KUALA LUMPUR, March 23: Malaysia’s central bank Wednesday announced a second wave of foreign exchange liberalization including easing red tape on hedging activities and rules on overseas investment as part of efforts to attract foreign investors. Some economists said the new measures effective April 1, exactly a year after Bank Negara Malaysia first relaxed foreign exchange rules, appeared to be a natural progression towards unwinding Malaysia’s seven-year-old currency peg. However Bank Negara governor Zeti Akhtar Aziz said the ringgit peg of 3.80 to the dollar, fixed since September 1998, remained “sustainable” and stressed there would be “no change at all” to the regime.

To reduce the costs of doing business, Zeti said there would be greater flexibility for residents to invest overseas and to borrow in foreign currencies to encourage businesses to diversify into other markets.

She said residents and non-residents could enter into forward foreign exchange contracts with licensed commercial, Islamic and merchant banks without prior approval to buy or sell foreign currencies, amid efforts to promote wider risk management options to guard against currency fluctuations.

“The new rules are to position Malaysia as an attractive and competitive investment destination,” Zeti told a news conference to mark the release of the central bank’s 2004 annual report.

Economists said the forex liberalisation marked a natural progression towards an eventual shift in Malaysia’s fixed exchange rate.

“They are starting to prepare the ground with all the infrastructure like hedging,” said Nizam Idris, regional economist with Singapore-based IDEAglobal.

“It’s another step towards a more flexible exchange rate regime but it still does not answer the question as to when it will happen.”

Nizam estimated the ringgit was currently undervalued by between five and 10 per cent and believed the time was right to de-peg the currency.

However Zeti said in the report the fixed exchange rate regime still “best serves the nation’s interest”.

“The basis for any change would therefore be made on long-term structural considerations and not short-term movements in capital flows or transient shifts in exchange rate expectations,” she said in the report.

The International Monetary Fund earlier this month urged Malaysia to scrap the peg to manage risks associated with increasing capital flows.

Former premier Mahathir Mohamad, who imposed the peg as part of capital controls to shield the economy from a regional financial crisis, has since joined others in calling for a review of the peg as a sharp decline in the dollar’s value has made Malaysian imports costlier.

Malaysia’s central bank said prolonged downturn in the global semiconductor industry, high oil prices and rising interest rates could push economic growth to as low as 5 per cent this year.

Bank Negara Malaysia said gross domestic product (GDP) growth was expected to slow to 5-6 per cent in 2005, after surging 7.1 per cent in 2004, its fastest pace in four years, and from an earlier 2005 forecast of six per cent.

Growth in manufacturing, which contributes a third of the economy, could slow to 4.5 per cent in 2005, less than half of the 9.8 per cent in 2004, with electronics exports growth falling to 4.5 per cent from 12.7 per cent, it said.

“There are uncertainties in the external environment and these uncertainties put our growth in a range (of five and six per cent),” central bank governor Zeti Akhtar Aziz said

“If the recovery takes place in the second half of the year in the electronic cycle, if interest rates still remain below the neutral level, if oil prices come down under 50 dollars a barrel, then these are positive trends and we will move closer to the six percent.

“However, if the reverse happens, then it will be less,” Zeti said. Growth in services was forecast at 5.7 per cent, against 6.7 per cent in 2004, while agriculture growth would slide to 3.3 per cent from five per cent, and mining would moderate to five per cent from 4.1 per cent.—AFP