Exclusive Malaysia better prepared for capital outflows, says Bank Negara

by **Cals** Mon 30 Dec 2013, 14:50

Exclusive Malaysia better prepared for capital outflows, says Bank Negara

Business & Markets 2013

Written by Jonathan Gan at theedgemalaysia.com

Monday, 30 December 2013 13:19

KUALA LUMPUR (Dec 30): Malaysia is better prepared for potential capital outflows as US policy makers reduce their quantitative easing (QE) measures, according to Bank Negara Malaysia (BNM).

In an emailed reply to queries by the theedgemalaysia.com, BNM said "Malaysia is better positioned to manage the volatility from capital inflows and now their potential reversal". This is due to structural changes, reforms and policies implemented over several years.

"Our economy is now more diversified and more resilient, the financial system is stronger, and we have greater policy flexibility. The Malaysian economy is now more balanced with diverse sources of growth. Domestic demand has become an important driver of growth.

"This has enabled us to withstand adverse external developments. The services sector also has a greater role in the economy. Continuous and comprehensive efforts are now being implemented to transform the economy aimed at raising the level of and the pace of innovation to enhance the potential of the economy and hence its resilience," BNM said.

BNM's reply is in response to queries on the effects of the US planned QE reduction on Malaysian financial markets.

The US Federal Reserve said on December 18 this year that it plans to reduce its $85 billion a month bond purchases by US$10 billion to U$75 billion. The new policy starts on January 1, 2014.

Malaysia had seen capital outflows in anticipation of the news.

A note by AmResearch indicates that BNM's international reserves amounted to US$135.3 billion (RM440.8 billion) as of December 13, 2013.

This represents a 0.7% drop from the end of November this year.

The drop is attributed to the outflow of short-term funds during the 1H of December, resulting in a weakening of the ringgit versus the US dollar.

The ringgit has weakened to RM3.2937 today compared to RM2.9625 in May this year due to capital outflows.

According to BNM, the US' QE reduction comes at a time when the global economic backdrop is improving.

BNM said global central banks' market mechanisms will help facilitate orderly currency and financial market adjustments as the reduction takes place.

In Malaysia, BNM said the presence of domestic institutional players also offers stabilising support to financial markets during capital-flow reversals.

BNM said “the increased financial market volatility is expected to be transitory".

“Fundamentals will eventually prevail” it said.

BNM is also mindful of domestic household debt and rising asset prices.

The central bank said macro-prudential measures related to the property market and household indebtedness including lower loan-to-value ratios and higher real property gains tax have resulted in stabilising trends in these sectors.

"Fiscal reforms are also on-going, including subsidy rationalisation and shifting from a blanket subsidy system to a more targeted one, to strengthen public finances and to ensure fiscal sustainability," BNM said.

With regards to the local financial sector, BNM said that the banking system is well capitalised with strong buffers.

BNM said so far, financial intermediation has not been disrupted during the currrent global financial crisis.

"There has been continued access to financing. Also important, is that almost 40% of the loans to businesses are channelled to SMEs," BNM said.