In a constant state of readiness

 

The business of central banking is to be in constant state of readiness ... to anticipate risks before they happen, says Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz

There are times, as a journalist, when taking notes can be a distraction. When that happens, it's best to put the pen down and just watch and listen.

Last week's Bank Negara briefing to editors, ahead of the release of its 2008 Annual Report, was one such occasion.

With the global economy in the state it is, this was an opportunity to understand the central bank's perspective on the state of the nation. The two hours that followed passed by quickly, and in the end there was a mixture of apprehension and reassurance. Yes, we are headed for a bad patch, but we're also in good hands.

In the mad rush of information and news churned out every day, perspective and balance can often get lost. Especially now, it is all bad news one day, and even worse news the next.

Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz, in her briefing, offered some perspective that's useful to keep in mind.

The financial crisis today started in the US and has badly affected their banks and those in Europe that took part in subprime lending or its derivatives. A lot of people borrowed more than they could afford, and when the time came to pay up and they couldn't, the system collapsed.

There is no (repeat NO) financial crisis in Malaysia and most economies in Asia. Financing is still available, and at relatively low cost.

How come? After the 1997/98 Asian financial crisis, the authorities cracked down and changed the financial landscape to make banks stronger so that they can withstand greater risks.

"The key is to build a buffer during the good times. This is what our banks did because we required them to do so. It cannot be done overnight. After 10 years, we are now seeing the pay-off," Zeti said.

Inflation in Malaysia is also declining, and when prices are low people can spend more, which will increase domestic consumption. This is vital because when exports have fallen sharply, it is up to local consumers to buy our own goods and services.

Incidentally, the drop in exports is not entirely our fault or within our control. It is not as if Malaysian-made products have suddenly become inferior. Rather, customers in the developed nations, because of their financial problems, do not have the money to buy as much as before.

While exports fall, our imports have also gone down, which keeps our current account balance in surplus. The early debt payments in previous years have also kept Malaysia's foreign borrowings low, which adds to our strong external position.

Add up these factors and you have a situation where Malaysia has the capacity to undertake strong policy response to the challenges brought on by the global slowdown.

This isn't the same as being in denial or believing that we won't be affected by the crisis. On the contrary, the experts at Bank Negara are fully aware of what's happened and what to expect. The key is that they also know what's at their disposal to respond when it happens.

"The business of central banking is to be in constant state of readiness ... to anticipate risks before they happen," Zeti said.

The central bank has acknowledged that Malaysia is mainly affected via a drastic drop in exports (because Western markets cannot buy as much as before) and the weak stock market (because of negative investor sentiment).

This is why the stimulus packages are specifically targeted at growing domestic demand to take up the slack. But it will take at least until the middle of 2009 before we start to see any impact.

"So, if we see negative GDP in the first and second quarters (of 2009), don't over-react. We expected it already," Zeti said, adding that the third quarter numbers will be crucial.

The government's projection of -1 to 1 per cent economic growth this year assumes that external conditions stabilise in the second half of 2009, and that there has been effective implementation of stimulus measures globally as well as in Malaysia.

"I would like to see sustained developments. Lending needs to resume, and there should be strong domestic consumption. If these do not happen, then we will have to review the projection," she said.

Bank Negara celebrates its 50th anniversary in 2009. One of the highlights this year will be the tabling of a new Central Bank of Malaysia Act in Parliament that involves a comprehensive review of the bank's mandate, governance, accountability and the legislative framework to ensure that it remains effective in performing its functions.

We wish them all the best. Happy Golden Jubilee!