Zeti: Malaysia's fundamentals still intact Wednesday, 21 January 2015 By: NG BEI SHAN

PUTRAJAYA: BANK Negara governor Tan Sri Dr Zeti Akhtar Aziz did not give away any indication that there is going to be a hike in the current overnight policy rate of 3.25%, as it is still accommodative for the country’s economic growth.

She said the country’s fundamentals were still intact and that growth prospects should prevail when external conditions stabilised.

“The economic fundamentals will prevail to reflect the strength of the ringgit,” she said.

According to Zeti, the central BANK has taken prudent macroeconomic measures that included building up the country’s foreign reserves and capping credit growth at a reasonable level “very much earlier on”.

“When we built up our reserves, we were being questioned for building up too much than that were required by a country of our size,” she said.

She added that the country’s optimal level of reserves was “very much lower” compared with TRADES and financial activities.

On the country’s current account surplus, she said: “We will continue to have a surplus in our current account, even though it might be a smaller surplus.”

On top of that, Zeti added, the central bank had introduced cooling measures to contain rapid credit growth when there was a surge in foreign FUND inflows.

As a result, household credit growth had moderated from the peak of 15% in 2010 to 10% currently, she said.

As for the country’s fundamentals, she said a projected gross domestic product (GDP) growth of 4.5% to 5.5% was still considered steady while the 2.5% to 3.5% inflation rate was still very credible.

On top of that, public indebtedness had declined from 52.8% from 54.7%, she noted.

“As we strengthen our position to address our vulnerabilities, this places us in a very positive position because over a period of time when conditions stabilise, our currency and country’s growth prospects will reflect our underlying fundamentals.”

Nonetheless, that did not help with the weakening ringgit, which fell to a near six-year low of 3.607 against the greenback yesterday.

Zeti said volatility in the financial markets was not unseen by the country and that the more developed a country was, the more susceptible it was to external developments such as capital flows.

Some analysts were concerned as foreign investors hold some 40% of Malaysian debt papers and the fear was the ringgit would depreciate significantly should they sell their bonds.

To this, Zeti said short-term investors might have fled from the domestic market but the country had other long-term investors such as pension funds, sovereign wealth funds and other central banks.

“These are more stable investors so we don’t expect an exodus like what was suggested.”

Quoting the example of South Korea during 2009, she said the won had appreciated some 30% to 40% before all the gains were erased due to fund reversals.

In comparison, the ringgit which appreciated by about 12% depreciated at the same rate, implying a lower volatility.

Back in 2009, Malaysia’s foreign reserves fell by US$30bil compared with South Korea’s US$70bil.

She also noted that the country continued to receive foreign direct INVESTMENTS (FDIs) of RM24bil annually as Malaysia was still one of the preferred destinations for FDIs.

“If we should ever have a deficit, we will still have financing in the form of FDIs.”

She assured that the central bank would support the real economic sector as well as keep tabs on the financial MARKET so that it continued to be “orderly”.