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Malaysia Need Not Rush For Capital Control Measures
News From : DagangHalal.com (12/1/2010)

Mier says Bank Negara has sufficient instruments to manage risks

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 after addressing the National Economic Outlook Conference 2011-2012 organised by Mier yesterday.

At the conference, 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 normalise) 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 US Federal Reserve announced last month its second round of quantitative easing (QE2), worth US$600bil.

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% to 3% by next year.

He said the inflation outlook for Malaysia remained stable, with the consumer price index expected to grow 2.2% this year and 2.5% in 2011.

The private think-tank's projection was for the ringgit's exchange rate to stabilise at 3.20 against the US 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% this year and 5.2% in 2011, citing the country's economic policies, which remained supportive of growth. This compared with the Government's forecast for 7% GDP growth in 2010 and between 5% and 6% growth in 2011.

At the conference, the IMF projected the world economy to grow 4.8% this year and 4.2% in 2011. Asia, which would lead the gobal growth, was expected to grow 8% in 2010 and 6.8% in 2011. Advanced economies, on the other hand, would grow only 2.7% in 2010 and 2.2% in 2011.

Downside risks for the global economy remain, and they stem mainly from the weak financial systems in advanced economies, Steinberg said.

Zakariah said there was an urgency for Malaysia to deal with its structural weakness, particularly human capital. Malaysia has a severe shortage of skilled labour, he said, adding that the country was losing its competitiveness vis-a-vis other countries in the region.

On one hand, we are losing out on investments in the low value-add, labour-intensive industries, and on the other hand, we are not attractive enough for foreign direct investments in the high value-add, skilled labour industries, he said, adding that the country had to urgently address its human capital challenges to overcome those issues.

- The Star Online

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