The full transcript of Emerging Market's exclusive interview with Malaysia's Central Bank Governor, Dr. Zeti Aziz.
What were the main factors underlying the move to a managed float?
The primary motivation for the change in the exchange rate regime was to better position Malaysia to respond to structural changes in the global and regional environment. Under the managed float, we now monitor the ringgit against a basket of currencies of our major trading partners.
It was also a response to the change in trading patterns. Our trade with Asia now accounts for more than 60% of our total trade. Therefore, the stability of our currency against our major trading partners has now become important to us.
We had the pegged exchange rate regime for seven years and it was important in providing stability that facilitated trade and investment. Of course, our trade with the US remains important. As a single trading partner, they remain the most important – but as our trade has become more diversified, it becomes important to consider the average movement of our currency against others in this region.
Why did the announcement concerning the ringgit come within one hour of the Chinese decision to revalue?
It was almost at the same time. It was part of the effort to ensure stable financial flows in the region. We also felt that it was in our interest to time it at the same time as their adjustment.
What exactly was the potential impact of the Chinese revaluation on Malaysian trade and investment? Why did you react to it so swiftly?
There was already a lot of discussion over an extended period on the potential for such an adjustment to take place. This did trigger some financial flows into the Asian region, with the expectation for a general appreciation of the regional currencies. These kinds of flows (some of them speculative in nature) could have been destabilising. The stability of the currency is important to facilitate trade and investment.
On why we reacted in this manner, let me put it this way, we already had all the pre-conditions in place to move to a more flexible regime. We had mentioned on many occasions that we knew what options we had before us, and that we would consider changing our regime in certain specific circumstances.
But you must have been given a heads-up?
Our bilateral relations will remain confidential.
China is a very large country in our region and it always said that any action it takes would take into consideration the implications on this region. The countries of the Asian region have many forums where we have discussions, and there are close working arrangements in the East Asian region, in particular.
Where next for the ringgit?
Since we have moved to the managed float, we have seen two-way flows which is very healthy. Only in the first day following the announcement did we see quite significant inflows. In subsequent days, these flows have normalised.
What level of concern is there about speculative flows?
We expect there to be two-way flows and there may be capital flows that are speculative in nature but we do not expect them to be large.
A number of changes have taken place since 1997/98 which have strengthened our ability to manage any potential inflows or outflows. Our reserve position has been strengthened to $80 billion US dollars. And in addition, our ability to monitor financial flows and market conditions has also improved, enabling us to have a better understanding of the dynamics of the market.
Also, within the region, we are well connected and linked to have a better understanding of the flows within the region. Given all this, Malaysia has liberalised its capital account so that there is a free inflow and outflow. For more than 3 years since 2003, we have implemented several measures to liberalise further the capital account. We have also allowed multinational corporations to raise ringgit funds in our domestic bond markets. But while we operate with a very liberalised capital account, we have one rule: the 'non-internationalisation' of the ringgit. This is an important safeguard against speculations financed from offshore sources. That was the real problem during the financial crisis, not capital flight.
Furthermore, we see no basis for such destabilizing capital flows. We have had solid growth for some years now, low external debt, low inflation, a strong external balance, and the banking sector has been strengthened. Another important structural change has been that our capital markets, and particularly our bond markets, are significantly more developed. It now accounts for 80% of GNP. There are significant investment opportunities in Malaysia. The direction of policy is to liberalise further.
But we want to see an orderly transition under this new regime. So far, we have not seen any significant speculative flows. The situation will be managed to ensure orderly market conditions. In fact, on most days, the market clears itself.
What's driving the current account surplus? Is it a lack of investment?
Strong export performance and the fact that we still have a high rate of savings, that is at 37% of GNP. The rate of investment is 22% of GNP, so it's still very high. The investments are going into new areas of growth that are in the services sector, are more technology and knowledge driven industries. The scale of the investments are lower but they are higher value added.
What does Malaysia's experience over the past few years tell us about East Asia generally?
Each country has their own motivations and circumstances. One of the factors common to the region is the increased integration – not only economic integration in terms of increased trade, but also increased financial integration. There is also greater cooperation – we meet regularly at all levels, at the government and senior officials, and at the working levels.
How will Malaysia be able to compete with China in the coming years?
There are great complementarities between China and the region, and we see great opportunities. Malaysia's trade has grown by a third with China, and with India as well. Malaysia has also done well in being ranked third in the world after India and China in being an outsourcing centre. The global market for this is very significant and growing.
We have never used the exchange rate to gain competitive advantage and Malaysia does not intend to rely on the exchange rate to increase our competitiveness. Our competitiveness has mainly been from our low business costs. And now we have moved into other areas of growth: oil, services, etc, that is, to new areas of competitiveness.
In what circumstance could you envisage a genuine float of the ringgit??
It will always be a managed float. It's a question of degree. A country like Malaysia is very open and highly integrated into the global economy. We are far more open than the US or China. We are at least three times more open than them. We also have a highly liberalised capital account and significant foreign participation in our financial markets. It is very important for us to have our exchange rate reflect the underlying economic and financial developments, and prevent extreme volatility that is highly destablising for our economy.
What issues do you think should be raised by emerging countries at this year's IMF/World Bank meeting?
One particular issue that is always raised by emerging markets is the representation issue. Given that there have been changes in the world economy, more inclusive participation would be desirable, and that includes having a higher number of votes on decision making bodies.