Asia Crisis Veteran Zeti Sees EM Resilience to ECB Action

The European Central Bank’s prospective quantitative easing is unlikely to be as disruptive to emerging markets as the Federal Reserve’s, Malaysia’s central bank chief said, signaling confidence developing nations can withstand the effects of unconventional monetary policy.

“In terms of their operations, it’s not going to be as significant as in the U.S., which has a greater influence,” Governor Zeti Akhtar Aziz, who guided Bank Negara Malaysia through the Asian financial crisis, said in an interview in Kuala Lumpur yesterday. Meanwhile, as the U.S. prepares to end its unprecedented stimulus that exacerbated global capital fluctuations, countries like Malaysia have improved their abilities to cope with volatile inflows and outflows, she said.

ECB policy makers meet today, after President Mario Draghi last month added to speculation he’s preparing Japan-style debt purchases known as quantitative easing to support the economy. Draghi has urged governments to complement monetary and fiscal policy with structural reforms to bolster a euro-area economy that stagnated in the second quarter and is vulnerable to geopolitical risks.

“We recognize that easing of policy is very important, but for it to be effective, it needs to be reinforced by other parts of the government” so that it won’t need to be in place for an extended period, Zeti, 67, said.

The Fed, which also uses quantitative easing in the U.S., is scaling back its debt purchases and is on course to end them this year. Emerging markets suffered outflows that caused their currencies to plunge last year as the U.S. central bank prepared to reduce its purchases. Investors are awaiting the first interest-rate increase after the so-called tapering ends.

‘Great Expectation’

There is “great expectation and anticipation” the Fed’s normalization will happen in an orderly manner, Zeti said.

Central banks should realize there are limits to what unconventional monetary easing can do, the governor said when asked if she’s concerned developed nations are contributing to a build-up of global financial risk with their policies.

“If there’s too-excessive reliance, of course it generates liquidity and of course it imposes the requirement for others to manage those risks. And this is what all of us have done,” she said.

Emerging-market bond funds received $494 million of inflows in the week ended Aug. 27, according to Standard Chartered Plc, citing data from Cambridge, Massachusetts-based EPFR Global.

“There are increasing numbers of outflows from European investors flowing into other regions including Asia,” said Saktiandi Supaat, Singapore-based head of foreign-exchange research at Malayan Banking Bhd. “That will still proceed. As long as the volatility remains low and the trade in search of yield continues, there will be continued enhanced flows into high-yielding regions including Asia.”

Outperforming Economy

Malaysia was the first country in Southeast Asia to raise its benchmark rate in 2014 -- to 3.25 percent -- as investment, private consumption and overseas orders for the nation’s goods sustained growth. Southeast Asia’s third-largest economy is outperforming most of its regional counterparts amid slowing expansions in Indonesia and Singapore last quarter.

Asked if she sees a need to be pre-emptive on rates given the risk inflation may accelerate, Zeti said the central bank doesn’t look at just a single number.

“We look at hundreds of indicators to assess the performance of the economy and to assess the outlook for inflation,” she said. “We need to monitor the second-round effects very closely and this will be an important consideration in deciding the interest rate policy.”

New Tax

Policy makers will consider the risks to underlying inflation rather than one-time adjustments that result in higher prices, Zeti said. Consumer prices will increase this year and into 2015 when the government implements a new tax on goods and services, Zeti said.

“Obviously we are not going to run the economy to the ground to achieve low inflation, we look at the risks to growth as well,” the governor said. “And if we see that growth is slowing very significantly, then that will be a cause for some pause in any further raising of rates in the near term.”

The inflation rate will stabilize at around 3 percent in 2016, she predicts. The central bank is not concerned right now that there will be second-round price effects and the country isn’t seeing excess demand or wage pressures, she said.

Policy Normalization

Second-quarter growth was the fastest since the final three months of 2012, and averaged 6.3 percent in the first half. Gross domestic product expansion in the second half may be between 5 percent to 5.5 percent or better, Zeti said yesterday.

“The actions that we have already taken are part of the normalization because the interest rate that is currently prevailing is very supportive of growth,” she said. “It will always be referred to as normalization when it does not have a dampening effect on growth. This is adjusting the degree of accommodation so that it will not promote financial imbalances.”

The ringgit gained 0.2 percent to 3.1735 per dollar as of 11:34 a.m. in Kuala Lumpur, halting four days of losses, according to data compiled by Bloomberg. Malaysian interest-rate swaps are pricing in a 50 basis-point increase in borrowing costs in the next year, data compiled by Bloomberg show.

“Zeti’s comments seemed a bit hawkish,” said Mirza Baig, head of Asian currency and rates strategy at BNP Paribas SA in Singapore. “They support our call for a rate hike in the September meeting.”

The currency has gained 3.2 percent in 2014, the best performance in Asia after Indonesia’s rupiah. Export growth, portfolio inflows and foreign direct investment have contributed to its strength, Zeti said. While the ringgit will reflect Malaysia’s fundamentals over the medium term, it may be subject to financial flows triggered by events that unsettle markets, she said.

“There could be occasions where the currency would move against the underlying fundamentals,” she said. “The role of the central bank would be just to maintain orderly conditions, and we would not try to affect the direction or the movement of the currency.”

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