Malaysia is set to meet its economic expansion target this year, even as risks to global growth mount and greater volatility might persist in capital flows, Bank Negara Malaysia Governor Zeti Akhtar Aziz said.
Price pressures are “quite contained” due to lower fuel and commodity costs and slightly slower demand, Zeti said in an interview in Washington on Saturday. Until there is more clarity to the growth and inflation outlook, the current monetary stance remains accommodative and supportive, she said.
Zeti, who leaves her position at the end of the month when her term is up, has helped to curb inflation and keep monetary policy steady to support domestic demand.
Photo: EPA
Malaysian Prime Minister Najib Razak is counting on consumers to support growth, finding ways to put more money into their pockets as he faces constraints in increasing government spending.
“We have a high degree of confidence” on this year’s growth target of 4 percent to 4.5 percent, Zeti said.
While fuel prices might remain lower for some time, Malaysia’s diversified economy that focuses on more consumption-led industries than exports, and reduced dependence on energy revenues means “we are affected, but to a much lesser extent than we would have been” in the past, she said.
GLOBAL WEAKNESS
Global finance ministers and central bankers pledged to step up their efforts to support growth, as chances rise of a broader slowdown and risks including migrant crises and a potential UK exit from the EU threaten the world economy.
Downside risks to the world economic outlook have increased since October last year, raising the possibility of a more generalized slowdown and a sudden pullback of capital flows, the IMF’s top policy advisory committee said on Saturday.
Malaysia remains “vulnerable” to a reversal of capital flows though buffers such as a highly developed bond market and strong financial intermediaries have helped to achieve adjustments in the exchange rate and in reserves, Zeti said.
“[The] prediction is greater volatility. That will continue,” she said.
Zeti said that the global recovery “is much more modest than had been earlier anticipated.”
Uncertainty in world financial markets, if it continues, “makes it a challenge for businesses” and they will “stay on the sidelines” instead of investing, while households might delay consumption, all of which would contribute to slower growth, she said.
HEIGHTENED VOLATILITY
“Having heightened volatility for long periods of time is not conducive to growth,” Zeti said.
The ringgit has risen about 10 percent this year to become the second-best performing currency in Asia, rebounding from a 17-year low. Global funds poured 6.1 billion ringgit (US$1.56 billion) into Malaysian equities in March, after outflows of 19.5 billion ringgit last year.
Concerns about the weaker world economic outlook, anticipation of further normalization of US monetary policy by the US Federal Reserve, and fuel price adjustments are among external factors weighing on Malaysia’s currency, according to Zeti.
“Right now, it does not reflect our fundamentals,” she said, adding that the nation has a current account surplus, relatively low foreign indebtedness and a high level of foreign exchange reserves.
With steady growth, low inflation and an improving fiscal position, “the currency would be stronger if it was reflecting our fundamentals,” she said.
Bank Negara Malaysia left the benchmark interest rate unchanged at 3.25 percent at Zeti’s last scheduled monetary policy decision in March as accelerating inflation reduced scope for a cut in borrowing costs.
LIQUIDITY MEASURE
The central bank ordered lenders to set aside less cash as reserves from February as policymakers sought to add more money in the financial system amid weakening growth. The move to cut the statutory reserve ratio has had an impact, Zeti said.
“There is potential to do more,” she said. “But right now it has stabilized liquidity conditions in our financial markets.”
The government has not announced who is to replace Zeti when she steps down from the central bank at the end of this month after 16 years at the helm.
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