Following is the transcript of a CNBC exclusive interview with the Zeti Akhtar Aziz, Governor of Bank Negara Malaysia at the Asian Financial Forum, conducted in Hong Kong.
All references must be sourced to a "CNBC Exclusive Interview"
Interviewed by Bernie Lo, Anchor, CNBC
Bernie: I thought this year was going to be better than last year, but boy, we have had a heck of a year and it is only three weeks old (laughs). What do you think is going on this year? Did China start it? Or was that just one small piece of a bigger problem?
Zeti: I think it is many developments taking place, and all at the same time. First you have got the change in direction of policy by the Federal Reserve Bank, the normalisation of its policies. Secondly you've got the collapse of the oil prices and then you've got geopolitical developments as well. So these are some of the developments that have implications on financial markets and of course China, the developments in China, the slowing of the economy. Developments in their financial markets have affected global financial system markets, and expectations and sentiment by the financial markets investors.
Bernie: As a long time central banker, you are much more experienced than a lot of the people do in central banking in many parts of the region. Do you see mistakes that they are making? For instance, China has come under a lot of criticism for things, like circuit breakers and trying to micromanage investments in the stock market... That's trying to do a lot of things at the same time, none of it working...
Zeti: I am not sure you can draw that conclusion. First of all, China is in a period of transition, because it is rebalancing its economy and it has been very much investment driven, it has to be more consumption driven. We know in Malaysia because we were also, when we had the Asian financial crisis, we had investment at 42 per cent of GDP, same as what China is having, and we had to rein in these excesses and we had to rein in excess credit growth. So we did this and there is a cost to growth but as a result, Malaysia has now a more diversified economic structure. Our growth is determined by domestic demand driven and mostly by consumption demand, and therefore this creates the foundation for future growth, more stable future growth. So China is doing the right thing on that front, and yes in the financial markets, I think there is overreaction by the markets on some of these developments. It perhaps could have been done better, some of the measures taken, but the objective of the measures was to restore stability in the financial markets. It's just that the markets do not appreciate this at a time of great uncertainty.
Bernie: You were at the central bank at the time when you put in place what was then seen as a very controversial move. It was the late 90s and capital flight was rampant throughout Asia, and Malaysia stood alone and put in capital controls pegged the ringgit to the dollar, much to the horror of the IMF and other international agencies. Fast forward and years later, the administration got kudos for actually doing the right thing at the right time and it actually worked for Malaysia. There has got to be a lesson in there somewhere for what China is going through...
Zeti: I am not sure that kind of lesson is important, but what is important is if you use those kind of measures, it has to be under extreme conditions. It was extreme conditions for us because we had wave after wave of capital flight by foreigners. We did not have domestic capital flight at that time so when we introduced this measure, it was like a circuit breaker and it just afforded us that period of time for 12 months to restore stability, and bring about an economic recovery and restructure our banking sector so that it would continue to function. So the lesson was, because I have been told by Nobel Laureates who said that Malaysia didn't need to do these extreme measures because we recovered about the same time the others in the region did, but there was one significant difference, that were covered at the lowest cost. Lowest cost to taxpayers, lowest cost in terms of labor dislocation and generally to our economic investors in our economy. After one year, those control were lifted, so it was a temporary measure so how you use it and how you implement it will be very important.
Bernie: When you put those measures in place though the structure of Bank Negara Malaysia was different. This was at a time when the bank did not have the independence which you instituted years later. If today's structure was in place back in the late 90s, will the same decisions and conclusions have come to pass?
Zeti: I think it would because a lot of people don't understand. The idea actually of imposing these measures was extensively discussed for many many months, and what was proposed was wide-ranging measures on capital flows. But actually what was implemented was a very small subset of what was being proposed and it was very targeted. When we presented it to economic leadership we said what is it that you really want to achieve,we have to know what is the objective. Is it on the private sector taking out monies? And the answer is no because the amount that was taken out was very small. Is it the speculators? The answer is yes, it was the speculators and they were dealing with billions and therefore the control measures which they are now known as capital flow management they were actually very very targeted and therefore not wide ranging. So the bank did have a very important role in deciding what actually was going to be implemented. It is the engagement that we have with the leadership to come to a conclusion what objective we wanted to achieve, and how what were the risks associated with it, and how to effectively implement it.
Bernie: Dr Zeti do you still call or get called by Dr Mahathir? You don't stay in touch?
Zeti: No, I don't. There was one time when he was talking about re-pegging the currency. We did have a discussion and I said that we have moved on from that time and it was very key to have flexibility in our exchange rate because if not other practice would just adjust, you know first of all demand or prices or exchange rate in actuality you need all three to adjust. If you over rely on one or the other to make the adjustment it would be highly disruptive and he agreed, so he didn't make such comments anymore on the exchange rate.
Bernie: He agreed?
Zeti: He is actually a very rational person when you present the case as when we had implemented the controls, that it was not necessary to do the wide ranging controls and that we needed to just focus on where we expected to produce the kind of results that we needed, and he agreed at that point.
Bernie: He was pragmatic about this?
Zeti: He was very pragmatic.
Bernie: Let's fast forward to today. The country, the economy, the currency have been overtaken by a lot of external events frankly, and internally you know perception, issues that are clearly out of the central bank's control. If I had to sum it up into one acronym -- 1MDB-- has done a lot of damage to the image of Malaysia. Parts of the press that normally wouldn't even write about Malaysia have followed this story that still is not resolved about 1MDB. From your viewpoint, how has the country suffered and what is the next step, what is the resolution? If there is one...
Zeti: Well, of course there was an investigation by different agencies on different aspects of this entity, and on the part of the bank we have completed our investigations. Now there is some enforcement actions being taken and when these are finalised, it will be made known as to what the outcome. But of course we are not the only investigating authority, there are others, so it is on-going and everyone wants a conclusion to it so that we can just move on and so that the currency will better reflect our fundamentals and we can deal with the other economic issues that the country is being confronted with.
Bernie: And it is not..it is no longer simply, exclusively, an internal investigation. It's gone quite global with many jurisdictions actually looking into this as well. I mean do you have any fears about what may happen and in the end? Most likely it is going to come after the end of your tenure I believe in April..
Zeti: I'm hoping that it can be all concluded by then so that I can hand over a clean slate to the next governor. Well, I did make a statement much earlier saying that this issue is..funds that move the money trail is followed throughout the world... and agreements have been signed between regulators around the world on anti-money laundering and so on. Therefore there is no way that there can be any (pause) funds will come to be known where they went and where they came from.
Bernie: 1MDB is not new but it is only in recent times that it's arrived in the headline for a lot of the wrong reasons. When the bad press started to happen, what went through your mind? What was your reaction?
Zeti: Well, first of all I have to tell you that we do monitor any highly leveraged entity. Any entity in Malaysia that has borrowed more than 2 billion will be on our watch list. So we have always watched and monitored this company but only when we were informed of some potential irregularities being practised that investigations commenced.
Bernie: The collateral damage has been quite apparent as well. All three major rating agencies have country still in investment grade but at the bottom, and the currency is now much weaker than it was during those years of capital controls.
Zeti: But this is as a result of cumulative factors. First, the anticipation of normalisation of the interest rates in the United States and this affected most emerging economies, so it is not unique to Malaysia. Then the drop and collapse in commodity and energy prices. This again is not unique to Malaysia and it was perceived that Malaysia would be very badly affected because we are an oil producing economy. However, we have restructured our economy in the sense that we have diversified the economic structure to be in manufacturing and services. Those two sectors account for 80 per cent of our economy. Then to be fair to the government, they have implemented fiscal reforms rationalisation of subsidies and the implementation of the GST. So the dependence on oil revenue has been reduced from more than 40 per cent to about 20 per cent and the deficit has been reduced over the years from six per cent fiscal deficit to 3.2 per cent. So within this we have reduced our dependence on the energy as an economic sector significantly in terms of the economic structure, in terms of employment, in terms of fiscal revenue. But the market hasn't wised up to this and therefore we have the perception, every time when there is a recovery in oil prices, the currency actually appreciates. So there is that link to the currency, and of course any domestic uncertainty or political tensions, all these contribute to it so what we all want to see is a quick conclusion to this whole matter.
Bernie: I kind of wonder if the world really understands how Malaysia's economy has evolved, they seem to think of oil as oil, period. Oil that the Saudis and the Iranians produce is very different because you have .. actually you have many different types of oil (Zeti: Exactly, exactly) including a lot of edible oil. It is edible oil manufacturer in the world but it is a fact that seems to be lost in the markets something that Malaysia doesn't get rewarded for..
Zeti: We are not as good as to articulate to investors and the world at large, that they should appreciate the economic restructuring that we have undertaken to better place us in domestic demand. We used to be an export-led economy in the 1990s but (we're) no longer so, it is driven by domestic demand for more than a decade that saved us. This is why we have five to six per cent growth even in the aftermath of the global financial crisis, it is because even though our trade contracted but domestic demand drove our growth, we have at least a five per cent growth.
Bernie: Why is the story not better told, certainly that is not the domain of the central bank, is there something missing? Is there some PR department that is missing the message? Or not making sure that it is you know registered with the rest of the world?
Zeti: Well I believe we make every effort to do so, including from the central bank, but another factor is we are a country that hasn't really borrowed significantly from the international capital markets and because when you raise funds then you go for roadshows and then you get better known. This is exactly what we did that turned the tide for Malaysia for the Asian crisis because as you mentioned the whole world is sort of turned against us when we implemented those extreme measures. But in May of 1999, which is just almost less than a year later, we decided to raise funds and we went on a road show around the world. I was in the team that went to the U.S. from coast to coast we had 26 meetings in 10 days and we were able to raise funds even under unstable market conditions, because developments while we were on the roadshow, there were developments in Argentina and Greenspan announced the bias towards tightening, spread started to widen but we proceeded with this and our issuance despite being brought down by two notches by rating agencies it was over-subscribed and the pricing was within the range that we wanted to see. So at that time when you really tell your story directly to the markets, there is a major economic payoff and I guess we haven't done that and that is why we are less known.
Bernie: When you are overseas, when you meet with potential industrial governance, do you still have a lot of questions about the whole what happened to the democratic movement? What happened to Anwar Ibrahim, where is he, how is he doing? Do you get questions like that which are normally not questions for the governor of the central bank to answer I might add...
Zeti: Well, there is not very much to what I can add to what they read in the press, but yes they do ask questions on Malaysia.
Bernie: What are you telling them? What do you try to impress upon them?
Zeti: Well, that there is a political process and that we have to let this political process roll out.
Bernie: It's not my purpose at all to dig up you know dirt from local press or fabricate things that don't exist, but there is no lack of the press about a how should I say, a challenging relationship between yourself and the prime minister...
Zeti: Well I would like to say that so far the central bank has maintained its independence and actually this current leadership was the one that supported our legislation a new central banking legislation in 2009. After 50 years of existence we wrote our central banking act. In that very act, many quoters had reservations on it but we received the support and it was tabled in parliament and that act legislates our independence, and to me that was particularly important. I would like to (think) that we always had this independence but I want to see it legislated for the future generation of central bankers in Malaysia. We were successful in legislating that independence and on top of it, we also legislated wide ranging powers which made some people question that the central bank was becoming too powerful in fact, but within that legislation we also legislated the accountability and the governance process and the transparency so that the central bank would never abuse its powers. So (pause) that is the relationship that we have with the government, it is a professional relationship and as an emerging market central bank we have a role in also performing other functions that some central banks in the developed world don't have, that relates to achieving some social objectives like financial inclusion and supporting small businesses and so on.
Bernie: The ability of Bank Negara Malaysia to stand alone, to be independent is enshrined, and you feel comfortable that you leave office in April knowing that this institution is protected, nobody can undo a lot of the work that you oversaw during your tenure. Is that correct?
Zeti: Yes that is correct but because I spend a lot of time and attention on instituting that legislation in particular but others as well during my term in office we have enacted more than 10 pieces of legislation for the financial sector and this gives certainty and predictability. Then there is a governance process was also instituted in the decision making process, and even the selection of the new governor will go through a governance committee of the board made up of private sector individuals.
Bernie: The front runner seems to be Muhammad Ibrahim. Is that a done deal, a forgone conclusion? Or is nothing ever done until it is done, with things of this matter?
Zeti: Of this matter, nothing is done until the King, the Agong, gives the royal assent.
Bernie: When you retire i think that's 30 years?
Zeti: I have been 35 years with the central bank and 16 years as governor. That is quite a long marathon that I have run and it has been some parts of the run through very treacherous terrain.
Bernie: What kept you doing this? Why did you dedicate your life to civil service, to the central bank serving the country like this under successive prime ministers? You are as educated as anybody could be. Masters, PhD from the University of Pennsylvania, I mean a lot of people would have taken a resume like that, done national duty, so you can say I've done it, I've done my job, I did my good to country and then gone off and made a gazillion dollars as a banker or something like that. But you never took that route, why?
Zeti: No, because it's a privilege. I believe (I am) given an opportunity to make a contribution and I felt this is where I can make a contribution and it's exciting and highly rewarding to be able to make a contribution to the Malaysian people and the economy, and to see the progress in the financial system that supports the entire economy.
Bernie: You faced a lot of odds along the way, you had your detractors, you faced criticism from successive administrations. I mean it takes a thick skin to go through that and not just say oh heck this isn't worth it..why in the world do I put myself through this? Were there moments likethat? In those 35 years?
Zeti: No, never, because I am a highly focused person, focused on what are the objectives I want.. what are the goals,what are the outcomes, and I had great clarity in my mind about what's needed to be achieved and transformation of the financial system, how we would build resilience. It is all about actually building resilience of the economy, of the financial system, and of the bank as well, the institutional resilience is equally important. So I found it very exciting and exhilarating to be involved in that.
Bernie: The work that you have done you know now you have seen the independence of the central bank legislating cast in law for eternity. Some would say that what you have been able to achieve in the central bank is something that society, the Malaysian society, could use and adopt some principles. You know the whole progress with democracy Malaysian style has taken a different course than a lot of people might have hoped 20 years ago; the ability of people to have a free choice, whether there is true democracy those were main open questions in some ways, don't you agree?
Zeti: Well, I am not a politician and I would like to think that I spent time protecting the bank from being drawn into any political controversy, tension and disruptions as they do occur. Because we can't allow ourselves to be distracted, and it's so easy to be distracted by the noise that is happening around you. But if you're very focused and you know in the end what you have to deliver, you always stay very focused and you always ensure that the whole governance process is also in place. There is a framework for how decisions are made so you will not be influenced by this kind of developments and there are things that just are beyond our powers, that we just have to take as a given, so within this then, this is what we need to focus on.
Bernie: I know enough about you to know that you are not going to just retire and then fade quietly into the sunset. You happen to be here at a forum today where there are a lot of central bankers there is even a helicopter pilot here today, Ben Bernanke. What can we expect from Dr Zeti in the years to come after BNM? Speech circuit? Kiss and tell? What comes next?
Zeti: Well I have already said I am going to do some writing. For a while now, I just want some time out for myself and for my family which I ave neglected immensely. Then I will decide what I am going to do but I don't think I will be taking on any position.
Bernie: You could impart your knowledge though, many people, many generations could learn from you, I'm sure you feel some obligation to share that expertise, don't you?
Something in academia perhaps?
Zeti: Well, not quite, I have been a policy maker and I will always be a policy maker in that sense that I will teach but not take on any jobs. We are setting up a business school in partnership with MIT Sloane and so that's a very exciting project that I will continue to support.
Bernie: And I can assume that you won't be holding beach parties with the Mahathirs or Najib anytime soon?
Zeti: I have never attended, I have always maintain a professional relationship not only with the politicians but also with the industry. So it is a sacrifice actually for whoever takes on the position of the governor, because you cannot build up any close relationship with politicians or with the financial industry. So who have been my friends? They are actually other central bankers and they will probably be what I will miss the most, the long lasting friendships that we meet all the time as central bankers. We are very cohesive and close knit and that is the community I will miss.