By KINIBIZ
The ringgit is significantly undervalued, Bank Negara Malaysia (BNM) Governor Zeti Akhtar Aziz said today at a press conference in conjunction with the release of the its 2014 Annual Report.
Pressed for a fundamental value of the ringgit and a forecast for the ringgit, she said: “We don’t forecast the ringgit. All we can forecast is continued volatility (for the ringgit).”
Zeti said the fall in the ringgit was largely expected because of capital outflows following announcements by the US Federal Reserve on ceasing of quantitative easing which refers to the cessation of bond buying by the Fed to inject liquidity liquidity into the system. This was made worse by falling oil prices.
The press conference became largely a question and answer session on the ringgit and 1Malaysia Development Bhd, whose large borrowings and questionable practices are generally considered to add to the downward pressure on the ringgit in addition to falling prices of oil.
Without mentioning 1MDB by name, the governor of the central bank said that stress tests conducted by BNM show no systemic risk to the system from the borrowings of any single highly leveraged entity.
“(In the event of default), profitability of some banks may be affected but most will remain profitable. There will be no systemic collapse, capital is adequate.”
She denied that a recent issue of Treasury bills by BNM of some RM2 billion was related to 1MDB. “This (the issue) is done periodically and according to a set calendar. Treasury bills are not issued for domestic debt repayment and if it is for foreign debt repayment, the government typically informs us first.”
During the briefing, Zeti emphasised that despite external challenges, Malaysia’s economic fundamentals remained strong. She credited the strength to the ongoing restructuring and reform which have take place over the past years.
These include higher private participation in the economy and a diverse export structure across products and markets. She said this had reduced the country’s over reliance on one particular sector for exports and government revenue. Furthermore a resilient and well developed financial system has also helped support growth.
Below are some of the questions which were posed to the governor and her responses.
On the causes of the recent depreciation of the ringgit
Zeti: The first thing to note was that the ringgit had appreciated from the beginning of 2014 up until September 2014 as a result of capital inflows. Therefore it was within our expectations when the US Federal Reserve bank began discussing the normalisation of its interest rates. Then across the board, most emerging markets experienced depreciation in their economies.
In the latter part of 2014 came the suddenly downward adjustment of energy prices, at levels that were more than expected despite assessments that there would be adjustments in the high prices because there was oversupply and slowing of demand.
But although this had been factored in, prices fell far more than what the fundamentals had seemed to indicate. Therefore they (analysts) looked at oil producing countries and considered them vulnerable.
But they wrongly analysed Malaysia’s dependence on the oil and gas sector. Some 80% of economy is in the manufacturing and services sector which is benefitting from the depreciated currency. They also said that the government was heavily dependent on oil and gas revenue, and that caused downward pressure on the currency. But that was not the case as well.
Was the recent RM2 billion Bank Negara Treasury bills issue to provide money to 1MDB to repay its debts as mentioned in some reports?
No. The issue of Treasury bills was normal and issued under a set calendar. We do not issue Treasury bills for the government to repay domestic debt. If foreign debt repayment is involved, the government will normally let us know.
Will the ringgit be re-pegged?
No. We don’t think it is necessary to re-peg. There needs to be flexibility to adjust. The ringgit will depend on demand and supply and prices. It needs to adjust to these. The exchange rate is not a policy instrument, it is to facilitate trade and investment.
How much is the ringgit internationalised? And how much does speculation play a part in the internationalisation of the ringgit? Are Malaysians taking money out?
It is not internationalised which means non-residents cannot borrow ringgit (to speculate). But some amount of speculation can happen during trading hours here. There are no signs that Malaysians are taking money out but there are many corporations investing overseas. Some of them are now trying to keep their money here in line with national aspirations.
Is the ringgit slide related to 1MDB?
There are many reasons to explain this. It (depreciation) has affected many emerging economies. Stress tests show that our financial and banking system is highly resilient but the market thrives on volatility. (Under such circumstances), the main thing for Malaysia to do is to strengthen its fundamentals – a steady growth path, high international reserves, a well-developed financial system which is well-capitalised. Our international reserves are still high, and the banking system has excess capital of RM97 billion. It is unlikely we will need this. The thrust is to support growth. Inflation is not likely to exceed 2-3%.
Is there a level at which BNM will consider intervening in the ringgit?
Our interventions are not based on maintaining any particular level. Our intervention will be to maintain orderly market conditions. If you had sudden movements especially when there is a low level or activity or when the market is thin, this will lead to abrupt changes and then BNM would step in. Or if there is huge transaction taking place, then BNM will step in.
Would it get worse when the US increases interest rates?
Usually these outflows happen before the event. When the event happens there is very little outflow. When it started (the announcement), the uncertainty began and hence the volatility. The movement of the currency is beyond the control of the central bank. That is why it is not a policy instrument.
Would you consider lowering interest rates?
The thrust is to support growth. We believe investment, especially foreign direct investment, is not dependent on the interest rate but the potential for return. Why has it (foreign direct investment) come in for more than a hundred years? It is because of profit. We have new industries with high value-added – RM35 billion a year (in approval for investments). High volume of approvals will translate to investments in 2016 and 2017.
Why has the government external debt increased?
This was because of a new definition of foreign debt. If you are a non-resident holding government debt , then it becomes an external loan, for instance government bonds and bills. It does not reflect (increased) borrowing.
What is the impact of 1Malaysia Development Bhd’s (1MDB) on the currency and its threat to Malaysia’s banking sector?
The point I want to highlight, is that we do conduct stress tests on the banking system. We test what happens if the government is plunged into a recession, if it experiences a collapse in financial markets and if there is a default by a highly leveraged entity. And we are one of the most transparent central banks in showing the results of our strength tests in great detail.
The stress tests show that the banks will be affected, but the banks minimum capital requirements will be maintained above the minimum requirements and therefore, most of the banks will remain in a profitable position.
So it is not quite what some have described, in that it will cause a systemic collapse of our banking system. On the contrary, our banking system has a high degree of resilience.
We also have a financial policy committee, we make an assessment on the stress test every quarter and if we are concerned that there are any vulnerabilities in our financial system or might cause economic dislocation, we take action well before anything can happen.
Do you see any risks from shadow banking and will BNM take any measures to deal with this?
BNM has extensive powers to obtain information to what has been described as shadow banking, which refers to those that are not under our regulatory purview. But we have the capability to introduce measures if we see there are risks emanating from their activities.
We have already implemented in 2013 macro prudential measures on these non-bank financial institutions and this is what accounted for the moderation in growth, particularly of personal loans. The growth of personal loans used to be something like 25% and it has moderated now to less than 5%. This is important as these are the kinds of borrowing by individuals that do not gain an asset, unlike a housing loan, where the borrower will have an asset. So our macroprudential measures on the so called shadow banking as yielded the results.
Will BNM consider the roll back of its macroprudential measures?
No, we believe the banks will assess all those who want to borrow based on their affordability, and will give the loan. Loan growth has been increasing now by 9.9% to household sector and to the business sector the loan growth is 9% and to the SME sector it is 13.3% – so there is no reason for BNM to roll back our macroprudential programme.
Does BNM want to see the levels personal financing go lower, and is it good for the economy is financing is difficult right now?
At this stage we do not want to see a rise in household indebtedness, especially among the middle and low income groups and especially in personal loans. This is because these personal loans are usually squandered in several days and the borrower remains indebted over a period of years.
For banks it is a period of six years for repayment of a personal loan and for non-banks we have reduced it to 10 years, it used to be 25 years. They wanted the borrower to be allowed to repay the loan over 25 years.
So the borrower has no assets as a result of this personal loan and then will spend 25 years of their life to repay this debt. All that now has been reduced significantly as a result.
But we are not restricting loans to those who fulfill the criteria. So if they can demonstrate their income stream and if they can show they have job security then they are entitled to borrow.
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