Adnan Zaylani Mohamad Zahid: Keynote address - Financial Market
Association of Malaysia Annual Dinner 2023
Keynote address by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the
Central Bank of Malaysia (Bank Negara Malaysia), at the Financial Market Association
of Malaysia Annual Dinner 2023, Kuala Lumpur, 24 November 2023.
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Assalamualaikum w.b.t and a very good evening.
Mr Chu Kok Wei, the President of the Financial Market Association of Malaysia,
committee members of PPKM and esteemed guests.
Thank you for inviting me to the Financial Market Association of Malaysia or PPKM
Annual Dinner and to deliver this address to members of the financial market industry. It
is always a great pleasure and as usual, an opportunity to share some reflections on
the financial markets, the current and the future. My remarks tonight will touch on two
aspects; firstly, the progress or development of financial markets and secondly, the
current events in financial markets.
Ladies and gentlemen,
The development of financial markets has always been an integral component of
economic and financial sector development. We often talk about intermediation as
something that takes place to facilitate economic or financial transactions, the transfer
or exchange of resources or funds for some economic good or activity. We often refer
to this as the role of the financial system, which is to intermediate savings or surpluses
to borrowers, intermediate between investors and entrepreneurs, between the public
sector and private and so on, with financial institutions being the key institutions
undertaking this role.
Financial institutions, in particular banking institutions, undertake this to a significant
degree within their own customers of savers and borrowers, within their own portfolio of
assets and liabilities. But can they have an exact match, to intermediate optimally within
their institution? This is highly unlikely and on any given day, they could have a surplus
of funds or a deficit. Understandably, a banking institution will always want to have
some excess cash, more than their projected requirements. With an interbank market,
this excess can still be deployed to earn returns. In the event of a shortfall, the banking
institution can also borrow other's excess in the interbank market to make up for this
gap. Beyond the day-to-day operational cash management, banking institutions will be
able to lend or borrow with each other over different term structures to manage against
the profile of their assets and liabilities. Banks with persistent surpluses will be able to
deploy their excesses and banks with persistent deficits can access interbank term
funding. Of course, we all know this, but these days, we take this for granted.
Without an interbank market, banking institutions have no avenues to do all this and no
agility in meeting their customer needs. The total assets or financing they can provide
will be constrained by the amount of equity from shareholders, deposits they have
raised and the liquidity they need to have available to meet requirements. Without an
interbank market, intermediation of surpluses and funds is constrained to individual
institutions. Risks will also not be able to be effectively managed and diversified without
these avenues. Consequently, the role of the interbank market expands the
intermediation capability and capacity of the financial institutions and hence the system.
The interbank market is the interconnection of the banking and financial system and the
more effective and efficient it is, the greater the capability and capacity of the system to
better intermediate the funds; savings, investment, borrowing and lending, within the
economy. This, I hope, puts into perspective why we place much emphasis on financial
market development and why we track such developments.
Where are we now then, with another challenging year almost behind us? Importantly,
how have we fared during these times?
I'm glad to see that on many fronts, market vibrancy and breadth continues to make
progress. Market indicators that we track - daily trading volumes in foreign exchange of
USD15.4 billion and interbank money market of RM8.77 billion - continue to show
strong growth in 2023. The outstanding size of our bond market is now above RM2
trillion with the Government bond market at RM1.1 trillion, a testament to how our
financial markets have been able to absorb and intermediate long-term financing for the
government and corporate sector. There is continued interest and support from our
institutional investors both in the primary and secondary market. We continue to see
very healthy auctions, with the bid-to-cover (BTC) ratio year-to-date averaging at 2.16
times and higher secondary market turnover volume that reached RM4.5 billion daily.
With orderly functioning of our bond market, this has helped cushion pockets of
nonresident sell-off during the year. Non-resident participation in our bond market remains
strong, with 22.2% ownership and significant participation in the onshore market. 119
out of 145 participants in our dynamic hedging programme today comprise of
nonresident investors. ESG bonds are also making further inroads, with an outstanding
issuance of RM11.53 billion, still small but four times its size just three years back.
From a market development and growth standpoint, all this looks quite alright.
So what gives?
Ladies and gentlemen,
The ringgit continued to be tested in 2023, continuing a challenging episode that we
had seen since 2022. Last year, the ringgit weakened by 5.4% against the US dollar
this year. We can add, for this year to date, another 6.0% weakening. This has
undoubtedly captured the attention and sparked concerns of many Malaysians.
Understandably so. Especially since we have seen the ringgit trading at quite low levels
against the US dollar, and these are levels only last seen during the Asian Financial
Crisis.
On this, please allow me to share some of my perspectives on these developments,
and perhaps to bring out the necessary and instrumental roles that we all need to
undertake, as key and active market participants, in the wake of the ever-shifting global
financial conditions.
As it stands, the . The fact is, its
ringgit has been driven mainly by external factors
movements have been much in tandem with many other regional currencies. Since
endDecember 2020, the US dollar has strengthened against all Asian currencies. The
aggressive monetary policy tightening in the developed markets, in particular by the US
Federal Reserve Bank has caused shifts in global portfolio allocation, as investors seek
higher returns from their investments in the US dollar. We saw the 10-year US Treasury
yield breaking away from a long-term downward trend and it has in recent times been
trading near 15-year high levels. The market had to also grapple with uncertainties over
China's economic growth prospect, particularly as China's economic recovery
momentum has been modest and as their domestic property sector turmoil persisted.
Ongoing geopolitical crises - the Russian-Ukraine war and more recently the Middle
East - further supported demand for the US dollar as investors sought for safe-haven
assets.
Consequently, the movements of the ringgit exchange rate in recent times have
not been a fair reflection of Malaysia's economic fundamentals. Malaysia continues
to register positive and rising economic activities that recorded 3.3% GDP growth
yearon-year (YOY) in Q3 2023, up from 2.9% growth in Q2 2023. And next year, we are
expected to grow by 4-5%. Similarly, Malaysia also continues to record a current
account balance surplus in 2Q 2023, equivalent to 3.3% of GDP. The fiscal position is
expected to improve with the fiscal deficit projected to consolidate further in 2023 to 5%
of GDP and expected to further reduce in 2024. Using the ringgit as a barometer of our
economic development is thus a misleading indicator.
We also continue to see resiliency in our financial markets. Our FX market, as I
mentioned earlier, recorded strong daily FX turnover volume of USD15.4 billion per day.
Ringgit volatility remains the lowest among regional peers. Indeed, two years into this
current cycle of US dollar strength, our markets, financial institutions and financial
sector, the economy have all weathered this challenge rather well. We are certainly not
in any crisis nor any financial or economic stress. Notwithstanding this, the central
.
bank remains vigilant
Firstly, while recent developments could indicate a possible change in global monetary
tightening stances, in particular the US, we recognise this is not a done deal. Inflation
risks remain present and Fed officials themselves remain highly cautious.
Secondly, any changes in interest rate differentials that could change the short-term
dynamics could still be far off. The incentives for exporters, businesses and residents to
continue holding foreign currency, and importers, portfolio investors to hedge into
foreign currency, could still be there for a while, as our own interest rates are much
lower than US dollar interest rates.
Thirdly, the favourable fundamentals, as well as positive structural and economic reform
programmes and industrial plans by the government, which would lead to a more
enduring support for the ringgit, will take some time to bear fruit.
With this in mind, we need to be prepared. BNM of course is monitoring market
behaviour and market flows and will act accordingly. At its basic, where necessary, we
will come to the market to ensure liquidity and stem any undue volatility. Our
surveillance has expanded, now covering not just financial markets, but also tracking
corporate flows; exports, imports and loan repayments, trends among the investing
public including the growing availability of foreign currency offerings. Market and public
sentiment is also something we closely watch, in particular realising how sentiment can
also drive traders' quoting and pricing of the USD/MYR pair, the market flows and the
public's behaviour.
Market players also have to be prepared to play their role. All of us have to recognise
that our individual actions could also be contributing to the short-term downward
pressure on the ringgit. Demands by corporates and investors to invest abroad,
exporters holding back conversion, importers purchasing foreign currency and hedging
well ahead before its necessary. Individuals, businesses, opening foreign currency
accounts and converting their ringgit savings for the higher foreign currency interest
rates. Undoubtedly, collectively, these add further downward pressure to the ringgit.
Perhaps we should consider the greater interest, beyond our own individual profits or
higher returns. We can see there's much general dissatisfaction, unhappiness over a
weak ringgit and by inference, many of us prefer a stronger ringgit. Yet our actions do
the opposite. We should change this.
Thus, amidst the prevailing sentiment on ringgit, it is quite important for market players
and participants to stay composed and play a stabilising role in riding out the
current highly dynamic situation. It goes without saying that we should avoid
contributing to the downward pressures on the ringgit, let alone jeopardise the orderly
functioning of the market. Accordingly, market players should advise their clients to
manage their FX exposures appropriately. This is to ensure that our financial market
activities do not become an amplifier of risks to the economy.
Ladies and gentlemen,
As we draw near the year end, I'm sure we're all looking forward, or hoping for better
developments in the financial market and going into 2024. Chances are we may see the
peak of US interest rate hikes as the Fed Reserve has been on hold for the last two
consecutive meetings and some of the recent US economic data also point to a slowing
economy and receding inflationary pressure. This may bode well for greater stability in
regional FX and the ringgit. Reflecting that the Federal Reserve could be nearly at the
end of its rate hiking cycle, recent FX forecasts by analysts also showed that some
market participants expect the ringgit to strengthen, reaching between 4.55 to 4.61 level
by year end and further strengthening in 2024. We can all play a role in getting us there.
Finally, as we step into the new year, I hope we continue to navigate the financial
markets with greater awareness of our impact and recognise that our collective
actions can shape a more resilient and equitable financial landscape .
With that, thank you and I wish you all another year of growth, prosperity, and shared
success.