Zeti: M’sia can withstand capital flows

(Bloomberg) – Malaysia can manage capital inflows due to monetary easing in advanced economies, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said, as Asian nations take steps to prevent asset bubbles after the United States boosted stimulus.

The country had policy tools and the flexibility to absorb any excess liquidity, said Zeti, who oversaw Malaysia’s response to capital outflows during the Asian financial crisis more than a decade ago.

The Malaysian economy was withstanding the impact of weakening global growth, with gross domestic product forecast to expand about 5% this year, Zeti said in an interview in Tokyo.

“We certainly are the recipient of capital flows but the Malaysian financial system has reached a level of maturity in terms of development and in its functioning that is able to intermediate these flows, both surges of inflows as well as reversals,” Zeti said. “The effects are disbursed through the financial system rather than concentrated.”

Malaysia joins Brazil among emerging markets signaling confidence they can counter any surge in fund flows stemming from the US Federal Reserve’s third round of quantitative easing.

US Fed chairman Ben S. Bernanke two days ago rebutted concern that the central bank’s decision to purchase US$40bil in mortgage-backed bonds a month will cause a destabilising influx of capital into developing economies.

Most Asian currencies have gained in the past three months, and Hong Kong and Singapore unveiled measures to cool property prices after the US stimulus. The ringgit has climbed about 4% since mid-July, the most among 11 Asian currencies tracked by Bloomberg after the Indian rupee.

Bank Negara has kept interest rates steady for eight meetings, most recently in September, as the lowest inflation rate among South-East Asia’s major economies reduced the need to tighten policy. Consumer prices rose 1.4% in August from a year earlier, staying at the lowest rate in more than two years.

“Right now on the horizon, the risk to inflation doesn’t appear to be imminent,” Zeti said. “There is less of a risk of inflation and given that we have excess capacity in our economy, the risk is on growth. But again right now, domestic demand is still relatively strong.”

The country’s monetary and fiscal policy was already “quite accommodative,” Zeti said. Malaysia has refrained from joining other Asian nations in lowering borrowing costs this year as Prime Minister Datuk Seri Najib Tun Razak increases spending ahead of a general election that must be held by early 2013.

“There is no big threat to growth prospects for Malaysia and inflation has been surprisingly low,” said Gundy Cahyadi, an economist in Singapore at Oversea-Chinese Banking Corp.

“There’s room for monetary policy accommodation if necessary but risks are not significant yet to trigger a cut. Any sort of boost will need to come from monetary policy rather than the fiscal side.”

Asia had “considerable policy flexibility” to respond to external and domestic developments, although a prolonged delay in the recovery in the advanced economies would erode this scope, Zeti said in a speech in Tokyo on Saturday.

“It’s important for us to have room to manoeuvre in the event things deteriorate, and so under these conditions we should just sustain what we believe is a sustainable growth path and maintain this growth trajectory,” she said.

If policymakers ease too soon, there would be less scope to do so later if “things take a turn for the worse,” she said.

Najib cut income taxes, gave civil servants a bonus and extended handouts for the poor in the budget announced last month, with the Government planning to spend RM251.6bil next year.

“We already have domestic demand growing, like consumption by 7%, and investment by more than 10%,” Zeti said. “This is already the limits to which domestic demand can expand without generating an overheating environment.”

Malaysia would probably refrain from selling global sovereign bonds for now, Zeti said.

“The Government is very cautious about entering into increased foreign debt and they have significant access to domestic sources of financing without crowding out private investment because there is ample liquidity,” she said.