Protecting the ringgit from political fallout may end up costing Malaysia more than any bailout for the debt-ridden 1MDB state fund, given the rate at which the central bank has been using its reserves in recent weeks.

Bank Negara Malaysia has taken an iron-fisted approach, barely allowing the ringgit to move since early July as investors became increasingly unnerved by the deepening scandal over how 1Malaysia Development Berhad got into US$11 billion of debt.

On Tuesday, Prime Minister Najib Abdul Razak sacked his deputy, who had urged him to give Malaysians a better explanation of where 1MDB's money went. Three other ministers were also shunted in the reshuffle. Najib also replaced the attorney-general.

On Thursday, the rumour mill went into overdrive, forcing the central bank to deny that governor Zeti Akhtar Aziz was resigning.

Financial markets were understandably nervous at the prospect of the well-regarded Zeti ( photo ), who has headed the central bank since 2000, becoming another casualty of the affair.

Since early July, even as foreign investors pulled out of Malaysian markets and risk metrics spiked, the ringgit has remained close to 3.8 to the dollar.

That is the same level the ringgit was pegged at during the Asian financial crisis by the then-prime minister Dr Mahathir Mohamad, when he sacked his deputy Anwar Ibrahim in 1998 and imposed capital controls that lasted seven years.

Currency reserves fell US$5 billion in the two weeks to July 5 as the central bank defended the ringgit and analysts estimate a lot more could have been spent since as the political storm around Najib intensified.

"We've crossed the Rubicon on a couple of politically sensitive levels and clearly there is some heavy smoothing operation going on," said Claudio Piron, head of rates and currency strategy at BofA Merrill Lynch in Singapore.

"That is evident in the FX reserves numbers and the behaviour of the ringgit that is holding around the 3.8 levels.

The ringgit is Asia's weakest currency this year, having shed nearly 9 percent of its value against the dollar. The decline largely reflected concerns over its vulnerability to rising US interest rates and the halving in the price of oil in the past year, which has dragged down the price of gas, though not by as much. Malaysia is the world's second-largest exporter of liquified natural gas.

Foreigners own US$48 billion of Malaysian government bonds - equivalent to half the country's reserves. As of June they weren't big sellers and fund managers with a longer horizon tend not to sell this investment grade market too impulsively.

Asian crisis lesson

Still, Bank Negara is sparing no effort to keep the ringgit in a narrow range.

Zeti has also fended off criticism that the currency's drop to levels unseen since the Asian financial crisis were reflective of the economy's poor fundamentals, while simultaneously trying to dissociate the central bank from the political fracas.

"The Central Bank has never been and will not be drawn into any political agenda but will remain accountable for delivering its mandates to the people of this country," Bank Negara said in a statement in June, as the sniping between Najib's loyalists and critics became fiercer.

Still, the psychological significance to Malaysians of having a currency that is now at the floor Mahathir put under it during the Asian crisis goes some way to explaining why the central bank has shown so much resolve this month holding the ringgit between 3.80 and 3.8175 per dollar.

Other Asian countries, such as Thailand, Indonesia and South Korea, went through turbulent political change in the aftermath of that crisis.

"Because the last serious bout of currency upheaval in this region, which was in 1997/98, was followed by significant political change in many countries, political leaders would be understandably reluctant to allow a sense of crisis to build up again," said Siddharth Mathur, head of emerging Asia currency and rates strategy at Citi in Singapore.

"That may partly explain the unwillingness to tolerate rapid currency depreciation.

"If that is true, perhaps a fairly large chunk of reserves could be earmarked for the defence of the currency. It is very tricky to forecast how this situation evolves."

- Reuters