Zeti defends Bank Negara’s go-it-alone stance

“We have removed almost all of the controls except one, which is the non-internationalisation of the currency,” she says. “At this point in time particularly it is important that we have that in place. It reduces the vulnerability of our currency being attacked by speculative activity that is financed from offshore sources.” If this remark seems to show echoes of a more paranoid era in Malaysia’s modern history, Zeti tries to be measured. “It is fine to have flows of funds that have come into the country; they can flow in and out freely, now with no restriction. But to have speculators have access to ringgit financing, to sell the currency down, renders us to become vulnerable.”

What has to change for this last restriction to go? “We see an important precondition of removing that particular control is to develop our own domestic foreign exchange market,” she says. “Once we have a vibrant foreign exchange market, with all the hedging instruments and so on and the talent necessary in our own financial system, then we would see the potential to remove that.”

That reflects the stance that was taken in removing other restrictions, notably the fixed exchange rate, and Zeti insists there is no danger of moving back. “In removing all the other controls it has brought new sources of business to the banks with their foreign currency accounts and all the foreign financial services that they can offer to exporters, investors and so on,” she says. “We are very pleased at the outcome.” She says that the preconditions to move to today’s flexible exchange rate regime, after seven years on a fixed one, were built gradually, developing the bond market, strengthening the banking sector, developing market based instruments. “It was a successful transition and a very orderly move to that regime. We do not stand in the way of an appreciation in the currency. We have a very good understanding of the potential for reversals and we highlight this to the market so there won’t be any overreaction if the reversals take place.”

And they might, since Malaysia’s economic standing today is doubtful. Macquarie analyst Rajeev Malik says that among Asean nations, “Malaysia is poised to be the second-worst hit economy after Singapore” because of its dependence on exports (its ratio of trade to GDP is over 100%). Also, a quarter of the economy is related to commodities, both mining and agricultural, so falling prices there have had a major impact too. “It is one of the more exposed economies to the global financial shock through trade and its financial markets,” Teather says. He’s now predicting a below-consensus 4.5% fall in real GDP growth in 2009, although he adds that in terms of reserve levels, financial risk in the system, gearing and current account, “Malaysia was pretty well placed to handle this global shock.”

Zeti and the bank recently completed a blueprint for financial system liberalisation in the next three years. So far it is light on specifics – that’s likely to come around the mid-year mark – but Zeti says it will include “opening up to greater foreign participation in our financial system.” Today, the greatest openness by far comes towards foreigners who are prepared to set up within the Islamic system. Foreign fund managers who launch within the Malaysian International Islamic Finance Centre are receiving not only generous tax breaks, but increasingly seed capital from the Employees Provident Fund. Middle Eastern institutions such as Kuwait Finance House and Al Rajhi Bank have been given apparent carte blanche to launch and grow in Malaysia, again provided the activities are Islamic.

Malaysia is for the first time confronting the possibility of political change, and the impacts on the nation and its society will be wide-ranging. Asked how that affects her and the bank, she first bats the question back with a textbook “the central bank remains very focused on its mandate”, but she does add: “If there were any kind of development that generated uncertainty, we believe we have a more important role in providing information about what is going on in our economy.” Zeti’s role in Malaysia is big enough as it is – as well as being one of the most powerful women in the Muslim world – but if political tension does hot up, and the economy take a dive, the long-standing governor’s sense of stability may prove more important still.