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NEWS UPDATES Asean Affairs                     9  August 2011

Malaysian currency to strengthen

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Economists expect the ringgit to further strengthen against the greenback and attract extensive capital inflow into the region. It will also lead to possible further hikes in statutory reserve requirement (SRR) to stem excess liquidity if the global financial volatility worsens following the US credit rating downgrade.

Standard and Poor's (S&P's) had last Friday downgraded the world's largest economy a notch lower to AA+ from a triple A rating since the credit rating was issued to the US in 1917.

MIDF Research chief economist Anthony Dass said he expected the ringgit to strengthen against the US dollar at an average 2.97 for the year supported by a combination of healthy economic fundamentals and strong inflow of liquidity.

He added that the stronger ringgit against the US dollar would help cushion some level of imported inflation, which would give some breathing space for Bank Negara on further raising the overnight policy rate (OPR), which now stood at 3%.

“We have now placed a 30 percent odd for the OPR to stay at 3 percent for the rest of the year and expect the central bank to raise it by another 25 basis points (bps) in the second half of this year,” Dass said.

Much depends on the direction of the ringgit, the global commodity and food prices, liquidity and whether there will be further relaxation of subsidies.

Underpinned by healthy economic fundamentals and benefiting from the regional net inflow of funds, liquidity inflow into Malaysia has been strong, forcing the central bank to raise the SRR by 300 bps to 4 percent between April-June 2011. SRR are non-interest deposits kept at the central bank to mop up excess liquidity in the financial system.

With lingering uncertainties on the global front, Dass said he expected Malaysia, like other Asian ex-Japan economies, to continue to see inflow of funds. While this would strengthen the ringgit, he said ample liquidity would add pressure on inflation, adding that he was not ruling out the possibility of further hikes in SRR by another 50 bps to 100 bps should the inflow of liquidity pose a problem.

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It is commonplace in journalism to write two types of articles at the transition point between the year that has passed and the New Year. As this writer qualifies as an “old hand” in observing Thailand with a track record dating back 14 years, it is time take a shot at what may unfold in Thailand in 2011.

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