Malaysia had the capacity to manage its currency volatility, Bank Negara said, as it brushed off concerns of an Asian contagion risk.
“We had demonstrated our ability to handle such a weakness at the height of the global financial crisis in 2008/09, and therefore, would be able to do the same in the current environment,” the central bank governor Tan Sri Dr Zeti Akhtar Aziz (pic) said at a press conference.
In highlighting Malaysia’s strengths that would enable it to deal with the present volatility, Zeti said: “Firstly, we have strong intermediaries, and a well-developed financial market.“Our bond market is one of the largest in South-East Asia, and we have a strong presence of institutional investors who can absorb any selling of our Malaysian Government securities. In addition, our reserves level currently is at its strongest ever and we have a low level of external indebtedness.”
In line with the performance of some regional currencies, Malaysia’s ringgit has weakened against the currencies of major economies in recent months.
Year-to-date, for instance, the ringgit has fallen around 7.7% against the US dollar to close at 3.2947 per US dollar yesterday, compared with 3.0580 per dollar at the start of the year.
Said Zeti: “We are seeing highly destabilising capital flows and this is within our expectations because we had earlier seen huge inflows into our financial system, as experienced by most emerging markets, when quantitative easing (by major developed countries) took place. We received something like RM70bil in inflows in search of higher returns.
“Now that there are discussions on tapering the quantitative easing, some of these funds would return to their respective economies, in particular, the United States. We expect that there would be reversals (of capital).
“This is not the first time we are seeing this phenomenon. Previously, at the height of the financial crisis in 2008/09, we also saw huge surges of capital flows. But then, deleveraging set in (as major developed nations attempted to reduce their indebtedness), which resulted in a significant reversal of funds, and that precipitated a depreciation in our currency and a significant decline in our reserves.
“But we demonstrated during that time that our financial system was able to cope with this (volatile condition), and therefore, we would be able to do the same in the current environment,” Zeti said.
She added that when global economic recovery improved further, the country’s financial markets would eventually move to reflect fundamentals.
“Our domestic economic fundamentals are strong. We have been able to have strong and resilient domestic demand, which grew at 7.2% year-on-year during the second quarter of this year.
“The private-sector investment is still growing at double-digit rates and investment activities are still holding up well. We have low price pressure in this environment and our labour market conditions remain stable,” she said.