Thursday, March 27, 2014

Our regulators have done well

The 1997 Asian financial crisis had hit Malaysia badly. It was the setting that led to capital controls and the Malaysian ringgit being pegged to the US dollar. The then leadership under Prime Minister Tun Dr Mahathir Mohamad was at the receiving end of bad press internationally.

A decade later came the global financial crisis. Large financial institutions, including names that you never thought would go under, were on the verge of total collapse. The allpowerful US was busy bailing out banks. Stock market around the world went into a tailspin. Nations were in a crisis mode to ensure their financial systems remained aloft.

Major central banks took unprecedented policy interventions, including reducing policy interest rates close to zero.

They also injected huge amounts of liquidity through the so-called quantitative easing (QE). The developments saw massive capital flow into Malaysia and other emerging markets. The money was in search of better returns. It is estimated that Malaysia received some US$47 billion (RM154.07 billion) in capital in the four years since US began its QE.

Then, in May 2013, hints emerged that US was ready to unwind QE. The QE tapering led to sudden and massive flow of funds out of emerging markets.

Malaysia was not spared. “These capital flows far exceed what we saw during the Asian financial crisis. It’s huge and massive,” said a central bank official.
If the nation’s financial landscape is ill-prepared, you can expect a repeat of the 1997 style crisis. But no such thing took place. The financial markets were jittery, but the overall mood was calm and collected. All systems held on to its place.
“Despite the increased capital flow volatility during the recent months, the domestic financial markets have remained orderly, and financial intermediation has not experienced any disruptions. This is largely from the payoffs from the decade of reforms to develop a more resilient domestic financial system,” says Bank Negara Malaysia (BNM) govenor Tan Sri Dr Zeti Akhtar Aziz in her statement in the just-released 2013 annual report for the central bank.

Despite the increase in the size and volatility of capital outflows since May 2013, the BNM annual report noted that adjustments in the domestic currency and financial markets were orderly. The report outlined some reasons as what led to spillovers to the real economy. It stated: managed float exchange rate system accorded flexibility for the ringgit exchange rate to facilitate adjustments; depth of the financial system ensured that these volatile flows were intermediated without causing disruptions to economic activity; and growing demand from the domestic institutional investors provided the underlying support to the bond market and contained the increase in borrowing costs that were benchmarked against the bond yields.

So, the central bank has done well to ensure a robust financial system is at work for Malaysia. Earlier banking reforms and continued close supervision have resulted in the banking sector remaining on a strong footing.

The other contributing factor would be the well developed and diversified capital markets. In Securities Commission (SC) annual report for 2013, the capital markets regulator had observed that the nation’s bond market was “resilient” to volatile international capital flows.

“The depth of the market provided an absorptive capacity for portfolios to be rebalanced across maturities in an orderly manner. Hence, Malaysia was not significantly affected by the retreat of foreign portfolio funds which other emerging bond markets experienced during the second-half of the year,” said SC chairman Datuk Ranjit Ajit Singh in the report.

At RM1 trillion, Malaysia’s bond market is the third-largest in Asia relative to the size of the economy, even larger than neighbouring Singapore.

Still, one cannot afford to let their guards down. The BNM annual report did note that “policymakers must remain vigilant in managing any perception of domestic vulnerabilities, which could unduly exacerbate the volatility in the financial markets”.