Malaysian economy can withstand sharp capital flow reversals: BNM

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KUALA LUMPUR (Jan 15): The Malaysian economy is broad and deep enough to intermediate sharp capital flow reversals, thanks to firm macroeconomic fundamentals, according to Bank Negara Malaysia assistant governor Marzunisham Omar.

Speaking at a World Bank Group’s conference on 'Globalization: Contents and Discontents' today, Marzunisham said two-way capital flows in Malaysia have increased by almost three-fold in the aftermath of the 2008 Global Financial Crisis.

“Similar to other emerging economies, we have also experienced several episodes of sharp capital flow reversals. Supported by firm macroeconomic fundamentals, our deep and broad financial markets were able to intermediate these flows in an orderly manner,” he said.

Marzunisham said beyond international trade, financial globalisation has expanded significantly, where cumulative global bond and equity market flows are now more than 80 times larger than that in the year 2000.

“There is no doubt that financial integration, if properly managed, can catalyse a more efficient allocation of productive capital and know-how transfers, with the intended benefits,” he said.

“However, financial globalisation has also been accompanied by highly-volatile short term portfolio flows, which frequently led to major disruptions to emerging economies’ financial markets.

“At the extreme, global financial flows can lead to the build-up of domestic vulnerabilities, such as currency mismatches, external indebtedness and broader financial imbalances. When financial globalisation becomes in itself a source of shock, financial markets can be easily overwhelmed,” he added.

Therefore, Marzunisham said he welcomes efforts to strengthen regional and global financial safety nets.

“To this end, Asean+3 countries achieved a significant milestone under the Chiang Mai Initiative Multilateralisation, when the fund size was doubled to US$240 billion in 2014,” he said.

“Moving forward, an important consideration is to bring the various bilateral swap arrangements and regional financial safety nets together with the IMF’s safety net into a coherent framework that will enhance their complementarities and thus, effectiveness in supporting emerging economies in dealing with short term capital flow volatility,” he added.

Marzunisham said capital flow volatility poses considerable challenges to emerging economies’ policymakers in safeguarding financial and macroeconomic stability.

While the global community continues to debate and explore possible solutions to manage spillovers and spillbacks of policies in advanced economies, he said for emerging economies, there is a need not just to preserve existing available tools, but to constantly refresh policy toolkit to deal with the multifaceted risks confronting these economies and to be flexible in implementing them.

“Pragmatism is key. Policy configuration will need to be pragmatic and premised on the risk that is being managed. Indeed, macroprudential policies have been found to be effective in managing financial cycles and associated risks, such as excessive credit growth and asset price inflation.

“Nevertheless, sizeable shifts in capital flows could cause disorderly financial market conditions and excessive exchange rate movements. In pursuit of preserving stability, policymakers must therefore be able to avail ourselves to a broad range of policy toolkit,” he said.