Zeti sees risks from US crisis, rules out rate cuts

 

The rates might not be aggressively accommodative, but it has not reached that state where the concern is great enough to consider any relaxation of monetary policy, says Zeti

THE US financial crisis is in its early stages and may pose added risks to Malaysia's growth, its central bank head said in an interview yesterday, though she said it was not time to cut interest rates.

Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz, who helped shepherd Malaysia through its recovery from the Asian financial crisis a decade ago, said yesterday that action in the very early stages of a crisis was crucial to ensuring a recovery.

"This is precisely what is happening now, but on a larger scale than what we saw in Asia 10 years ago," Zeti said.

Malaysia's central bank governor was speaking as US lawmakers prepared to vote yesterday on a US$700 billion (US$1 = RM3.44) government fund to buy bad debt, a step in a process to encourage banks to start lending again to each other.

"This kind of resolution needs to address the root of the problem and it also requires the problem to be addressed comprehensively ... it has to be addressed on all fronts and this is from our own experience during the Asian crisis," Zeti said.

Malaysia spurned cash and advice from Washington when it grappled with its own financial meltdown in 1997 and 1998 as the region's tiger economies plunged into crisis due to overvalued exchange rates, persistent current account deficits, speculation in financial markets and dependence on short term capital flows.

It recapitalised banks and pooled the toxic assets.

"We actually came out of it in the money and in the case of the purchase of the bad assets, we didn't warehouse these assets, we pooled them to enhance the value of these assets and then disposed of (them) and we had a recovery rate of about 60 per cent so we were able to minimise the cost of these operations," Zeti said.

By issuing bonds and making provisions throughout, that meant taxpayers now and in the future had not borne the cost burden of the recovery, she said.

Still, some effects of the 1997-98 crisis linger here and Malaysia has controls on the offshore market for the ringgit, which Zeti said had limited the potential for speculation against the currency.

There is no chance that controls will be lifted in the current environment, she said when asked if there were immediate plans to revise the rules.

"Not in the near-term and we generally introduce new regimes or frameworks during more stable periods which have some degree of predictability rather than periods of great uncertainty," Zeti said.

Malaysia's central bank is forecasting economic growth to slow from the 6.7 per cent recorded in the first half of 2008 and believes it will not bounce back until the second half of the 2009.

Inflation is also seen dropping to below four per cent year-on-year by the middle of 2009 from 8.5 per cent now, Zeti said.

"The (economic) assessment essentially remains the same, but the issue of growth has become more of a concern because it comes from more than one source, the deflationary effect of higher commodity prices, which has receded to some extent, and the external conditions and then the potential wealth effect (in Malaysia from the US)," she said.

When asked if that meant rate cuts were now on the cards, Zeti said no.

"They (rates) might not be aggressively accommodative, but we have not reached that state where the concern is great enough to consider any relaxation of monetary policy," she said.

On another issue, Zeti said Malaysia should sell a second sovereign global Islamic bond, as the country steps up efforts to pull away from rivals that are gaining ground in the US$1 trillion industry.

Malaysia has the world's largest Islamic bond, or sukuk, market, with US$66 billion or 62.6 per cent of global outstanding sukuk issuance as at end June 2008.

"We have mentioned to the government that it would be good to raise funding again and have our name in the market," Zeti said.

Malaysia last tapped the global Islamic bond market in 2002 when it raised US$600 million through the sale of its first international sukuk.

Zeti said the sukuk market worldwide would be hit by the US financial sector crisis but there was still strong demand for Islamic paper.

She also said there the central bank would consider giving out more Islamic licences to foreign lenders as there were still unexplored opportunities in the Industry. "We believe that the market is still very untapped," she added. - Reuters