Malaysia’s central bank Governor Zeti Akhtar Aziz said the ringgit could gain over time if the nation’s fundamentals remain strong, and predicted faster economic expansion in 2014.
Gross domestic product growth may reach the higher end of the 4.5 percent to 5 percent forecast for this year if exports recover further, Zeti, 66, said in an Oct. 12 Bloomberg interview in Washington. She said she expects that economic expansion next year “would be an improvement from 2013.”
“When you compare our currency with other currencies, it’s been relatively stable,” Zeti said. “And therefore, we believe, that over the medium term, yes, it should reflect underlying fundamentals, and if the underlying fundamentals remain strong, then over time it should be an appreciating trend.”
Malaysia, Southeast Asia’s third-largest economy, has posted average annual growth of 6 percent in the three years through 2012. As the country now joins Asian emerging markets from Indonesia to China in facing slower expansion, Zeti said domestic demand has helped cushion the impact of weakening exports.
“The domestic sector has been solid and has been the anchor to drive our growth during this more challenging period,” Zeti said. In 2013, “global trade slowed down very significantly, and of course, that affected us because of the openness of our economy. But had we not rebalanced our economy, we would have had 1 to 2 percent growth.”
Malaysia in August cut its forecast for 2013 expansion from a previous prediction of as much as 6 percent. The central bank held its benchmark interest rate at 3 percent for a 14th consecutive meeting on Sept. 5 to support economic growth.
Zeti was the first woman to become Malaysia’s central bank governor, initially in an acting capacity in 1998 when then-Prime Minister Mahathir Mohamad imposed capital controls and pegged the ringgit during the Asian financial crisis. A ban on offshore trading in the currency has remained in force, though the peg was removed in 2005.
“In unstable international financial markets, we would not venture to internationalize the currency in this kind of environment,” Zeti said. “We want to have a well-developed foreign-exchange market, and while this has progressively improved, it has not reached the stage where we believe that we should internationalize our market.”
The ringgit has fallen about 4 percent this year and traded 0.2 percent lower at 3.1845 a dollar as of 9:40 a.m. local time today, according to data compiled by Bloomberg.
Bank Negara Malaysia will only intervene to “maintain important market conditions” and not to defend the currency at any particular level, Zeti said, adding the currency market has been operating in an orderly manner even as she expects global currencies to experience volatility.
Zeti said over the next six months to a year, she is focused “mostly on growth” rather than inflation, because global expansion will remain “subdued.” Inflation is stable, she said, as “demand is on a steady growth path and we have significant expansion of capacity.”
Malaysia’s benchmark interest rate is “appropriate” for now, she said. Consumer prices rose 1.9 percent in August from a year earlier.
“With inflation stabilizing, we believe the central bank will not be changing its policy rate for some time,” said Irene Cheung, a currency strategist in Singapore at Australia & New Zealand Banking Group Ltd. “The next key thing to watch is the budget as the rating agencies are saying the fiscal deficit remains relatively high.”
After Fitch Ratings cut Malaysia’s credit outlook to negative in July citing rising debt levels and a lack of budgetary reform, Prime Minister Najib Razak in September raised subsidized fuel prices for the first time since 2010 and said he will delay some public projects. The government has run annual budget deficits since the Asian financial crisis, with state spending exceeding revenue every year starting in 1998.
While the government’s subsidy rationalization will contribute in some part to higher prices, productivity gains can help lower costs, Zeti said. The government’s financial position will improve from revenue collection, which has become more efficient, and the implementation of a value-added tax will also boost the revenue base, she said.
On the risk of a Fitch rating cut for Malaysia, Zeti said she was “confident that the commitment by the government will demonstrate the potential for improvement in the government financial position, with a number of initiatives that will be announced in the budget.”
Zeti said the U.S. Federal Reserve slowing the pace of its $85 billion a month in asset purchases will be positive if it’s based on strength in the world’s largest economy, and that better communication by American policy makers will reduce volatility in financial markets when it happens.
Tapering the bond buying amid an “economic recovery that is accompanied by job creation” will be “a positive development for the rest of the world,” Zeti said. “More precise communication would contribute to the orderly implementation of this tapering.”
“When this tapering takes place and it’s based on an economic recovery, then it is very likely that the volatility in the financial markets will be temporary,” she said. “However, if the recovery stalls or is disrupted then of course that volatility will continue and therefore it’s quite important that the recovery is entrenched prior to the tapering.”
Zeti said Fed Vice Chairman Janet Yellen’s nomination to succeed Chairman Ben S. Bernanke signals continuity for the central bank’s policies because she was “part of the team” as policy makers undertook unconventional actions to spur growth.
“Continuity is very important at this stage in particular because it is at a challenging point of having these kinds of unconventional policies, and she’ll face the challenge of managing the exit,” Zeti said. “I know her well and I really welcome her prospective appointment as the chairman of the Fed. She is very qualified for the position.”