Among the things Horst Kohler, managing director of the International Monetary Fund, said in his recent visit to Malaysia was that outgoing prime minister Mahathir Mohamad should re-consider the ringgit's peg to the United States dollar. Among the things that will have been swirling round in Mahathir's head would be to tell the IMF to 'go fly kites' again.

To heed Kohler's advice wouldn't be because de-pegging the ringgit will be seen as affirming, to a greater or lesser degree, that the IMF is now right in its policy when it got it hopelessly wrong during the Asian crisis in 1997-98. But Malaysia's economy is at the crossroads and clearly Mahathir hasn't a clue on making Malaysia internationally competitive again.

Despite Mahathir's hype and hubris, real reforms in the domestic economy never got off the ground. Most key corporations aligned to the Barisan Nasional government remain locked in the grid of the corrupt and inefficient Malaysia Inc, which still enjoys massive state protection.

Moreover, the Kuala Lumpur Stock Exchange, the so-called barometer of confidence in corporate Malaysia, is still volatile. It hasn't reached Mahathir's vaunted 900 points that he's been predicting for a few years now notwithstanding government funds like Valuecap and Khazanah have been propping up the market while most local and foreign investors remain on the sidelines.

No clear policy direction

Problem is, Mahathir hasn't produced a clear policy direction for corporate restructuring other than his antiquated idea to wait out the world economic turbulence and export its way out of trouble. Malaysia's gross domestic product won't even sniff Mahathir's crystal ball 5 per cent prediction. Curiously, Bank Negara has been making the same racket in recent months but never once backed its claim with hard data.

All the economic indicators suggest GDP growth for 2003 will be closer to 3 per cent unless the US economy suddenly fires up in the final two quarters of this year. Even that seems unlikely, despite US productivity rising above 50 points. There's still no sign of a spike in domestic aggregate demand, and US consumer sentiment will drift off as another harsh winter approaches.

All of which points, as expected, that any recovery in the US will be short lived since it'll mostly be a jobless one. More, the problems aren't cyclical but structural, and US president George W Bush, like Mahathir, hasn't a clue about fixing the economy while perpetrating the biggest tax con on the American people.

Mahathir will be worried about the US recovery puffing out faster than most economists have been foolishly predicting of a sharp upturn. For Mahathir, then, as long as recovery remains uncertain, he won't budge on the peg.

De-pegging the ringgit could easily veer the corporate sector into massive despair. It'll also unleash the burden of higher unemployment on his government, which is already bogged down with a sizable fiscal deficit. Moreover, higher unemployment will be political suicide for the Barisan Nasional that's readying itself for a snap poll.

China's yuan peg

There's another reason why Mahathir won't de-peg the ringgit: China's yuan peg. In recent weeks the US and the European Union have been pressing Beijing to revalue the yuan from 8.28 to the greenback. It's been trading in an extremely narrow band of 0.004 per cent of this mark since 1995. China fears any revaluation will trim a chunk off China's GDP of between 8 and 9 percent. And a low currency also keeps the lid on wages blowout and boosts the trade balance.

Beijing's continued to peg the yuan when the US dollar has been declining irks Washington. Also, China's trade balance continues to rake in surpluses against its major trading partners, including Japan. Mahathir's fear is that China's yuan peg is far too competitive for even Malaysia's ringgit peg and could easily derail Malaysian exports.

While foreign direct investment into Malaysia is at record lows, China has been gobbling up the bulk of this into East Asia. That's not all: Even hot money flows into the region have made beelines for China. In recent months some US$20 billion to US$30 billion have entered the Chinese financial economy, possibly on rumours that Beijing is about to de-peg the currency.

But China's foreign exchange reserves stood at US$356 billion in July. That gives Beijing the muscle to defend the yuan against any external pressures, and even from domestic sources, such as shoring up insolvent Chinese banks. Beijing's thinking is similar to Mahathir's: No de-pegs at the expense of domestic economic turmoil with dire political spillover effects for the ruling party.

Mahathir can't make the China peg his election issue but incoming premier Abdullah Badawi may, as the scurrilous George Bush is making it the scapegoat for his blunders. But Abdullah, unlike Mahathir, must quickly and squarely face up to one issue: Can Malaysia Inc withstand global competition pressures once the de-pegging finally comes? And it will.

The first test is Afta (Asean Free Trade Area) and the survival of Mahathir's national car project, which has siphoned off a sizeable share of Malaysia's national wealth. The other isn't too far away either: The World Trade Organisation's timetable for financial liberalisation, in 2005. It'll sorely test Malaysia's banks against the global players, especially given the hype behind the so-called bank consolidation exercise. Or was that a sideshow, to take away the glare from Mahathir merely reshuffling deckchairs to entrench Malaysia Inc for his cronies?


MANJIT BHATIA is managing director of AsiaRisk - a political and economic research and risk analysis consultancy in Australia. The writer specialises in international economics and politics and the Asia-Pacific region.