This article first appeared in The Edge Malaysia Weekly, on March 21 - 27, 2016.
AS speculation intensifies over who will replace governor Tan Sri Dr Zeti Akhtar Aziz when she retires from Bank Negara Malaysia on April 30, one thing is apparent — hers are big shoes to fill and her successor will need to start filling them up fast given the many issues facing the banking sector and the economy.
She has, over her 16 years as the central bank chief, performed “an extremely difficult job very well,” Datuk Seri Nazir Razak, chairman of CIMB Group Holdings Bhd, tells The Edge (see Q&A on next page).
It is a view held by many in the financial industry that she regulates.
Her numerous global accolades — including being named one of the world’s best central bank chiefs by Global Finance magazine in 2009 and seen as a possible candidate to helm the International Monetary Fund (IMF) in 2011 — are testatement to her achievements.
Her successor will surely face a daunting task measuring up. But given the weaker economic climate and the host of challenges that come with it, the person will have to immediately roll up his or her sleeves and get down to work, senior bankers and economists say.
There are critical issues to be dealt with — from the high sovereign and household debt to the low oil price, weak ringgit and rising cost of living — and failure to handle them competently could mean a downgrade in the country’s credit rating by international rating agencies.
“The role and policy framework of Bank Negara is of paramount importance to tackle these issues. Our economy is currently going through a period of adjustment given the continued external uncertainty and the ongoing domestic reforms,” independent economist Lee Heng Guie notes.
Just last Thursday, the Ministry of Finance (MoF) revealed in Parliament that the sovereign debt level as at end-2015, at RM630.5 billion, stands at 54.5% of gross domestic product, precariously close to the unofficial self-imposed 55% limit.
And then, there is scandal-ridden state investment fund 1Malaysia Development Bhd (1MDB) that continues to garner international headlines and sour the country’s reputation.
These make it critical for Zeti’s work at Bank Negara to be passed to good, competent and most importantly, politically impartial hands.
“The appointment of less ideal candidates during such economic times (protracted economic slowdown, the government’s stretched balance sheet, 1MDB controversy) could erode foreign investors’ capricious confidence in emerging markets like Malaysia. Hence, foreign investors may require higher risk premiums for investing in Malaysia’s capital markets,” notes UOB Kay Hian Research in a March 14 report.
Candidates
The government’s list of potential candidates has narrowed in the last few months.
It is now said to be down to Datuk Muhammad Ibrahim, the most senior of the three deputy governors and reportedly the favoured in-house candidate; Datuk Seri Abdul Wahid Omar, Minister in the Prime Minister’s department in charge of economic planning and formerly the CEO of Malayan Banking Bhd; and Tan Sri Mohd Irwan Serigar Abdullah, the secretary general of treasury at the Ministry of Finance (MoF). Mohd Irwan is also on the board of advisers at 1MDB.
Malaysia’s ambassador to the US, Datuk Dr Awang Adek Hussein, was also one of the shortlisted candidates although his involvement in politics with Umno is deemed a liability. According to people who know him, Awang Adek is not keen but will accept the job if selected.
Only three of the seven governors over the past three decades were non-rank-and-file appointments. Of the three, two were former CEOs of Maybank.
Industry observers say investors are likely to prefer to have the role taken up by an existing deputy governor — in this case, Muhammad Ibrahim — to ensure that current policies that have been successful in promoting monetary and financial stability are maintained, especially in these tougher times.
Not promoting from within could send the message that succession planning efforts at key government institutions and companies are a waste of time.
“An external appointment could have Bank Negara adopting more pro-growth populist measures but potentially at the expense of higher household debt,” says UOB Kay Hian, in its report following a Wall Street Journal article on March 11 that Mohd Irwan was expected to take Zeti’s place.
“The (potential) appointment of Mohd Irwan may cast doubts on the transparency of the selection process, and dull confidence in the level of autonomy that the Bank Negara governor would have. He may initiate more policies in line with the government’s efforts to promote growth, but this could bring about a longer-term burden on household debt. Policy measures could include: reducing policy rates, re-allowing the property developer interest-bearing scheme (DIBS) or more extremely, lengthening the tenure of personal loans for civil servants, which may in turn spur higher household debt,” the foreign research house notes with concern.
If Mohd Irwan is appointed, it could also present a potential conflict of interest given his role as a member of the 1MDB advisory board and the fact that the MoF is the sole shareholder of 1MDB.
With about a month-plus left until Zeti’s end of term, there is increasing pressure on the government for a successor to be named quickly — the investment and business community hates uncertainty.
It is understood that the MoF will make the announcement once it has obtained the Yang di-Pertuan Agong’s royal assent on the candidate.
Bankers that The Edge spoke to stress the importance for Bank Negara to remain independent and for the new governor to be — and be seen as — apolitical.
Zeti has openly stated that the governor’s post should not be held by a politician — a statement some say was aimed at Awang Adek. “Even for financial institutions, we do not have politicians on the board, so least of all should be the central bank,” she told reporters last month.
“The new govenor needs to take a leaf from Zeti’s book and that is to stay absolutely apolitical,” stresses a top official from a foreign bank in Malaysia. “The new govenor has also to be articulate in order to command the respect from the investor community.”
The Central Bank of Malaysia Act 2009, which came about after 50 years of the central bank’s existance and which Zeti had a key role in pushing, legislates Bank Negara’s independence.
The Act also clearly states that governors and deputy governors should be those of “impeccable reputation with proven experience and recognised knowledged in monetary or financial matters”.
They are expected to devote the whole of their professional time to the service of the central bank, and while holding office, cannot occupy “any other office or employment, whether remunerated or not”.
The job requires total dedication, which Zeti has ably demonstrated. She sometimes mentions that it can be a lonely job for one to have.
“It is a sacrifice, actually, for whoever takes on the position of the governor, because you cannot build up any close relationship with politicians or with the financial industry. So, who have been my friends? They are actually other central bankers ... we are very cohesive and close knit and that is the community I will miss,” she told CNBC in an interview two months ago.
Economist Lee says: “The first challenge the new governor has to face is to maintain the high standards of governance and excellence set by previous governors.
“Second, to ensure economic and financial stability in the wake of uneven global growth, capital flows and exchange rate volatility due to the divergent monetary policy in major advanced economies.
“Third, it seems managing high household debt would be challenging in an environment of high retrenchment, weak income growth and higher cost of living.”
There are also other issues for the new governor to tackle.
“The widening income gap, coupled with record high house prices and household debt, will make it challenging for the new central bank governor to strike a fine balance in executing effective policy measures to help promote sustainable growth while ensuring that the structural high household debt issues are being addressed,” a UOB Kay Hian analyst tells The Edge.
Bouquets and brickbats
Observers say it is a shame that Zeti’s impending exit from Bank Negara — she has been with the bank for 35 years — is somewhat marred by the unresolved controversy that is 1MDB. The case is growing in size and complexity, with several overseas investigations — including the US, Singapore and Switzerland — into the fund’s various dealings.
“Her exit at the time when issues surrounding 1MDB are very much outstanding seems to suggest Bank Negara has been weak in enforcing its regulations on politically-connected accounts,” says a senior banker.
Nevertheless, the central bank has probably been the most agressive agency in probing 1MDB. It even recommended that criminal action be taken against the fund. But the recently-appointed attorney-general Tan Sri Mohamed Apandi Ali rejected this.
The AG last month also cleared Prime Minister Datuk Seri Najib Razak of any criminal wrongdoing, declaring that the RM2.6 billion channelled into his private bank accounts at AMMB Holdings Bhd — which accusers say came from 1MDB-related entities — was a personal donation from Saudi Arabia’s royal family.
Zeti has expressed hope that investigations into 1MDB can be concluded by end-April so that she can hand over a clean slate to the next governor. As it stands, however, the chances of that happening look remote.
Last November, in what is believed to be an unprecendented move in banking history, Bank Negara slapped a RM53.7 million penalty on AMMB for what the banking group said was “non-compliance with certain regulations”. The Edge previously reported that the breaches had to do with transactions linked to 1MDB.
Soft-spoken yet tough, Zeti has firmly steered the central bank through the vagaries of economic cycles and tough external forces, making Bank Negara a well-respected institution on the world financial stage.
A career central banker, Zeti, who turns 69 this August, took on the top job in May 2000. But she came into prominence a little earlier, during the 1997/98 Asian financial crisis. She was pulled into former Prime Minister Tun Dr Mahathir Mohamad’s controversial plan to impose capital control measures in 1998, while she was an assistant governor.
The then governor, Tan Sri Ahmad Don, a well-respected economist, stepped down together with deputy governor Datuk Fong Weng Pak, in protest against the drastic capital control measures, which saw the ringgit pegged to the US dollar, among others. Zeti was then appointed acting governor.
Shortly after the peg was implemented, Tan Sri Ali Abul Hassan Sulaiman was appointed as governor, while Zeti was made deputy governor. Two years later, she moved up to become the central bank’s 7th and first ever female governor.
The impudent capital controls drew the ire of the international community but enabled Malaysia to avoid having to get financial aid from the IMF that came with tight conditions, like its neighbours did. In later years, some Western institutions, including the IMF, have acknowledged that there were useful lessons to be learnt from the Malaysian experience.
Under Zeti’s watch, 54 domestic banking institutions were consolidated into 10 banking groups, allowing them to compete more effectively. Today, there are eight, and a couple — CIMB Group and Maybank — are considered regional champions.
The central bank stepped up oversight of the financial system following the Asian crisis. The financial reforms it pushed helped put Malaysia on a much stronger footing by the time the 2008 financial crisis came, allowing the country to emerge relatively unscathed.
Zeti is understood to have personally written much of the country’s first financial sector master plan, a blueprint of the sector’s long-term growth.
In July 2013, Bank Negara launched the Financial Services Act 2013 and the Islamic Financial Services Act 2013 (IFSA) that gave the regulator stronger powers to bring about better governance and checks and balances among financial institutions.
She has worked tirelessly to promote Islamic finance, putting in place what she thought was necessary to make Malaysia an international Islamic finance hub. Her dream of having a mega Islamic bank in the country, however, is yet to be realised.
“I think her biggest contribution and legacy when she leaves Bank Negara is the success of her efforts to upskill the banking and financial services providers and practitioners through training and education. She took a personal interest in spearheading the establishment of several learning institutions — for example, INCEIF, ICLIF and more recently, the Asia Business School in conjunction with the MIT Sloan School of Business,” says a senior official from a foreign bank.
Lee, a former colleague of Zeti’s at Bank Negara when she was heading the economics department, describes Zeti as a perfectionist who has consistently maintained the highest standards of professionalism and excellence for herself and her staff.
“Her frankness and sharpness of mind, as well as forceful views, challenged yet enriched many who worked with her. She demonstrates great concern for precision and accuracy. Her meticulous attention to detail made her judgement and assessment of issues impactful,” he shares.
But Zeti has also had her fair share of critics. Some, for instance, complain that hers was a period of over regulation.
“Yes, there were instances of over regulation of the local banking industry, especially following the failure of several large international banks as a result of the 2008/09 global financial crisis. This led to the overzealous regulations recommended by the Basel Committee, which may have substantially increased the cost of regulations and compliance in the local banking industry.
“All said, this may be good for the industry in the long run as banks are more insulated and well prepared to face increased volatility from impending credit and/or liquidity crunch,” a senior banker shares.
Others felt she could have intervened earlier to tackle the country’s high household debt. The latest data as at August 2015 show that household debt stands at 88.1% of GDP. “The responsible lending guidelines that Bank Negara came out with for banks — which limited the tenures of individual mortagages and personal loans, for example — could have been implemented a lot earlier, perhaps when it was approaching 60%,” an economist remarks.
Some Islamic bankers feel the IFSA is nothing more than an administrative legislation and that Zeti should have pushed Islamic banking subsidiaries to be more independently run.
That said, even her harshest critics acknowlege that the Johor native’s contributions to the financial industry and nation outweigh whatever shortcomings she may have.
It would be a crying shame if Malaysia, after all this progress at home and on the global stage under Zeti, were to regress because of a misplaced appointee at a key institution.
Maybe she will have something to say about this and other topical issues when she presents her last Bank Negara Annual Report this week.
A snapshot of key accomplishments under Zeti’s stewardship
2000 Zeti is made governor in May
2001 Launch of the Financial Sector Masterplan (2001 – 2010)
Establishment of the Islamic Financial Services Board (IFSB)
2002 Issuance of the first ever sovereign sukuk
2004 Bank Negara adopts new interest rate framework
2005 Malaysia adopts managed float for the ringgit exchange rate
Malaysia introduces deposit insurance system to enhance consumer protection
2006 INCEIF, the first global university dedicated to Islamic finance is established
Launch of Malaysia Islamic Finance Centre (MIFC) to promote Malaysia as a hub for international Islamic finance.
Establishment of Credit Counselling and Debt Management Agency (AKPK)
2009 The Central Bank of Malaysia Act 2009 is passed by Parliament
Zeti named one of the world’s best central bank chiefs by Global Finance magazine
Asian Institute of Finance (AIF) is established to develop human capital for financial services industry
2010 Establishment of the International Islamic Liquidity Management Corp (IILM) to provide short term liquidity for international Islamic financial markets
2011 Launch of the Financial Sector Blueprint for 2011-2020
Money Services Business Act 2011 gives central bank power to licence and regulate money changing businesses
2012 Zeti receives the Islamic Development Bank’s Islamic Banking and Finance award
Responsible lending guidelines for banks are introduced in July to curb high household debt
2013 The Financial Services Act (FSA) and Islamic Financial Services Act (IFSA) 2013 is implemented in July
Bank Negara opens a representative office in Beijing to promote bilateral trade and investment
2015 Introduction of the Base Rate to replace Base Lending Rate (BLR) as the main reference rate for new retail floating rate loans.
Zeti gets lifetime achievement award for her work in Islamic finance from Dubai’s ruler
The Asia School of Business, the world’s first central bank business school is set up, in collaboration with the Massachusetts Institute of Technology
2016 Zeti receives Lifetime Achievement Award at the Central Banking Awards in January
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