August 20, 2015 / 5:40 AM / in 2 years

UPDATE 2-Malaysia says will not peg ringgit or implement capital controls

3 Min Read

(Adds analyst comment, details on planned anti-government rally)

By Trinna Leong and Emily Chow

KUALA LUMPUR, Aug 20 (Reuters) - Malaysian Prime Minister Najib Razak said on Thursday he would not peg the ringgit to the U.S. dollar or implement capital controls as he sought to calm fears about the sliding currency and capital flight from Southeast Asia's third-largest economy.

Najib, who has come under severe criticism after being embroiled in a scandal over indebted state fund 1Malaysia Development Berhad (1MDB), is trying to reassert his leadership over his government and a stumbling economy.

"The flexibility of our exchange rate is important to absorb global adjustments and volatility," Najib said in a statement.

Najib's comments mirrored remarks made by central bank chief Zeti Akhtar Aziz. Zeti, a widely respected economist, last month denied rumours she had resigned from her post after coming under pressure amid investigations into 1MDB.

Analysts said Najib's comments would reassure investors rattled by the political turmoil facing the government and by external factors weighing down the economy, but only to an extent.

"It's important that his message is now consistent with the central bank but in the near term we are unlikely to see any significant impact in the markets," said Rahul Bajoria, regional economist at Barclays in Singapore. "To see a positive impact, it will be global dynamics that make an impact as much as the domestic environment."

The ringgit, Asia's worst performer this year with losses exceeding 17 percent against the dollar, dropped nearly 1 percent on Thursday despite the comments.

"There's no intention of moving to a less flexible regime like a peg exchange rate regime," Zeti told reporters, adding that fact that international reserves had dipped below the psycologically significant level of $100 billion was not a cause for worry.

Najib has faced criticism for taking his eye off an economy suffering from weak global commodity prices and falling domestic consumption.

The 62-year-old, who also serves as finance minister, met economists from local and foreign financial institutions this week, promising to "proactively manage the economy going forward", he wrote on Facebook.

At the heart of Najib's woes is 1MDB, which has debts of over $11 billion and is being investigated for allegations of graft and financial mismanagement. Najib sits as the chair of its advisory board.

The prime minister sacked his deputy and other cabinet members last month and replaced the attorney general heading a probe into 1MDB.

His crackdown on criticism has extended to traditional and online media, angering pro-democracy activists. A rally planned for next week calling for Najib's resignation is expected to draw thousands despite being officially barred by authorities. (Additional reporting by Al-Zaquan Amer Hamzah; Writing by Kanupriya Kapoor; Editing by Raju Gopalakrishnan)

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