Financial market players have reason to question Malaysia’s political direction on the eve of a hotly contested general election, but they can count on continued firm leadership at the country’s central bank.
Zeti Akhtar Aziz, governor of Bank Negara M alaysia, insists there will be no return to the controversial capital controls that Malaysia adopted during the Asian financial crisis of the late 1990s. “We’ve moved on,” she said in a recent interview. “We’ve liberalized, and we’ve liberalized significantly and progressively.”
In 1998, as policymakers across Asia slashed budgets and adopted free-market policies prescribed by the International Monetary Fund, Malaysia’s then-ruling prime minister, Mahathir Mohamad, famously refused IMF assistance and introduced capital controls in a bid to insulate the counry’s economy from the turmoil. The move flew in the face of the so-called Washington consensus.
Today, the turbulence is in the developed world. Emerging market economies are struggling to cope with massive capital inflows because of the liquidity generated by the major advanced economies, with Japan recently joining the U.S. and the U.K. in an unprecedented experiment in open-ended, extra-easy monetary policy. Countries like Brazil have experimented with capital controls, and even the IMF now considers them appropriate in some cases.
But according to Zeti, who spoke to Institutional Investor on the sidelines of the recent IMF/World Bank meetings in Washington, D.C., Malaysia is well equipped to manage hot money flows without recourse to restrictions because of reforms the government introduced in response to the Asian crisis, including measures to strengthen local banks and to develop a domestic bond market.
Malaysia “had very fragmented financial institutions, we had less developed financial markets,” the central bank governor said, “but now, even though the capital flows are more significant and their amplitude is more volatile, we have actually been able to intermediate these flows much more effectively.”
The ringgit has been extremely stable over the past year, thanks in part to the central bank’s policy of having a managed float of the exchange rate. The currency has traded in a very narrow range and on May 3 stood 1.7 percent above the level of a year, at 3.0270 to the dollar.
Although Zeti largely welcomed the efforts of monetary authorities in the advanced countries to stabilize financial markets and boost output, she saw limits to their powers. Central banks “are not really in a position to be the only source of policy that will generate sustainable growth,” she said. But she acknowledged that the pressure on central banks to produce magic policy bullets is great. Prime Minister Shinzo Abe led the Liberal Democratic Party to victory in Japan’s December parliamentary election by campaigning for a dramatic easing of monetary policy to break the country’s deflation. He then appointed Haruhiko Kuroda as governor of the Bank of Japan, and Kuroda almost immediately launched a quantitative easing policy even more aggressive than that of the Federal Reserve Board.
Could something similar happen in Malaysia? Zeti pointed out that the country rewrote its central bank law in 2009 to give Bank Negara full autonomy over the conduct of monetary policy.
Yet Malaysians go to the voting booths on May 5 in what could be the closest parliamentary election the country has seen since it won independence from the U.K. in 1957. The opposition Pakatan Rakyat, led by former deputy prime minister Anwar Ibrahim, stands a chance of toppling the Barisan Nasional coalition of Prime Minister Najib Razak, which has governed Malaysia since the nation’s founding. An opposition victory, or a close outcome that increases policy uncertainty, could trigger a sell-off in Malaysian assets, some analysts warn.
Zeti remains sanguine, though. “We’re very fortunate that the election is taking place at a time when the economy is doing extremely well,” she says. “Our financial system is extremely resilient, our financial markets are vibrant, so there aren’t economic or financial issues around the election. Most of the issues are political issues, so that’s all outside our realm.”
In other words, change may be coming to Malaysia — just not in monetary policy.
