BNM Annual Report 2015: Building resilience crucial to face challenges

Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz

BNM Annual Report 2015: Building resilience crucial to face challenges

KUALA LUMPUR: Bank Negara Malaysia (BNM) expects Malaysia to face significant challenges over the medium term and its Governor Tan Sri Dr Zeti Akhtar Aziz calls for continued focus towards building future resilience.

In the foreword to BNM Annual Report 2015 released on Wednesday, she said the building of such resilience was crucial beyond managing the risks to macroeconomic and financial stability arising from external uncertainties.

“At the same time, there is increased urgency for the economy to accelerate its transition to a higher value-added, high-income economy and avoid a slide into a middle-income trap,” she said. 

To achieve this outcome, three vital shifts are necessary:

Firstly, there is a need to step up the private sector-driven shift towards higher productivity and innovation. Also there must be reduced reliance on factor accumulation and low-value production to drive economic growth.

Secondly, the Malaysian economy must to strengthen its integration with the global economy due to the new and changing international landscape. The economy must draw on new areas of comparative advantage and harnessing new sources of opportunity. 

Thirdly, the existing institutional and physical infrastructures must be strengthened to create an enabling environment for a modern economy in this fast-changing environment. 

“Despite the challenges, Malaysia has every potential to transition into a higher value-added, high-income economy going forward,” she said.

To recap, Zeti said 2015 was a year of significant developments with far-reaching implications. The global economy’s recovery has remained modest, amid slowing world trade, moderating growth in the emerging economies and the ongoing concerns on the durability of the economic recovery in the advanced economies. 

She pointed out the changing global policies, with monetary policy normalisation in the US and the continued policy easing in other major economies, and the collapse of energy prices arising from both short-term and structural changes in global supply and demand conditions.

The confluence of these developments has generated large shifts in capital flows and heightened volatility in the international financial markets. 

“In the near term, these developments will continue to unfold and the expectation is for the global environment to remain highly uncertain.

“As we move further into the future, it is important to recognise that the global landscape has changed in fundamental ways and that these conditions will not revert to those experienced in the decades before,” she said.

The challenge to secure more sustainable global growth will increasingly hinge on the efforts across advanced and emerging economies to being better able to adapt to this changed landscape.

Zeti said due to the Malaysian economy’s high degree of openness and the increased integration with the international financial system, the domestic economy is significantly affected by both the global and regional developments. 

Despite the challenges, however, the Malaysian economy has been able to weather the developments in 2015 and sustain a respectable growth. Importantly, the growth prospects for the economy remain. 

The continued strength of our economic fundamentals and a reflection of the structural adjustments and reforms undertaken in the recent decade reflects the resilience that underpins the Malaysian economy.

She said the economy has shifted from over-dependence on exports to develop new domestic sources of growth. This has reduced the reliance of the overall economy on any single source of growth and thus the vulnerability to shocks in any particular industry.

Additionally, growth has become more balanced, anchored by sustained private sector-led domestic demand and reinforced in part by the series of measures implemented in the recent years to rein in excesses and imbalances. 

“The financial system is also a key pillar of Malaysia’s economic strength,” she pointed out. 

While the domestic financial markets and the ringgit exchange rate were affected by the large shifts in capital flows, the more resilient and developed financial system, together with the continued high level of international reserves and the manageable level of external indebtedness, have strengthened the capacity of the economy to cope with the external shocks. It has ensured that financial intermediation has remained uninterrupted. 

The Malaysian economy continued to be in a period of adjustment, with the ongoing implementation of fiscal reforms. These reforms are crucial and have a vital role in supporting the sustainable growth of the economy. 

In the interim, however, these domestic adjustments, alongside the impact of the weaker ringgit exchange rate, have affected the cost of living for households, particularly for the lower-income segment. 

“But as they are being introduced in an environment of lower global commodity prices and generally subdued global inflation, the expectation is for the overall inflation to remain manageable,” Zeti said.