Highlight BNM more cautious about economy

by **Cals** Thu 20 Mar 2014, 09:58

Highlight BNM more cautious about economy

Business & Markets 2014

Written by Charles Yong of theedgemalaysia.com

Thursday, 20 March 2014 09:02

KUALA LUMPUR: Bank Negara Malaysia (BNM), which had earlier projected economic growth this year at 5% to 5.5%, has broadened the range to 4.5% to 5.5% to reflect heightened global uncertainties.

Governor Tan Sri Dr Zeti Akhtar Aziz said while the recovery in the global economy is positive and very encouraging at the moment, the central bank is not ruling out a slowdown in view of these global uncertainties.

“Key risks include the continued fiscal uncertainty in the advanced economies, financial imbalances in both the advanced and emerging economies, and risks from the global monetary policy normalisation that we expect to take place.

“This is important because it could potentially destabilise capital flows, in particular to emerging markets, and this would result in volatile financial markets,” Zeti told a press conference yesterday in conjunction with the release of the central bank’s 2013 annual report.

Zeti said if this slowdown were to happen, Malaysia’s economic growth would be closer to where it is now. The economy grew by 4.7% in 2013.

Zeti forecasts inflation will range from 3% to 4% in 2014, higher than the historical average of 3%. She said the inflation rate would be closer to 4% if further subsidy reduction takes effect.

Zeti said macroprudential measures have already shown results in controlling household indebtedness.

“Right now we believe that the macroprudential measures are beginning to take effect. We’re already seeing the moderation taking place for a number of years now. So I believe that we will just monitor.

“And [we will monitor] the quality of the loans as well. The impairment ratio, which is the non-performing loan ratio, is less than 2%, so it’s very low.”

Growth in credit to households moderated to 11.7% last year compared with 13.5% in 2012.

On the current account surplus, which BNM expects to narrow to 3% of gross national income from 3.9% last year, Zeti said the central bank is “not very concerned at this point in time” as it knows what accounts for the trend.

“Investment activity and the export sector having intermediate needs explain the increase in imports … Going forward, some of these investments are going to have large one-off import items, and therefore we could, for a certain period, even have a deficit. But we are not concerned because it is not a fundamental trend.

“In the meantime, we focus our activity on improving our export performance and better managing the projects so that they do not have all the imports coming in at the same time. So we anticipate that at least in the next two years, we will have a positive balance of payments and current account position.”

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Zeti: The role of the central bank is to ensure that the market remains orderly. We do not try to influence the underlying trend because this will eventually reflect our underlying fundamentals. Our purpose is to make sure that our underlying fundamentals remain strong.

Zeti said fundamentals — such as a current account surplus, high foreign reserves, a steady growth path and relatively low external indebtedness (about 30% of gross domestic product [GDP]) — will lend support to the local currency. However, on a day-to-day basis, there will be volatile inflows and outflows.

“The role of the central bank is to ensure that the market remains orderly. We do not try to influence the underlying trend because this will eventually reflect our underlying fundamentals. Our purpose is to make sure that our underlying fundamentals remain strong.”

The central bank governor said Malaysia is in a better position to weather a global financial crisis as it has become more domestic-oriented and the financial system has become more resilient with well-capitalised and larger banks following the Asian financial crisis of the late 1990s.

She said BNM now has at its disposal a wider range of powers and instruments to address risks from non-bank sectors. It also has in place a crisis management framework and a regional surveillance mechanism that has been “strengthened immensely”. The bond market has also deepened to account for 108% of GDP from 35% in 1997.

This article first appeared in The Edge Financial Daily, on March 20, 2014.