Brunei's Currency Peg

It has been a while since I last posted anything about economics in this blog. I was sending some payment this afternoon and I saw the Malaysian to Brunei exchange rate was RM2.46. I don't know what it has been all this while whether higher or lower. I read this article in The Brunei Times about the highs and lows of Brunei's currency peg and apparently Brunei dollar has depreciated significantly last week. The argument in the article was that Brunei might have not have to face the depreciation and it only did so because of our peg to the Singapore currency. Many have asked whether this peg is worthwhile. Read the article below:

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The highs and lows of Brunei's currency peg

DR ARNO MAIERBRUGGER

BANDAR SERI BEGAWAN, Monday, June 24, 2013 - THE latest depreciation of most Southeast Asian currencies did not fail to make its mark on the Brunei dollar. Interestingly, this has nothing to do with how resistant the Brunei economy is against currency crises or fiscal imbalances on the world market. The oil-rich Sultanate is far away from a crisis and is also not a prior target of international currency speculators.

No. The reason why the Brunei dollar depreciated significantly last week in concert with other ASEAN currencies is simply that it is pegged to the Singapore dollar and managed by the Monetary Authority of Singapore, while the Brunei Currency and Monetary Board, which serves as a kind of central bank for the country, does not have many means to influence exchange rates if it is not done jointly with Singapore.

Thus, the Brunei dollar was carried down in the same way the Singapore dollar joined the heaviest depreciation of ASEAN currencies in a year. The Thai baht fell, Malaysia's ringgit depreciated, as did Indonesia's rupiah and the Philippine peso. The Singapore dollar dropped 2.6 per cent in May, the biggest slump since May 2012. It has also tumbled against all of its main Asian peers this year except the Japanese yen and South Korean won. By the end of May it was also down 5.5 per cent versus the Thai baht.

The Singapore dollar's strong alignment to global factors is also the fate of the Brunei dollar, although the underlying economic factors might be fairly different. The city state's currency's substantial correlation with the Swiss franc and little capacity for it external sector to benefit from the US growth recovery are some of the factors that might dragging the currency further. Singapore is also the only ASEAN nation that has only narrowly avoided a recession in the fourth quarter of 2012, a situation that normally brings with it a weakening currency. And despite reporting surprisingly positive GDP data during the first quarter of 2013, Singapore's recent numbers are still lacklustre when compared to the region and even the US.

A number of past financial crises have had their roots in countries pegging their currency. If there is change in the structure of interest or exchange rates then this has large effects on both monetary systems even if they have a differently structured economy. While a peg to a major ASEAN currency certainly has its advantages for Brunei, the country also has to face possible unwanted results that are not its own fault.

The Brunei Currency and Monetary Board will probably have to look into measures that offset the depreciation of the Brunei dollar at least to ensure that local purchasing power remains intact and rising prices for imports will not have any effect on fiscal stability. The board will also have to take into account that the envisaged role to develop Brunei towards an Islamic and International Financial Centre will also strongly depend on how the future strategy with regards to the Singapore dollar peg will be laid out.

Do you think Brunei should de-peg its currency from the Singapore dollar? What effect would it have? Let us know through Twitter: @insideinvestor using hashtag #bruneitimes.

-- Courtesy of The Brunei Times --
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