Malaysia need not rush capital controls: MIER

The Star/Asia News Network

KUALA LUMPUR — There is no need for Malaysia to rush into implementing capital control measures to deal with the current flow of hot money into the country, says Malaysian Institute of Economic Research (MIER) executive director Dr. Zakariah Abdul Rashid. “I believe Bank Negara has sufficient instruments at the moment to manage the risks inherent in the massive inflow of short-term capital,” he told reporters. Dr. Chad Steinberg, who is senior economist at the International Monetary Fund (IMF) regional office for Asia and the Pacific, said short-term capital flows to emerging markets, including Asia, were complicating the region’s effort to tighten (or normalize) their monetary policies. He also warned about the risk of capital flows causing financial instability in emerging economies. Asia’s past experiences show capital flows can easily trigger the boom and bust cycles in their economies. Hence the need for the region to take prudent measures, Steinberg said. So far, only Brazil, South Korea, Indonesia, Taiwan and Thailand have implemented macro-prudential measures to curb speculation and limit vulnerabilities to the risk of capital flows. But emerging economies, including Malaysia, were becoming concerned with the high inflow of hot money from advanced economies that have been coming into the region to chase after higher returns. This was particularly so after the U.S. Federal Reserve announced last month its second round of quantitative easing (QE2), worth US$600 billion. Concerns were that hot money inflow could give rise to the formation of unsustainable asset bubbles and runaway inflation that could derail the economic recovery emerging of markets. Zakariah opined that the full impact of the QE2 would remain largely unknown at this juncture as the stimulus measure would be implemented in a staggered phase until the first half of next year. What’s crucial is for us to monitor the situation closely, Zakariah said. In his presentation, Zakariah said Mier expected Bank Negara to raise the benchmark overnight policy rate from the current 2.75 percent to 3 percent by next year. He said the inflation outlook for Malaysia remained stable, with the consumer price index expected to grow 2.2 percent this year and 2.5 percent in 2011. The private think-tank’s projection was for the ringgit’s exchange rate to stabilize at 3.20 against the U.S. dollar this year, before appreciating further to 3.10 next year. Mier also maintained its projection for Malaysia’s gross domestic product (GDP) growth at 6.8 percent this year and 5.2 percent in 2011, citing the country’s economic policies, which remained supportive of growth. This compared with the Government’s forecast for 7 percent GDP growth in 2010 and between 5 percent and 6 percent growth in 2011. At the conference, the IMF projected the world economy to grow 4.8 percent this year and 4.2 percent in 2011. Asia, which would lead the global growth, was expected to grow 8 percent in 2010 and 6.8 percent in 2011. Advanced economies, on the other hand, would grow only 2.7 percent in 2010 and 2.2 percent in 2011.