Why Malaysia is not in trouble

KUALA LUMPUR - Malaysia is better prepared to manage another global financial crisis due to its sound economic and financial structure as well as the availability of a strong surveillance mechanism, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz.

"Reforms that we have implemented since the 1997/98 Asian Financial Crisis have improved the resilience of our financial system tremendously so much so that we are now better able to manage any global financial market volatility," Zeti told reporters during a press briefing in conjunction with the release of Bank Negara's 2013 annual report.

"Whether we will have another financial crisis or not is beyond our control," Zeti said, adding that the country would be better able to manage risks should another financial crisis occur.

She said conditions for the financial system had improved while the global economy was on a steady recovery path.

"This recovery is going to be modest and it will happen very gradually over a number of years," Zeti said, adding that the global economy and financial system remained vulnerable to setbacks that could undermine its recovery process.

"But I believe the recent global financial crisis that happened in 2007/08 has put forth many lessons that we can learn ," Zeti said in response to a question on whether Malaysia was prepared for another financial crisis.

Recently, former Prime Minister Tun Dr Mahathir Mohamad had said that Malaysia should be prepared for another financial crisis.

Towards this end, Zeti outlined reforms in five key areas that have played a part in strengthening the country's economy.

"First, our economic structure has changed. It is now more balanced, as domestic demand has become the driver of growth. If there are major economic contractions due to global developments as we have seen in recent years, our growth would be modest, but we could stay on a steady growth path," she said.

Second, the financial system has become more resilient with stronger banks.

"Previously, we had a fragmented banking system. Now, our banks are well-capitalised; they are much larger and are certainly less vulnerable to the various kinds of shocks that we could experience," she said.

Zeti said the third fundamental change would be the central bank having a wider range of powers and instruments at its disposal to address contagion risks.

"We have the power now not only to address risks that arise from those sectors that are regulated directly by us, but also other non-bank sectors that contribute to build-up in excesses in the financial system," she said, noting that policymakers had drawn many lessons from the United States and European experience in the wake of the global financial crisis.

"When we see something happening in one segment of the financial system, we quickly address it, taking into account the contagion and knock-on effects," she noted.

The fourth area relates to having in place an integrated regional crisis management framework that puts policymakers in a constant state of readiness and prepares them for any eventuality, including better assessment of risks and implementing pre-emptive measures.

Zeti disclosed that under the framework, Bank Negara and its counterparts in the region had many simulations of unanticipated events, and a command and recovery centre to tackle various risks.

Lastly, the country's primary and secondary bond markets have deepened since the Asian financial crisis.

"Before the 1997/98 Asian Financial Crisis, the bond market accounted for only about 35 per cent of gross domestic product (GDP). Now, it accounts for 108 per cent of GDP," she said, adding that Malaysia currently had the largest bond market in South-East Asia, with 50 per cent of its bond market being made up of corporate bond issuance and the remainder syariah-compliant or sukuk issuances.

"Finally, we have some degree of confidence in being able to pre-emptively manage any risk of a crisis which is beyond our control because our surveillance mechanism has been strengthened immensely over the years," Zeti said.

The surveillance mechanism extended not only nationwide but also across Asia, Zeti said adding: "We have a regional surveillance mechanism in place so that we can understand very early on what the risks are to our economy and financial stability. We have communications with our counterparts on a weekly or regular basis to analyse the risks that we could be facing," she said.

 

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