Bank Negara Malaysia is big on communication. Barely a day goes by without a statement from the central bank in the Malaysian media. Governor Tan Sri Dr Zeti Akhtar Aziz says this was a key lesson the bank learned from the Asian financial crisis of the late 1990s, and is essential to dealing with the current one.
Following the 1997 crisis, Malaysia imposed capital controls and sparked negative sentiment in the market. Ms Zeti believes it was because Bank Negara failed to inform people about what was happening and to communicate the bank's strategy. When, in 1999, the Malaysian government wanted to do a bond deal, Bank Negara had the tricky task of turning that sentiment around – at the same time that Brazil's devaluation was hitting all emerging market spreads.
Turning point
"I did 26 meetings across the US in 10 days," says Ms Zeti. "Latin America's problems led to a bias towards tightening, but we told our story and we shifted negative sentiment to positive; the bond deal was 3.5x oversubscribed. This was a turning point for us; and a big lesson for the bank. You have to stay engaged with the private sector and the international community."
To ensure everyone understands how Bank Negara is dealing with the current crisis, it has weekly meetings with manufacturers, exporters, analysts, financial institutions and the international community. "We don't wait to react after the fact," says Ms Zeti.
Today, the Malaysian economy and financial system are barely recognisable, largely thanks to the building blocks put in place after 1997 to ensure that the country would never again be as vulnerable to currency speculation. As part of a 10-year plan instituted by Ms Zeti in 2001, the once bank-dominated financial system has been replaced with a more diversified financial sector, with a full range of products and one of the most well-developed bond markets in Asia. A highly controlled regulatory environment has been replaced with a deregulated, principles-based system.
It is a much more liberalised system, with much greater foreign participation and many of the practices common in western markets, such as the flexible remuneration packages currently in the line of fire in London and New York. "It is ironic that we recently moved to a flexible approach [to remuneration] because we didn't want the Malaysian financial industry to lose out in securing the right talent," says Ms Zeti.
But as other, more troubled financial sectors contemplate tougher controls over their financial sectors, Malaysia plans to continue liberalisation. "Our financial system needs to evolve further," says Ms Zeti. A blueprint will be announced in the coming weeks, but in broad terms, it means greater foreign participation and Malaysian institutions operating abroad, she says.
Crucial to managing greater liberalisation is the new Central Bank Act, which Ms Zeti hopes will be passed this year. While not a response to the crisis – it has been in the pipeline for about two years – the current situation has highlighted the necessity for many of the changes it will bring. It sets out the bank's mandate more clearly and institutionalises many of the governance practices that it has put in place, guaranteeing sufficient checks and balances.
As importantly, says Ms Zeti, it will clarify how the bank should deal with a 21st-century financial landscape. "The current Central Bank Act is 50 years old; it needed updating. [The act] will empower the bank to deal with a new environment, such as non-regulated institutions that have systemic implications," she says.
With a eye on the confusion that has hit both US and the UK regulatory regimes, the new act lays out what Bank Negara is responsible for in cases where it shares regulation of institutions such as investment banks with the Securities Commission. "There are clear lines of accountability," says Ms Zeti. "The central bank supervises the prudential aspects while the Securities Commission looks at market activities."
Direct approach
Bank Negara is dealing with the impact of the current slowdown on Malaysia's economy directly. It has set up the Credit Guarantee Corporation to restructure the debt of small to medium-sized enterprises, and in the retail sector, it has introduced a credit counselling and debt management agency, which has offices all over the country.
Thus far, Ms Zeti does not see the need for a "too low" interest rate environment. She says credit channels are still working and that while demand has slowed, Malaysian banks, which have "ample liquidity", had still seen loan growth. As testament to the power of communication, Malaysian banks were persuaded not to stop lending. "In October [last year] there was evidence of some cautiousness by the banks and there was a drop in lending," says Ms Zeti. "We engaged with the banks, talked about the economy, and they have responded."
