KUALA LUMPUR, 5 July 2005 — Bank Negara Malaysia Governor Dr. Zeti Akhtar Aziz reiterated that Malaysia will have to reconsider its seven-year-old ringgit peg of 3.8 to the US dollar only if the rate becomes fundamentally misaligned, or if there is a structural change in the exchange rate policies of regional countries or of global currencies such as the dollar and the euro.
“The fundamental objective of Bank Negara’s fixed exchange rate policy is stability. The exchange rate cannot solve structural policy on its own. Trade flows do have wide swings and may weaken the economy but in response to financial flows, they reflect sentiments. This has a bigger impact on the markets,” she explained.
Dr. Zeti dismissed suggestions that the ringgit was undervalued and refused to confirm Malaysian Second Finance Minister Tan Sri Nor Mohamed Yakcop’s sentiments that “The fixed exchange rate policy is not cast in stone.”
Discussing the latest fundamentals of the Malaysian economy at a roundtable at Bank Negara last week, Dr. Zeti stressed that during the strong dollar period, the ringgit strengthened with the US dollar, but the country’s trade had continued to increase robustly.
GDP growth is projected at an estimated 7.1 percent in 2004. In the first quarter of 2005, growth reached 5.7 percent. Despite the global economic slowdown, Malaysia, she added, was very positive about meeting its 5-6 percent economic growth target this year which will be one of the highest in the region.
The current weakened dollar is unlikely to have any fundamental implications for Malaysia because trade has continued to grow and foreign direct investments have mostly seen a steady inflow.
Malaysia’s former Prime Minister Mahathir Mohamad fixed the ringgit at 3.8 to the dollar in September 1998 to stem capital flight during the Asian financial crisis. The peg gave the central bank room to cut interest rates, helping the economy recover from its worst recession in 41 years.
Inflation, which hit a six-year high in May, could edge higher before tapering off later this year, Dr. Zeti said. Inflation of 3.1 percent in May, the biggest gain since an increase of 3.2 percent in the year through March 1999, was within expectations. “Because costs are rising, inflation may edge up during the year but it will taper off in the later part of the year,” she said.
On Islamic banking, Dr. Zeti said the development of a vibrant and dynamic Islamic system required well-defined strategies. This should focus on two main areas - building institutional capacity and the development of the supporting financial structure. There is a need to ensure that Islamic banks are well capitalized and resilient. “For Islamic banks that are already in existence, clear criteria need to be specified on the minimum capital size that will enable them to be significant players in the market, be able to gain from the economies of scale, have a diversified earning base and a stronger market presence.”
Dr. Zeti said that in countries with a dual banking system where conventional banks and Islamic banks operate side-by-side, and where conventional banks are allowed to offer Islamic banking products, there must be adequate firewalls to ensure absolute separation of banking operations to avoid co-mingling between the Islamic and conventional funds. She added that Bank Negara will establish an endowment fund of RM200 million, which will be managed by the central bank, to support the role of the international community of Shariah scholars in the global development of Islamic finance.
Dr. Zeti said the foreign institutions issued licenses to operate Islamic banks in Malaysia will start operations later this year. Malaysia has issued licenses to Al-Rajhi Banking and Investment Corp., Kuwait Finance House and a consortium led by Rusd Investment Bank and including Qatar Islamic Bank and Global Investment House. “We expect them to commence operations later this year or early 2006,” she said.
Malaysia is also trying to attract foreign direct investment (FDI) from Gulf countries. “As oil prices are high and there is ample liquidity available in the Gulf states, Malaysia will try to attract investment from the region in various sectors through liberal economic and financial policies.”
Dr. Zeti said Malaysia had attracted RM24 billion in FDI in 2004. Trade also received a boost due to the low cost of doing business in Malaysia as well as the competitive infrastructure offered.
Malaysia’s bond market is gaining increasing prominence with more than 40 percent of portfolio funds flowing into the country being ploughed into bonds. She said that it was recognized that there had been considerable foreign interest in Malaysian bond market. Asked whether Malaysia was looking at issuing more Islamic sovereign bonds such as the $600 million Malaysia Global Sukuk, she said: “We have not ventured to look at issuing more but there are some of the areas we are open to studying, because we believe there is potential to further develop the bond market.”
