By Audrey Tan

ANY move by Malaysia to remove or tweak its currency peg could result in the ringgit rising as much as 10 per cent against the US dollar and 7 per cent against the Singapore dollar, analysts said.

They were commenting amid growing speculation that Malaysia will make changes to the ringgit peg.

As DBS Bank currency analyst Philip Wee said: 'In January, speculation has increased that Malaysia may be considering a change to the ringgit peg. But it's unlikely that peg changes will be imminent in 2004.'

With the ringgit pegged at 3.8 to the US dollar, Malaysia has benefited from the weakening greenback as Malaysian goods became cheaper for foreign buyers.

Analysts say that at its current value, the ringgit is undervalued by around 10 per cent. If it is allowed to float, it may rise to 3.5 against the US dollar, said DBS' Mr Wee.

Standard Chartered Bank (Stanchart) currency analyst Claudio Piron said that if there is a change to the ringgit peg, the ringgit could rise 5 to 10 per cent against the US dollar.

Against the trade-weighted Singapore dollar, it would rise a smaller 3 to 7 per cent.

The ringgit is facing the greatest pressure to revalue since the peg was introduced in 1998 during the Asian financial crisis, said Mr Piron.

'The inflow of funds into Asia and the trade surpluses are putting pressure on the currency to appreciate,' he said.

Market speculation was also fuelled by comments made by Malaysian Prime Minister Abdullah Ahmad Badawi last month. He said of the peg: 'We are not dogmatic. If the situation warrants a change, then we will change it.'

For Singapore companies, a stronger ringgit will have mixed implications.

Those selling to the Malaysian market may find that demand for their products will rise as the purchasing power of Malaysians increase.

An added benefit is that when they repatriate the profits back to Singapore, a stronger ringgit will mean higher profits in Singapore dollars.

Osim chairman Ron Sim, for one, welcomed the prospect of a stronger ringgit. 'It will mean more buying power for Malaysians, which will increase our revenues,' he said. Malaysia accounts for more than 10 per cent of Osim's annual revenues.

But for those companies with factories in Malaysia, a stronger ringgit means that their wage bills will increase.

Malaysian-made products will also become more expensive for foreign buyers, said Murata Electronics general manager C.T. Kang. 'It will definitely affect labour costs, which will go up. It may also be a bit more difficult to export the products.'

Japan-based Murata, which makes electronics products, employs more than 500 people in its Ipoh factory.

But despite all the market speculation, analysts do not expect Datuk Seri Abdullah to make any changes to the peg till after the elections later this year.

Many in Malaysia wish to maintain the status quo. Manufacturers, for example, want to keep their current export competitiveness, analysts said.

'It's politically too early because of the elections,' said Mr Wee.

Malaysia also does not need a stronger currency to ward off imported inflation because inflationary pressures do not pose a threat now.

But if the US dollar continues to weaken, it could trigger higher inflation in Malaysia and create greater pressure on the peg, analysts said.

A leading think-tank, the Malaysian Institute of Economic Research, said recently that a review of the peg is likely if the US dollar falls to 1.4 against the euro and the yen rises to 100 against the greenback.

That is not an unlikely scenario. Stanchart, for one, expects the US dollar to hit 1.4 against the euro and the yen to hit 95 against the US dollar in the April-to-June quarter.

Mr Piron said: 'This means that in the third quarter, there will be some pressure on the ringgit and the government will have to do some serious soul-searching on the peg.'