Interview with Malaysia's Central Bank Governor

How is the real economy faring?

Excerpts from the interview with Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz on issues surrounding the domestic and international economy. Yap Leng Kuen, Jagdev Singh Sidhu and P. Gunasegaram interviewed her.

Bizweek: Do you expect the 3.5% growth next year to be achievable?

Yes.

What do you think will threaten the forecast?

An external environment that is beyond what we have already priced in, that is half the world in a recession.

If the recession becomes a depression, with high rates of unemployment and severe economic contraction, then of course, this will have repercussions even for Asia.

When do we see a recovery?

Warren Buffet got it right. It will take about 18 months. When we implemented the resolution to restructure our banking sector during the (1997) crisis, banks started lending again six months after the implementation of Pengurusan Danaharta Bhd, Danamodal Nasional Bhd and the Corporate Debt Restructuring Committee, together with other measures.

So the first indicator is when banks start lending again. The confidence has to return for the recovery to take place.

Crisis – past & present

If we were to compare the current economic condition to that of the previous crisis, how bad is it for Malaysia and globally?

We need to separate the two. We are not in a recession and we don’t expect to be in one.

Half the world will likely be in a recession. We are the other part that expects to still see growth because there are real economic activities happening.

You have to make a distinction between the stage of the crisis. In our case, we took action very early so there is the potential for containing the severity of the crisis.

In the case of the US, the action was taken too late and as a result, the crisis will have to run its full course.

What this means is the prices, mostly asset prices, will have to adjust before they reach their lows. The slower they adjust, the more prolonged it will be. It will likely take 18 months from the time they implement all their measures and that will take us into 2010.

Do you see unemployment in Malaysia rising?

It will rise but not significantly. The measures that are being put in place are promoting job creation and the education system to retrain and re-absorb.

The financial services sector is not contracting. In fact, it is expanding. There are job opportunities and there are still many vacancies in many organisations.

This is a time the workforce needs to be redeployed to the areas where there are opportunities. People may not get the jobs they want to have but during this kind of period, they have to take on jobs where there are vacancies.

Do you foresee the ringgit going back to the level of RM3.80/US dollar?

It would not reflect our underlying fundamentals. Currently, it reflects short-term flows. In the near term, we are going to see volatility but the medium-term underlying trend should be a gradual appreciation.

What is the comfortable level for the ringgit?

We don’t have a level that we are looking at. The International Monetary Fund continues to tell us that our ringgit is undervalued.

We said as a central bank, we never stood in the way of an underlying trend for the currency and in fact, it appreciated quite sharply to RM3.15. We didn’t stand in the way. Now, it has depreciated.

And we noticed when our currency appreciated, there was no representation to the central bank that this is too fast or putting us in difficulty.

Now, the currency has depreciated and importers will be affected. But again, there have been no remarks.

What is key to us is that the market remains orderly. The central bank will be there to ensure orderly conditions.

Over the long term, don’t you think the Asian currencies will have to strengthen as an overall adjustment?

I don’t think Asia determines the exchange rate of major currencies. The point that I want to emphasise is we don’t just look at one currency anymore. We should not just look at our link to the US dollar.

We should look at all the other currencies. Against the sterling, we have appreciated significantly. Against the euro, we have appreciated by a lesser amount and against the Aussie, quite a lot of people are quite happy.

Asia does not determine the currencies. (it is) the financial flows... that is why we have heightened our surveillance of the financial system. Asian countries have been responsible in the way they manage their reserves.

In the case of Malaysia, we had diversified our portfolio seven or eight years ago. This is important because of the high volatility of all the currencies.

People say interest rates should be reduced. Where do you see the interest rates heading?

We have said that we would take swift action to support the economy. If it is necessary, certainly, we have the flexibility to do so.

Do you think we need to bring the budget deficit under control?

In good times, every effort should be made to bring it under control. But under these challenging times, it is important to provide support to the economy to prevent a sharp economic downturn.

Yes, some of the issues need to be addressed like enhancing the revenue base. But this can be done during better times like having value-added tax.

There are other fiscal issues that need to be addressed and will be taken up when we have increased economic conditions.

The key is fiscal sustainability which should be assessed in terms of the indebtedness of the Government and right now, that is low. That does give some flexibility despite the deficit being higher.

There is so much reliance on the consumer to drive economic growth. Won’t the recession in the US and about half of the world discourage the consumer from fulfilling the task?

The external sector has become affected as a result of the depressed global demand. While there has been some disruption, the underlying real activity still remains in our economy.

There are various industries that meet consumer demand and our own investment projects have been implemented.

One needs to understand the situation and manage it from household to businesses.

I have full confidence as we had managed ourselves out of the severe crisis in 1997/98 and came out of it so quickly.

What we are facing now is nothing compared with that. We have the capacity, aptitude and drive to bring ourselves out of it at a very low cost to the country.

The biggest factor is one of confidence. It is not that Malaysians don’t have the money but suddenly, most are pulling back. What do you do in a situation like that?

They should know the consequences that they will contribute to the slowdown, and this will become self-fulfilling.

We need to be prudent, manage ourselves well.

It is during the good times that we need to moderate ourselves and avoid excesses, so that in bad times, we can pull ourselves through.

People should live within their means. The environment now varies from the 1990s and 1980s. Everyone needs to have an awareness of the business environment, how to survive and manage themselves.

If you talk to those savvy businesses, they know how to cut costs and what business to prepare for.

Are consumers saying they are in a recession?

We are not in a recession but should brace ourselves for the worst. We are going to be plagued by this kind of crisis from time to time, and we cannot prevent this from happening. We have to raise our resilience and tolerance level to ensure that we can manage ourselves in such circumstances.

I believe that in our banking sector, they are able to, within the circumstances, manage themselves.

How do you see the inflation numbers?

We believe it has peaked. It will moderate into the early part of next year, and moderate significantly into the second half of next year to less than 3%.

Do you expect commodity prices to remain low?

It depends on the global economy, and depth of recession to be experienced in some major economies. The two factors that resulted in our inflation rising to 7% to 8% was rising food and fuel prices.

These have come down. We expect inflation to moderate.

About 80% of the increase was due to these two items.

The supply and distribution of food have improved and of course, fuel is determined by international forces.

What is the level of household debt in Malaysia?

It remains under prudential levels and has not increased. It is generally borrowing within the household’s means and of course, we have exceptions, and these are candidates for the credit counselling agency, AKPK.

We have opened AKPK branches. It is a positive development that people come forward to speak about their financial difficulties and the AKPK arranges for the borrowers and banks to engage and look at options of ensuring the loans continue to be performing.

We also reinforce that by raising the level of financial awareness through advertising.