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Zeti Says Malaysia Can Withstand Capital Flows: Southeast Asia

Bank Negara Malaysia Governor Zeti Akhtar Aziz
Bank Negara Malaysia Governor Zeti Akhtar Aziz. Photographer:Tomohiro Ohsumi/Bloomberg

Malaysia can manage capital inflows due to monetary easing in advanced economies, central bank Governor Zeti Akhtar Aziz said, as Asian nations take steps to prevent asset bubbles after the U.S. boosted stimulus.

The country has policy tools and the flexibility to absorb any excess liquidity, said Zeti, who oversaw Malaysia’s response to capital outflows during the Asian financial crisis more than a decade ago. The Malaysian economy is withstanding the impact of weakening global growth, with gross domestic product forecast to expand about 5 percent this year, Zeti said in an Oct. 14 interview in Tokyo.

“We certainly are the recipient of capital flows but the Malaysian financial system has reached a level of maturity in terms of development and in its functioning that is able to intermediate these flows, both surges of inflows as well as reversals,” Zeti said. “The effects are disbursed through the financial system rather than concentrated.”

Malaysia joins Brazil among emerging markets signaling confidence they can counter any surge in fund flows stemming from the U.S. Federal Reserve’s third round of quantitative easing. Fed Chairman Ben S. Bernanke two days ago rebutted concern that the central bank’s decision to purchase $40 billion in mortgage-backed bonds a month will cause a destabilizing influx of capital into developing economies.

Brazil’s central bank President Alexandre Tombini said yesterday his country will defend itself from short-term capital flows that bring financial instability and inflation risks amid an easing push from major economies. “We have the conditions to protect ourselves and we are doing that,” he said.

Currency Risk

Indian Finance Minister Palaniappan Chidambaram told U.S. Treasury Secretary Timothy F. Geithner the Fed’s easing may push commodity prices higher. Brazilian Finance Minister Guido Mantega said this month that QE3 risks aggravating currency problems for emerging markets, and vowed to do whatever is necessary to stop the “selfish” monetary policies of some developed nations from hurting his country’s economy. Japanese Prime Minister Yoshihiko Noda said last week his government will act against disorderly gains in the yen.

Most Asian currencies have gained in the past three months, and Hong Kong and Singapore unveiled measures to cool property prices after the U.S. stimulus. Malaysia’s ringgit has climbed about 4 percent since mid-July, the most among 11 Asian currencies tracked by Bloomberg after the Indian rupee.

First Woman

The first Malaysian woman to become central bank governor, Zeti obtained a doctorate in economics from the University of Pennsylvania in 1978, with a thesis focusing on international capital flows and implications for macroeconomic policies. She was assistant governor responsible for economics, reserves management, money market and foreign exchange operations when Thailand devalued the baht on July 2, 1997, setting off a plunge in regional currencies. The ringgit fell 89 percent in the next six months, dropping to 4.77 against the dollar.

Zeti was acting governor in 1998 when Malaysia set limits on foreign-exchange transactions and fixed the ringgit at 3.8 to the dollar. The currency peg was scrapped on July 21, 2005. The ringgit was at 3.0503 per dollar as of 1:51 p.m. local time.

The Malaysian central bank has kept interest rates steady for eight meetings, most recently in September, as the lowest inflation rate among Southeast Asia’s major economies reduced the need to tighten policy. Consumer prices rose 1.4 percent in August from a year earlier, staying at the lowest rate in more than two years.

Strong Demand

“Right now on the horizon, the risk to inflation doesn’t appear to be imminent,” Zeti said. “There is less of a risk of inflation and given that we have excess capacity in our economy, the risk is on growth. But again right now, domestic demand is still relatively strong.”

The country’s monetary and fiscal policy is already “quite accommodative,” Zeti said. Malaysia has refrained from joining other Asian nations in lowering borrowing costs this year as Prime Minister Najib Razak increases spending ahead of a general election that must be held by early 2013.

“There is no big threat to growth prospects for Malaysia and inflation has been surprisingly low,” said Gundy Cahyadi, an economist in Singapore at Oversea-Chinese Banking Corp. “There’s room for monetary policy accommodation if necessary but risks are not significant yet to trigger a cut. Any sort of boost will need to come from monetary policy rather than the fiscal side.”

Policy Flexibility

Asia has “considerable policy flexibility” to respond to external and domestic developments, although a prolonged delay in the recovery in the advanced economies would erode this scope, Zeti said in a speech in Tokyo on Oct. 13.

“It’s important for us to have room to maneuver in the event things deteriorate, and so under these conditions we should just sustain what we believe is a sustainable growth path and maintain this growth trajectory,” she said. If policy makers ease too soon, there will be less scope to do so later if “things take a turn for the worse,” she said.

Najib cut income taxes, gave civil servants a bonus and extended handouts for the poor in the 2013 budget announced last month, with the government planning to spend 251.6 billion ringgit ($82 billion) next year.

“We already have domestic demand growing, like consumption by 7 percent, and investment by more than 10 percent,” Zeti said. “This is already the limits to which domestic demand can expand without generating an overheating environment.”

Growth Quickens

The government’s so-called economic transformation program is also spurring investment and boosting sales for local manufacturers and developers. MTD ACPI Engineering Bhd., a maker and supplier of precast concrete products, and construction and property group Sunway Bhd. have won contracts for a mass railway project in the capital.

Economic growth accelerated in the second quarter as construction and consumption climbed. Gross domestic product rose 5.4 percent in the three months through June from a year earlier, after expanding 4.9 percent in the previous quarter.

Rising incomes and strong investment should help Malaysia achieve “good growth” in the third and fourth quarters, Zeti said. Growth in 2013 will be “much the same” unless the world economy takes a turn for the worse, she said.

Still, demand for Malaysia’s goods has eased as global growth weakens. Industrial output slid in August for the first time in more than a year as manufacturing contracted, while overseas sales tumbled the most since 2009 in the same month.

Europe’s debt crisis has weighed on the world economy and hurt Asian exports, with the International Monetary Fund cutting its forecast for global growth last week.

Malaysia will probably refrain from selling global sovereign bonds for now, Zeti said.

“The government is very cautious about entering into increased foreign debt and they have significant access to domestic sources of financing without crowding out private investment because there is ample liquidity,” she said.

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