Adnan Zaylani Mohamad Zahid: Review and outlook of the Malaysian
financial market
Speech by Mr Adnan Zaylani Mohamad Zahid, Deputy Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the Financial Market Association of Malaysia 2024
Annual Dinner, Kuala Lumpur, 29 November 2024.
* * *
It is an honour and privilege for me to be here tonight. Let me first extend my heartfelt
congratulations to PPKM and the organising committee for putting together this much
anticipated annual event. I always look forward to this dinner. Besides being highly
entertaining, it's a time to catch up with friends and colleagues in the market in a
different setting, as well as allowing me to share some thoughts on our financial
markets.
We are, after all stepping into the final month of the year, so this is a good time as any
for us to reflect on the year and to prepare ourselves for the challenges and
opportunities that lie ahead.
Financial Market Review - Resiliency of the Ringgit
I recall a year ago, at this dinner, expressing somewhat, a 'cautiously optimistic' view on
the ringgit for 2024. This was on the back of an expected end and turnaround in the Fed
hiking cycle. Well, the first half of the year saw ringgit come under pressure, trading at
historical low levels, driven by global uncertainties surrounding US policy rates, China's
growth trajectory and ongoing geopolitical risk in Europe and Middle East. These
factors created a highly challenging environment. For us, this marked only the second
time that Malaysia has faced negative interest rate differentials compared to the US.
The wide interest rate differentials had shaped the behaviour of investors, corporates,
exporters, importers and the broader public. We saw increased interest among
investors and the public to allocate funds to foreign currency assets. Exporters
preferred to retain earnings in foreign currencies, while importers front-loaded their
purchases taking advantage of the forward discounts on the exchange rate. Similarly,
some corporates were observed expediting the repayment of foreign currency debt to
reduce their debt servicing cost as well as their exposure to exchange rate risk. These
conditions led to the ringgit trading under pressure in the first half of 2024.
Since then, we have turned the corner. Firstly, the coordinated actions by BNM and the
Government in encouraging income repatriation and conversion among the GLICs and
GLCs played a crucial role in helping us stabilise the market during the challenging
period. Together with our intervention, these measures not only curbed excessive
volatility but also restored investor and public confidence to the market. Secondly,
following a clearer easing path from the US Federal Reserve in July, the ringgit
rebounded strongly, appreciating by 14.4% in the third quarter, the highest in the
region. And while there has been a correction of late, on year-to-date basis, the ringgit
is still up by 3.3%, being the only currency in the region to strengthen against the dollar
amid all the volatility we have witnessed. Thirdly, the economy has performed quite well
this year, delivering a robust performance with inflation being under control. The
government has also embarked on a number of reforms that not only set the stage for
stronger and healthy growth in the future, but also an encouraging fiscal consolidation
trajectory, which further strengthen our long-term fundamentals. The stellar
performance of the ringgit affirmed that the earlier pressure was largely unwarranted,
and it has now reinforced the market's confidence in the ringgit's resilience and
longterm strength.
Overall, our domestic markets have also shown commendable resilience. Across
foreign exchange, money, and bond markets, we witnessed healthy volume growth,
reflecting effective intermediation and robust two-way flows. Key metrics that we
monitor - daily FX trading volume, averaged USD17.6 billion, while the money market
recorded RM10.4 billion in daily transactions - all higher compared to last year.
Additionally, the outstanding size of our bond market, which surpassed RM2 trillion last
year, continued to expand - reflecting our financial sector's ability to absorb and
intermediate long-term financing. There is still more we can do to expand our bond and
sukuk markets and widen our investor base.
Indeed, on this, I understand that some industry players have been actively advocating
for the inclusion of the MGII in the FTSE World Government Bond Index, and I certainly
commend these efforts. It is about time for us to gain this recognition for our MGII,
which now comprises 47.5% of our government bond market. From our observations,
daily trading volumes of MGII is often now comparable to MGS. Yields have narrowed
against MGS while liquidity has certainly improved tremendously. With the current
initiative to introduce an additional structure of wakalah bi al-khadamat to the
issuances, we believe that this will further enhance the appeal of MGII to the
international investment community. We are certainly looking forward to these
developments and a favourable outcome for the inclusion of MGII into the FTSE World
Government Bond Index.
As it stands, the non-resident holdings of our government bond now comprise around
21.5% of the market, a significant portion consisting of stable, long-term investors.
Foreign investments into our equity market have also been encouraging. From our
surveillance data, this year would mark the first year of inflows since 2018. All these
stands as further proof of global confidence in our market.
Our ability to remain agile and proactive throughout the year has been crucial in
strengthening our resilience. Going forward, BNM will continue to be in the market to
ensure stability and prevent excessive fluctuations. We will also continue with our active
encouragement for our investors and corporates to bring back their income and sustain,
if necessary, inflows from this rich source. This includes our initiative extended to
corporates and businesses to support their repatriation of foreign currency balances,
the Qualified Resident Investors (QRI) pilot programme. Since its inception in April, this
programme has onboarded large corporate groups, bringing in substantial inflows thus
far. Participants have lauded the programme for its simplicity, efficiency and quick
turnaround times, as well as the certainty it provides for reconverting ringgit funds for
future direct investment abroad.
Many of these measures and initiatives help us in achieving a better balance of flows
and a more stable foreign exchange market. These measures and other initiatives to
enhance domestic FX market liquidity will continue into 2025. In addition, next year's
outlook for the Malaysia economy remains favourable. The economy is expected to
grow by 4.5% - 5.5%, as outlined in Belanjawan 2025 with continued robust domestic
demand and investment activity, supported by higher tourism and exports. All these are
expected to lend enduring support to the ringgit.
Challenges Ahead and Call to Action
Having said that, it is never a done deal when it comes to the evolving market outlook.
As we look ahead to 2025, new factors are emerging, potentially disrupting and
presenting fresh challenges. One key area to monitor is the evolving international trade
landscape following President Trump's re-election, which could impact both global
growth and inflation trends. We can see that the dollar has been taking its cue on any
developments surrounding how high tariffs will be. This is not an unfamiliar situation to
us as we saw something similar when President Trump was elected in 2016. How did
things fare for us back then? Looking back at his previous presidency, Malaysia's GDP
grew by 10% between 2017 and 2019, and our exports increased by approximately 8%.
The ringgit also appreciated by around 8% during the period.1
So, it may not be all that bad as what is being implied by market talk now. But there are
of course other issues that demand our attention, such as uncertainty surrounding
China's growth and ongoing geopolitical instability. Overall, the situation remains fluid,
and we will live with volatility for a while.
How do we prepare ourselves then ahead of this?
One of our greatest strengths we have is the solid foundation of our economy and the
positive prospects going forward. However, we also need to actively communicate with
the global investment community. Strengthening our outreach efforts is critical to
sustaining and attracting international inflows. By highlighting the positive
developments, we can showcase Malaysia as an attractive and resilient investment
destination. Indeed, this was the genesis of the Investment Relations Office and the
nd
InvestMalaysia Portal launched recently by the 2 Finance Minister. This is a one-stop
centre for all investors, not just portfolio, to obtain information on Malaysia and further
improving access to the Malaysian market.
Complementing such outreach efforts, we must ensure that the increasing demand from
global investors is met with availability of instruments into these attractive investment
opportunities. For this, our financial markets need to step up their efforts in enabling
investable assets creation and strengthening their market-making capabilities. On this, I
would like to acknowledge the efforts and initiatives of the Islamic Financial Market
Committee in working with IsDB and other stakeholders, to convene and connect
issuers, investors and market players with a view to open up the avenues and
marketplace for these investment opportunities.
The recent liberalization of the Foreign Exchange Policy (FEP) is one step in bringing in
new and more investors. By allowing Multilateral Development Banks (MDBs) and
nonresident Development Financial Institutions (DFIs) to issue ringgit-denominated debt
securities, we open the doors to greater and more diverse participation in our bond and
sukuk markets. This move not only broadens our investor base but also enhances
market depth, enhancing Malaysia's financial markets appeal to international investors.
A deeper and more liquid market supports the broader economy by facilitating efficient
capital allocation. Such progress strengthens Malaysia's position as a hub for
sustainable finance and a premier global investment destination.
Finally, a strong and well-functioning interbank market is also crucial. It plays a critical
role in ensuring the smooth flow of both ringgit and foreign currency liquidity, which
directly supports intermediation. The foreign exchange market, in particular, is often the
first to feel the impact during periods of market stress. In such situations, market
participants must step up as the first line of defence to maintain stability. This requires
focusing on economic fundamentals rather than reacting to market sentiment alone,
avoiding excessive bid-ask spreads during high uncertainty, and continuing to fulfil the
role of market makers by proving consistent quotes, even in challenging conditions. Let
me assure you that Bank Negara Malaysia will be very vigilant in this and will be there
to maintain an orderly market and a stable currency.
As for the money market, challenges like market fragmentation and what ends up
looking like liquidity hoarding can further disrupt the interbank market's role as an
effective intermediary. When liquidity is unevenly distributed, it can lead to volatility in
rates and undermine the market's ability to function effectively. To address this, we
need to focus on creating a more efficient interbank market. One area where we will be
pushing for is in the market infrastructure by expanding the network of interbank lines
among players so we can achieve better price discovery and ensure smoother liquidity
distribution. Other areas to further improve on liquidity intermediation includes our
introduction of the 7-day reverse repo which has received good response from the
market. As we approach the year end, we thus wouldn't expect similar situations of past
years where rates spike, as interbank players compete for deposits. We also expect
that with the recent Liquidity Risk Policy Document issued last month, which puts out
requirements for LCR disclosure on an average basis, this pressure will be much less.
Initiatives for Further Resilience
The measures and initiatives introduced over the years have significantly contributed to
the stability, growth and resilience of Malaysia's financial markets. However, there is
always room to build upon these. I would like to outline three key initiatives for the
coming year that we are looking to do.
First, we are enhancing our tools to strengthen market intermediation and integrity.
Among others, the usage of Islamic FX swap as an additional liquidity management
tool, which will help us to manage interbank liquidity more effectively. Also, operating
frameworks are already undergoing studies to address market fragmentation in the
interbank market. Similarly, efforts are underway to align our markets with global
standards. The transition from KLIBOR to MYOR is a notable example. A discussion
paper published last quarter outlines the roadmap for this transition, with enhancements
to MYOR expected in 2025 and the cessation of KLIBOR by 2028. These changes will
undoubtedly improve the integrity of our markets, while aligning them with international
best practices.
Second, next year is a significant year for Malaysia as we assume the ASEAN
chairmanship. This is a unique opportunity to advance regional collaboration, including
for the financial sector and position Malaysia accordingly. For example, Malaysia
currently accounts for 25% of the total issuance of ASEAN Green, Social and
Sustainability debt securities. As we pursue catalytic projects under the National Energy
Transition Roadmap, green sukuk will play a crucial role in meeting funding
requirements with estimated RM1.85 trillion by 2050. Leveraging our global leadership
position in Islamic Finance, with the presence of the MIFC Leadership Council (MLC)
and Islamic Financial Market Committee (IFMC), we aim to scale up green sukuk
adoption, grow Islamic assets and position Malaysia as the gateway to ASEAN.
Finally, I might add, this also provides Malaysia with a unique opportunity to offer
ourselves as a centre for regional currency trading and liquidity management. For
example, one key area where we have made considerable progress is in promoting the
settlement of cross-border transactions in local currencies. Settling transactions in local
currencies reduces the additional costs of dual-leg currency conversions and lowers
reliance on the US dollar. Our local currency Settlement Frameworks with countries like
Thailand and Indonesia provide harmonised rules that make bilateral transactions in
local currencies more accessible. Local currency settlements also figure significantly in
our trade and investment with China and Singapore, where accessibility to RMB and
SGD has long been facilitated. This allows businesses to better manage their foreign
exchange risk while promoting the resilience of regional currencies and trade against
external shocks. Building on this foundation, Malaysia has the potential to further
expand its role by leveraging the extensive presence of its banking network which is
present across all ASEAN countries. In addition, our network of Appointed Overseas
Office (AOO), spanning ASEAN and key global markets, further enhance our ability to
support cross-border transactions and promote regional integration of local currency
settlements.
All of this bodes well for the economy and our prospects. To realise this potential, I
must highlight the significant need for collaboration and coordination between BNM and
the industry. We have already witnessed meaningful collaboration, particularly through
the Financial Market Committee (FMC) and MIFC Leadership Council, and I look
forward to build and expand on this foundation and enhancing our joint efforts as we
head into the coming year.
Conclusion
In closing, I want to emphasise that while we face challenges, the resilience of
Malaysia's economy and financial markets gives us reason to be optimistic. The
strategies we have in place, supported by sound fundamentals and innovative
initiatives, position us well to navigate future uncertainties.
Izinkan saya akhiri ucapan ini dengan serangkap pantun.
Dari dollar Malaya ke ringgit Malaysia,
Legasi menuju negara yang kukuh,
Bekerja erat, maju bersama,
Sistem kewangan terbina utuh.
Thank you for your time, and I wish you all an enjoyable evening.
1 rd
Source: Governor' media statement during 3 quarter GDP release