Not ready to liberalise the ringgit yet
In a radio interview last week, Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz told BFM the central bank is looking at the ringgit’s liberalisation as a matter of course and is also on the watchout for possible instances of corruption in the financial circles. Below are extracts from the BFM interview
Tuesday, March 06, 2012 - 12:29
A: The final question left is the internationalisation of the ringgit and everyone always asks: when are we going to venture to lift that rule?
We have said again and again, and also in our blueprint that we have launched recently in December for the development of our financial sector, that we want to see our foreign exchange market become more well developed and the volume of activity increase and the range of products and services being offered in that market also to increase.
Until then, we don’t want a situation where — when we internationalise the currency — the foreign exchange currency migrates to other countries and this will increase our vulnerability to the experience that we have seen recently previously during the Asian Financial Crisis and in other parts of the world.
Then of course we want to put in place the surveillence mechanism, which is more or less being put into place now, so we can see the inflows and outflows in and out of the country almost near real time and we won’t overreact when we see surges of inflows or massive reversals.
We can take this in our stride, first of all because our financial system is more developed and the implications of this phenomenon is spread out through the financial system rather than concentrated and highly destabilising.
More or less, that part is in place so that we have a surveillence mechanism and we know exactly what is happening at near real time. And now, it is a matter of developing further and we have a chapter on that in our blueprint on how we’re going to take forward the development of our exchange market.
So, in a year or two, we’ll be ready to internationalise the ringgit?
Well the other thing is about the timing, one never undertakes these kind of major policies during unstable times.
And now, the unstable times precipitated mainly by the soveriegn debt crisis in Europe is causing tremendous volatility in financial markets worldwide. It would not be timely and it all depends on whether conditions stabilise and that we have our own domestic preconditions in place.
Do you expect we’ll see the worst soon to be over for the eurozone debt crisis or will it snowball to other countries?
We don’t envisage it will snowball to other countries but essentially, it remains uncertain as to how it will be resolved. To an extent, some of the new initiatives that were announced recently are positive but there are several structural issues that need to be addressed and that remains to be seen.
China’s authorities have indicated that they are looking to liberalise their financial sector, they want to do some currency reforms and they say they may want to make the yuan more tradeable. So would China’s move see Malaysia allow the ringgit to be freely floated sooner rather than later?
We observe the developments around us but we are very focused because we know what the risk to our system is and we want to be well-positioned to be able to manage those risks.
It is very important for us that whatever happens in other parts of the world, including China, that if we do not have a well-developed foreign exchange market, it would not be ideal for us to internationalise our currency at that stage.
If say we were able to internationalise the currency, would Bank Negara continue to intervene to ensure the ringgit trades within a certain band against the US dollar?
We don’t have any band in managing our currency, we don’t have any target level that we want to achieve. We have only one objective and it’s part of our mandate — orderly market conditions. And we don’t monitor our currency against another single currency but we monitor it against a basket of currencies.
We cannot of course see highly-destablising conditions or very excessive movements in one particular day. The final outcome is that the foreign exchange market and the foreign exchange rate must be able to facilitate greater trade and investment.
When you say orderly management, it does sound like there will be some form of intervention just to make it sure it stays within a certain band.
We are not a country that has any band. After all, our currency did appreciate from 380 (against the US dollar) all the way to about 313 and when there was this deleveraging after the recent global collapse, then we saw the ringgit as a result of the deleveraging go all the way to 370 and we were not the worst affected.
In fact, in Korea, the adjustment was more significant because their markets are larger and therefore they were more affected by the inflows and subsequent reversals. So, this can happen and we didn’t stand in the way in the appreciation and then the depreciation but we were there to ensure that it happened in an orderly manner.
Recently the national fatwa council ruled that forex trading is haram because it is speculative. It has since specified that it is halal if you do it through a licensed institution. How closely does Bank Negara work with the fatwa council?
They engage with our institution, and yes, they engage with our Syariah council. It was just a matter of communications and so all that’s been resolved now.
It was very unfortunate the media drew that conclusion. And so, they were referring to illegal activities and not the regular foreign exchange transactions, whether it is through the banking system or through money changers.
On corporate governance, Bank Negara Malaysia is obviously seen as very highly strict on this issue, one of your assistant governors was charged for accepting bribes mounting to about RM100,000 to help a company secure the contract to print the RM5 notes. What steps have the central bank taken since then to tighten these procedures?
This case is still going through the courts but I have to tell you that the process is at many levels.
First at the technical level to see whether entities who bid for contracts for currency are eligible to bid and so there’s that technical group.
Then subsequently, there’s an evaluation made by another team and decisions are made by a committee.
So, no one individual can make a decision in favour of one currency printer over another. It subsequently goes up to our board that finally approves it. And these are all extensively discussed and it is a very rigourous process.
When the envelopes of the bids are opened, the auditors, the risk management chief and so on are present to witness it so that there are no improprieties or irregularities. But of course, we cannot prevent any member of our staff.
We continually highlight that if you are a central banker, you have to be whiter than white and so on and to have the higher standards of integrity.
We have had from time to time taken action against those who are involved in irregular practices and it can even be somebody who had forged a medical certificate for example, and the penalty can be outright dismissal. There’s no consideration, we take the highest action taken against any irregular practice.
We’ll collaborate with all the other agencies like the Malaysian Anti-Corruption Commission, Special Branch and the police on this.
The subsequent parts of this BFM interview transcript will be run over the next few days.