Amid economic headwinds, Bank Negara's Zeti will be a hard act to follow

MALAYSIA's top central bank post will have an untimely void at the end of April when the widely respected governor of 16 years, Zeti Akhtar Aziz, retires - raising questions (and heightened scrutiny) on who will replace her at the helm of Bank Negara Malaysia (BNM).

"It feels like the end of an era," said OCBC Bank in a note as Dr Zeti attended her last monetary policy meeting a week ago at which the central bank, expectedly, kept the policy rate unchanged .

The appointment of the new central bank chief is especially pivotal now given the headwinds faced by Malaysia's oil and gas-reliant economy. Falling oil prices have hit the country's coffers - although oil revenue no longer makes up one-third of government revenue, it is still significant - and exports are falling. The government has said that for every US$1 drop in oil prices, the government's annual revenue slips RM300 million (S$100 million).

The ringgit has shed about 16 per cent of its value against the US dollar since the start of 2015. Although it has strengthened slightly this year, it remains vulnerable to a reversal in commodity prices and prospects of higher interest rates in the US as well as domestic storms - particularly a looming political crisis in Malaysia triggered by a financial scandal involving 1Malaysia Development Berhad (1MDB).

The foreign reserves of South-east Asia's third largest economy dipped 18 per cent in 2015 and have stayed below the comfort mark of US$100 billion that was breached last August for the first time in five years.

GDP growth has slowed since the second quarter of 2015. Although last year's figure came in better than expected, at 5 per cent, growth is winding down and is expected to moderate to 4-4.5 per cent this year.

Even if domestic consumption is pulling its weight to shore up major leading economic indicators, economists say the biggest downside risks to Malaysia could come from external developments - notably sluggish world trade as China heads for hard economic times and a commodity slump.

While Malaysia's banks are well capitalised (a much needed buffer against rising credit risks), there are weak spots. Moody's Investors Service flagged recently that banks' domestic asset quality could deteriorate from the strong levels of the past three years as the commodity and manufacturing sectors face rising pressure from weak external demand.

In the face of these challenges, Malaysia's central bank will need steady and credible leadership that can provide clarity and inspire confidence both at home and among investors abroad.

This is how Dr Zeti, as the country's chief central banker, handled her mandate for over a decade and a half, during which she deftly steered the country through two crises. That Malaysia's financial system is sound - and has, thus far, been resilient to external headwinds - is testimony to her sterling track record.

Central banking, in Dr Zeti's own words uttered recently, is an "unfinished business" with new challenges always on the horizon. She will not be an easy act to follow. It is imperative that the candidate chosen to succeed her be judged purely on merit, track record and integrity. All other considerations, including whether the new central bank chief comes from within the organisation or outside, are secondary.

This article was first published on March 17, 2016.
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