How Malaysia's Economy Has Grown as Central Bank Chief Marks One Yearby
Economy grew at fastest pace in two years last quarter
Ringgit among top Asian performers in 2017; gained about 3.7%
Malaysian central bank Governor Muhammad Ibrahim enters his second year in office with some economic tailwinds.
After navigating volatile financial markets, springing a surprise interest-rate cut, and implementing curbs on some foreign-exchange trading that worsened a currency slump, things are looking up: the economy’s outlook is strengthening amid an exports bounce, foreigners are returning to the bond market and the ringgit has rebounded.
“He definitely had a pretty challenging start” from Brexit to currency turmoil, said Michael Wan, an economist at Credit Suisse Group AG in Singapore. The governor’s next test will be maintaining stability in the exchange rate and “communicating the central bank’s intentions and policies even better to the market,” he said.
A report on Friday showed gross domestic product increased 5.6 percent last quarter from a year ago, the fastest pace in two years and beating all estimates in a Bloomberg survey. The ringgit has climbed 3.7 percent against the dollar this year, after depreciating almost 8 percent in the last quarter of 2016 amid a crackdown on the offshore forwards market.
Barely two months into his term, Muhammad unexpectedly cut interest rates to help cushion the economy after the U.K.’s decision to leave the European Union in June increased economic risks globally. While investors questioned the move at the time, the governor’s tenure has largely been marked by policy continuity, said Krystal Tan, an economist with Capital Economics Ltd. in Singapore.
“The first cut was a surprise, but I don’t think we are going to see a repeat of that,” she said before Friday’s data. “Growth is now taking off, slowly, but it looks stable.”
The currency restrictions imposed at the end of last year didn’t go down well with investors. The sudden limit in the ability of foreign investors to hedge hurt sentiment toward the $143 billion government bond market and -- along with a regional trend following the U.S. presidential election -- contributed to 10-year bond yields surging to the highest since 2008. Overseas investors cut holdings of ringgit debt to a five-year low in March.
Since then, the central bank has taken steps to revive interest in the Malaysian financial markets. It allowed investors to fully hedge their currency exposure and eased rules to let all domestic players short-sell government bonds. Coupled with a brightening economic growth outlook, that led to the Malaysian debt market’s first foreign inflows in six months in April.
“There were initially some apprehension about the forex measures that they introduced,” said Julia Goh, an economist with United Overseas Bank Ltd. in Kuala Lumpur. The recent easing of measures in the bond market “has helped to soothe sentiment and aid the recovery in flows as evident in the reversal in bond flows.”
Currency risk will continue to be a challenge for Muhammad, this time linked to tighter monetary policy in the U.S.
The Federal Reserve is seeking to reduce its balance sheet and “depending on how they do it and how they communicate to markets, there could be some potential effects on markets and currencies,” said Goh. “Obviously, that would have an effect on the ringgit as well.”
The central bank said on Friday that ringgit volatility may resurface on external uncertainties, including the pace of U.S. interest-rate normalization, global oil price fluctuations, and developments in global politics and financial markets.
National Australia Bank Ltd. estimates Malaysia has one of the weakest reserves positions of any country in East Asia, making it vulnerable to sharp currency moves. Reserves have dropped 0.9 percent to $96.1 billion in the past year.
For now, the central bank can take comfort in a stronger export outlook, oil prices not falling significantly and a stronger currency. While inflation has accelerated, the central bank said there’s no evidence of price pressures spreading more broadly in the economy.
“This year, maybe Malaysia is going to get a respite,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. “It’s been a rough patch for them in 2015 and 2016 but it can get better soon.”