Zeti leads pack to offer 'wiggle room' on rates

Tan Sri Dr Zeti Akhtar Aziz, 25-year veteran of Malaysia’s central bank, is used to being told she’s wrong.

It was Zeti who announced in the 1998 Asian financial crisis Malaysia was implementing capital controls, drawing the ire of the International Monetary Fund. It was Zeti who 10 years later resisted calls to raise borrowing costs just before the global economic slump. Now, she and her associates at Bank Negara Malaysia have done it again.

Zeti, 62, boosted interest rates this month to avert “imbalances” like asset bubbles, she said in a March 12 interview, moving before most Asian central banks, from China to Indonesia. The decision reflected a recovery that’s “firmly” established, according to the bank, which presents annual economic projections today.

The payoff: the earlier move may help limit the extent of rate increases needed to keep prices stable, according to Venkatraman Anantha-Nageswaran, the global chief investment officer of Julius Baer & Co.



“Bank Negara had been accused of being lax on inflation and behind the curve, especially in 2008 when Zeti didn’t tighten, but eventually she was proven right,” said Singapore-based Anantha-Nageswaran, who helps manage about US$142 billion in assets and says he’s not a buyer of Malaysian bonds. “They didn’t hesitate to tighten now and that’ll give them more wiggle room in the future.”

Early Riser

Malaysia is once again a standout. While the Reserve Bank of India followed with a March 19 rate increase, it only did so after its benchmark inflation gauge approached 10 per cent, compared with Malaysia’s measure at less than 2 perc ent.

China’s central bank hasn’t increased borrowing costs since December 2007, even as consumer prices jumped 2.7 per cent in February from a year earlier and exports rose 46 per cent. Indonesia, Thailand, South Korea and the Philippines left rates unchanged at meetings this month. Only Vietnam raised rates last year to combat inflation.

Central banks “absolutely everywhere” in Asia are “behind the curve” in fighting inflation, save for Malaysia, DBS Bank Ltd. economist David Carbon said in a March 18 report, before India’s move.

A strengthening economy will prompt Malaysia’s central bank to raise interest rates by another quarter percentage point to 2.5 per cent on May 13, according to Standard Chartered Bank, HSBC Holdings Plc and Barclays Plc. Zeti has said the central bank will further “normalize” rates if necessary.

‘Lonely Job’

The Malaysian central banker says hers is a “lonely job” that requires “nerves of steel.”

She was criticized by some economists for not joining neighbors in increasing borrowing costs in 2008 as domestic inflation accelerated to the fastest in a quarter century. In July 2008, Lye Thim Loong, a fund manager at Avenue Invest Bhd in Kuala Lumpur, said Malaysia risked falling behind in fighting price gains.

Bank Negara kept its overnight policy rate unchanged at 3.5 per cent for 20 consecutive meetings from May 2006 to October 2008. In contrast, Bank Indonesia cut or raised borrowing costs 20 times in the same period. As the global financial crisis unfolded, Zeti reduced the benchmark to a record-low 2 per cent, holding it there for a year before raising it to 2.25 per cent on March 4.

Journalist Mother

The first Malaysian woman to become central bank governor, Zeti is the only child of Malaysian Royal Professor Ungku Abdul Aziz Ungku Abdul Hamid and Sharifah Azah Mohamed Alsagoff, founder of the Women Journalist Association of Malaysia.

She obtained a doctorate in economics from the University of Pennsylvania in 1978, with a thesis focusing on international capital flows and its implications for macroeconomic policies. That knowledge was put to the test two decades later.

She was assistant governor responsible for economics, reserves management, money market and foreign exchange operations when Thailand devalued the baht on July 2, 1997, setting off a plunge in regional currencies. The ringgit fell 89 per cent in the next six months, dropping to 4.77 against the dollar.

Casting Blame

Prime Minister Tun Mahathir Mohamad blamed the ringgit’s slide on investors, including billionaire financier George Soros, whom Mahathir labeled a “moron” who was trying to destroy growth through speculative attacks on the currency.

“Very often, I sat in the dealing room from early in the morning to the early hours when New York closed because the speculative attacks came from all directions,” Zeti said.

Zeti became Acting Governor on Sept. 1, 1998 after Mahathir ousted one of her predecessors, who disagreed with the prime minister’s plans to impose capital controls. On her first day, she announced that Malaysia would set limits on foreign-exchange transactions, trapping an estimated US$18 billion of foreign capital for at least a year.

The next day, Malaysia fixed the ringgit at 3.8 to the dollar, a peg that would remain for almost seven years until Mahathir’s successor, Tun Abdullah Ahmad Badawi, ended it on July 21, 2005. Since then, the ringgit has climbed 14 per cent to 3.3205 against the US. currency, though the ban on offshore trading of the ringgit remains.

‘Heavy Handed’

The government “was pretty heavy handed,” said William Pitman, a partner at St. James’s Place Partnership in London who was director of investment at Henderson Investors Singapore Ltd in 1998. At the time, he said Malaysia’s controls sacrificed its long-term economic goals for “political expediency.”

Advocates of free markets abandoned their positions when “their home economies were called on to take the same medicine,” Pitman said. At the same time, he also said “I do remember Zeti being an honest and impressive figure.”

“In Malaysia’s case, the market players only tried to show that ‘the king is naked,’” said Flavio Cirio, a proprietary commodity trader at Banca Monte dei Paschi in Siena, Italy, who traded Asian financial futures and options during the 1990s. “It’s also happening now with Greece as their finances get out of control. You have to examine yourself first, not too quick to stick the blame on the market,” he said, referring to the sell-off of Greek debt in recent months.

IMF’s Call

The IMF called Malaysia’s response “a step back.” Years later, the Washington-based lender that pushed spending cuts and rate increases in countries from South Korea to Indonesia as a condition for aid changed its tune.

In February this year, the IMF released a study saying limits on capital flows are a “legitimate” tool in some cases for governments facing surges in investment that threaten to destabilize their economies.

“Zeti was subjected to extraordinary criticism but she stood up to them when she supported the need for capital controls,” said Nobel laureate Joseph Stiglitz, now a professor at Columbia University in New York. “It takes not just intellectual independence but also a kind of bravery to stand up for what you believe.”

Taking Charge

Zeti continued to oversee Malaysia’s capital controls as deputy governor after Ali Abul Hassan Sulaiman was made the Bank Negara head in September 1998. She took the bank’s helm in May 2000, becoming one of Malaysia’s two most senior female officials since the nation’s independence in 1957.

Zeti is the only governor to rise through the bank’s ranks rather than be appointed from outside. She has said she regards as a mentor former Bank of England Governor Edward George, who steered his bank into a new era of independence in the 1990s.

Zeti is treading a similar path. Amendments to Malaysia’s central bank act last year gave autonomy to the rate-setting Monetary Policy Committee. It also gave the central bank more governance, regulation and surveillance over the financial industry to ensure stability.

Strengthening the central bank “allows us to stand on solid ground so that every night we can go back and sleep well and know that we have what it takes” to deal with emergencies, Zeti said. “The world has changed.” -- Bloomberg