Malaysias central bank chief, like many of her peers,
is a cautious and understated speaker in her regular
engagements around the world.
But when pressed on Malaysias monetary policy stance over
the past year, Zeti Akhtar Azizs response is as close to
impassioned as she may ever get in public. Shooting back at
critics of Malaysias refusal to hike interest rates in
the wake of sharply rising food and energy prices a year ago,
the veteran policy-maker delivers a simple message: dont
lecture us; we know what were doing. The principle, she
says, must be that countries are afforded the flexibility
to assess what they think to be effective.
A year ago, the market clamoured for interest rate hikes,
fearing inflation. But the bank, seeing no excess demand,
refused to make them a stance it maintained even after
the government peeled back petroleum subsidies in July, thus
increasing inflationary pressure.
In that environment [our action] brought tremendous
criticism, recalls Zeti. Malaysia is not an
inflation-targeting central bank, and [it was] certainly made
to feel highly uncomfortable during that period. The view was:
the numbers show inflation has increased, and the central bank
At the time, Zeti argued that a growth slowdown was imminent.
She was right: by February this year Malaysias exports
had fallen for a fifth straight month, extending the longest
slump in seven years. To spur the economy, the central bank,
Bank Negara, slashed rates with surprising force, including a
single 75 basis point cut that Zeti describes as front
loading. The bank has made a cumulative 150 basis points
cut in the overnight policy rate from 3.5% last November to the
Although largely wary of the move at the time, the market has
since applauded Bank Negaras approach. I think the
central bank has done a much better job on interest rates than
the market would have done had the market been in charge,
says Edward Teather, senior Asean (Association of South-East
Asian Nations) economist at UBS.
Although the vast majority of policies from the Mahathir era
are gone, Malaysias approach to policy is still
distinctive, not least its championing of Islamic finance. Zeti
has also recently proposed a central bank bill, which, if
passed this year, ought to give Bank Negara greater power.
The central banker says the new legislation would give the bank
greater clarity of mandate, institutionalizing many
practices it has adopted over the years, such as the monetary
policy committee, as well as increased transparency and
But the bank would also gain clout, partly because it would
become more nimble. It is important because it will
provide the ability for the bank to be effective in a very
changed environment, she says.
During the last financial crisis, the government set up an
asset management corporation to recapitalize banks; though
relatively swift, it still took three months to implement, she
says. As [the central bank bill] becomes enacted, we
would be empowered to respond immediately.
The new proposals include greater ease in working with other
regulators, clearly delineated roles (especially regarding
oversight of investment banks, where there is overlap with the
Securities Commission), and a clear mandate to promote what
Zeti calls financial inclusion.
But Zeti insists the act is not a response to todays
crisis and has been under development for two years. Still, she
says, the crisis brought to the forefront many
issues it addresses.
The new law is unlikely to lead to a reversal of other policy
initiatives, including controls on foreign exchange. Malaysia
has ditched all its controversial capital controls except one,
the non-internationalization of the currency. At this
point in time particularly it is important that we have that in
place. It reduces the vulnerability of our currency being
attacked by speculative activity that is financed from offshore
The remark may seem a distant echo of post-Asia crisis
Malaysia, where such fears ushered in the tight capital
controls, but today Zeti attempts a more measured tone:
It is fine to have flows of funds that have come into the
country; they can flow in and out freely, now with no
restriction. But to have speculators have access to ringgit
financing, to sell the currency down, renders us
What has to change for this last restriction to go? We
see an important precondition of removing that particular
control is to develop our own domestic foreign exchange
market, she says. Once we have a vibrant foreign
exchange market, with all the hedging instruments and so on and
the talent necessary in our own financial system, then we would
see the potential to remove that.
Her stance reflects the pragmatism behind Malaysias
currency reform, which led to its ditching a fixed exchange
rate regime in 2005. Zeti insists there is no danger of
regressing. In removing all the other controls it has
brought new sources of business to the banks with their foreign
currency accounts and all the foreign financial services that
they can offer to exporters, investors and so on, she
says. We are very pleased at the outcome.
Yet today, Malaysias economic position is uncertain.
Macquarie analyst Rajeev Malik notes that among Asean nations,
Malaysia is set to be the second-worst-hit economy after
Singapore because of its dependence on exports (over 100%
of GDP). A quarter of the economy is related to commodities,
both mining and agricultural, so falling prices have also had a
It is one of the more exposed economies to the global
financial shock through trade and its financial markets,
Teather says. He predicts a below-consensus 4.5% fall in real
GDP growth in 2009; but given its reserve levels, relatively
low financial risk, healthy gearing and current account,
Malaysia is nevertheless pretty well placed to handle
this global shock.