Zeti: BNM won’t allow any default to impact economy

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KUALA LUMPUR: Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz pledged yesterday that the central bank will ensure any potential loan default by 1Malaysia Development Bhd (1MDB) will not have systemic implications on Malaysia’s financial system.

“We have arrangements to deal with it so that no individual entity is going to have systemic implications on the overall financial system and on our economy,” she told reporters after the signing of agreements between the World Bank Group and the Malaysian government for the former to establish a knowledge and research office in Kuala Lumpur yesterday.

“That is the basic principle that will prevail,” said Zeti, adding that the central bank does not comment on individual entities.

She noted that extensions given to 1MDB for the repayment of its loans are not decisions made by the central bank.

“In the case of any extension being provided, that is not by Bank Negara, that is by the lenders who are the commercial banks — they make those decisions,” she said, referring to the extensions given by local lenders to 1MDB on its RM2 billion loan that was originally due on Nov 30, 2014.

The first extension given to the state wealth fund was until Dec 31, 2014. Then, early this month, it was given until Jan 30 to settle the debt, for which Malayan Banking Bhd and RHB Bank Bhd are the lead lenders.

Zeti commented on the current valuation of the ringgit, which is trading towards six-year lows, and opined that it “doesn’t reflect our strong, underlying fundamentals”.

“We’ve seen these levels before. This [weaker ringgit] reflects the events that are unfolding in the global environment.

“We believe that when these events settle down and stabilise, the ringgit will trend towards reflecting our underlying fundamentals,” she said.

Zeti said Malaysia’s current gross domestic product (GDP) growth forecast of 4.5% to 5.5% is “relatively strong growth” in light of the challenges that the country is facing.

“We also have inflation projected between 2.5% and 3.5%, a highly capitalised banking system, and credit growth in the region of 10%,” she pointed out, adding that ample access by the financial sector to financing via the bond and capital market all point towards support for sustainable growth.

The central bank governor added that overall growth for 2014 (GDP) is going to be “within the projected forecast of projections”.

As for the impact of the European Central Bank’s (ECB) recently announced quantitative easing (QE) programme, Zeti said it will be generally positive for Malaysia, provided that the QE is successful in providing stability to global financial markets and if it supports the recovery and development of the European economy.

“We will see surges of inflows and then reversal of these flows — as demonstrated by the experience of the Fed’s QE and its tapering. Our financial system has reached maturity whereby we can ride out that kind of experience.

“I do believe that in this [ECB’s QE] case, we will [be able to] do the same,” she said, expressing her confidence in the Malaysian and emerging markets’ economies to weather the eventual tapering that will follow after the surge in inflow of foreign funds.

She does not expect Greece to exit the European Union (EU) as there is no mechanism and provision for the exit by the EU.

“Whatever happens, we believe that the world will rise up to manage it, and we are in a state of readiness to manage these kinds of eventualities,” she pointed out.

World Bank regional vice-president for East Asia and Pacific, Axel van Trotsenburg, agreed that Malaysia is well positioned to weather the current challenging financial landscape.

“Malaysia is blessed by a very strong, capitalised financial system based on prudent macroeconomic policies and keeping its microfinancials stable,” he told reporters on the sidelines after the signing ceremony for the new World Bank Group office.

Meanwhile, van Trotsenburg said the new office will conduct research in the areas of financial stability, Islamic finance and public finance, and will allow Malaysia to further leverage on the World Bank’s expertise in its transformation into a developed, high-income economy.

 

This article first appeared in The Edge Financial Daily, on January 28, 2015.