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There is some talk in the market about Malaysia re-establishing the ringgit peg.  We downplay the notion, and do not think it has the support of government policy-makers since central bank Governor Zeti and new Finance Minister Najib both spoke out strongly against the peg today.  Zeti said that repegging would be harmful to the economy and that a floating exchange rate provides stability, while Najib said the authorities have no intention of repegging.  Najib just last week swapped the post of Finance Minister for Defense Minister with Prime Minister Abdullah Badawi, and so Najib is clearly signaling policy continuity.  Abdullah also agreed to hand over the leadership reins to Najib by June 2010, but left open the possibility of an even earlier date.

Note that newswires are reporting that the proposal to repeg was put forth by none other than former PM Mahathir, who instituted the peg during the Asian crisis. Mahathir's proposal was backed by Minister of International Trade and Industry Yassin. Mahathir and his followers are locked in a power struggle with the Abdullah faction, with the latter coming under fire for significant losses in elections earlier this year.  Mahathir has been calling for Abdullah to step down.  After all, it was Abdullah who scrapped the peg back in July 2005.  Yassin has also called for Abdullah to step down, which cements our view that it was a calculated political move to undermine confidence in Abdullah.

While we think that a repeg is unlikely, we note that political risks are rising. Besides the internal struggle within the ruling National Front coalition, former Deputy PM and now opposition leader Anwar claims to have enough votes and defectors to bring down the government.  Anwar has called for a confidence vote to be brought forward to an emergency meeting of parliament on September 23, but there has been no government response yet to this request.  The government on September 12 detained an opposition lawmaker in the interests of ?public order and safety? and is very worrisome since Abdullah is now calling Anwar a threat to Malaysia?s economy and security.

Malaysia fundamentals remain strong, but the current bout of global risk aversion coupled with rising political risk suggests that MYR is likely to continue to underperform.  Indeed, the political outlook is fraught with possibilities.  Since July 15, when the dollar bottomed vs. the euro, MYR has been one of the worst performers in Asia (down 6%), second only to KRW (down 10%).  USD/MYR has fallen today, helped by some semblance of calm returning to the markets, but we continue to feel that the outlook for EM currencies in general remain poor.  Despite the relief rally on the wide-ranging bailout plan, conditions going forward are not conducive for EM:  low risk appetite, global recession risk, and tight global liquidity conditions.

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Source: Malaysian Ringgit Repeg Unlikely