest rate differentials between Malaysia and the United States, he added.

- Bernama