Malaysia needs structural change, says central bank governor
Central Bank of Malaysia Needs Structural Changes:
The head of the Central Bank of Malaysia is calling on the government to implement key structural reforms to boost growth and protect the economy from future economic shocks.
Bank Negara’s Governor, Nor Shamsiah Mohd Yunus, said that the proposed reforms will help Malaysians with the cost of living and support the country’s transition to a high-income economy.
The bank has put forward six key policy areas for reforms: digitalization; fiscal resilience; a climate resilient economy; growth potential; a future-ready workforce; and social protection.
“Structural reforms remain important, but a carefully considered sequencing of these critical reforms will be important to deliver sustainable growth and price stability, while minimising transitory costs,” she said at the launch of Bank Negara’s annual report.
At the same event the central bank also launched its Economic and Monetary Review 2022 and the Financial Stability Review for Second Half 2022.
On reforms for growth, Nor Shamsiah cited the New Investment Policy as vital for attracting high-quality inward investment. “Key strategies include to further improve investment targeting and promotion of key strategic sectors, develop dynamic and agile incentive packages, and strengthen environmental, social and governance practices,” she said.
Nor Shamsiah also said that reforms to the social protection framework are important to address economic fragilities. She said: “The drawdown of retirement savings during the pandemic have further exacerbated households’ vulnerabilities to future shocks.
“Greater focus should be geared towards enhancing the three pillars, namely social safety nets, social insurance, and active labour market policies.
“Each of these pillars reinforce each other and strengthen social mobility through higher skills and earnings, while providing protection against health, environment, social and economic shocks,” she said.
The governor also highlighted the importance of subsidy rationalisation, pointing out that while subsidies are not sustainable, the magnitude and timing of subsidy rationalisation would determine inflation outcome.
Nor Shamsiah said subsidy rationalization, particularly for fuel subsidies, would help the country reduce its carbon footprint. “It is never the right time to rationalize subsidy, but it is something that needs to be done to ensure fiscal sustainability,” she said.
Digital banks on tracks
On the topic of digital financial services, Nor Shamsiah said that the country’s five digital banks including the central bank of Malaysia, are on track to begin operations by the second quarter of 2024.
The central bank of Malaysia said that the recent scare across the world’s banking sector following the collapse of Silicon Valley Bank and Credit Suisse should not unduly worry Malaysians, with the country’s domestic financial market conditions remaining stable.
“It is worth noting that the impact of the recent United States and Swiss banking sector stress on our banks has been minimal,” she said. “Banks in Malaysia have limited exposures to the troubled US and Swiss banks. The depositor base of our banks is also more diversified.
“In terms of the impact of the mark-to-market losses due to rising interest rates on the bond holdings of banks in Malaysia, this remains well within the internal capital targets of banks.
“Banks also continued to hold high levels of high-quality liquid assets in the form of placements with Bank Negara and government bonds that can be pledged with the central bank to meet any additional liquidity needs,” according to Nor Shamsiah.
She added that the central bank of Malaysia has tested the resilience of Malaysian banks and insurance companies through Bank Negara’s annual stress test exercise. She added that local banks have ample resources losses to absorb losses.
Under the stress test, banks are subjected to operating environment scenarios that are more severe than that observed during the 2008 global financial crisis and the Covid-19 pandemic in 2020.
“The stress test results reaffirm that our banks are sound, with total capital ratio remaining well above the minimum requirement of 8% under adverse scenarios,” she said.
She added that the Malaysian banking system remains resilient, with healthy levels of capital and liquidity buffers.
