KUALA LUMPUR (Oct 26): Malaysia, as a small and open economy, needs to ensure that it is well prepared and has the necessary buffers to face a changing global economic environment, said Bank Negara Malaysia (BNM) governor Datuk Seri Abdul Rasheed Ghaffour.
"[In doing so], one important element [in this process] is the diversification of our economy, which provides a shield to help us absorb any challenges that arise," he said during an interview with the CNBC news channel at the International Monetary Fund's annual meetings in Washington, DC, recently.
Abdul Rasheed was asked about the impact of the US presidential election, to be held on Nov 5, on Malaysia’s future growth.
He said the US election is among the things that BNM is watching very closely, adding that things are still very fluid at the moment.
"Of course, when considering what [Republican presidential candidate] Donald Trump has been saying about the three key areas — tariffs, immigration, and tax cuts — these policies are basically inflationary. If implemented, they could have negative implications for growth, and this could be inflationary.
"What we are seeing now is primarily rhetoric, and it depends on what actually translates into policy. For instance, in 2016, there was a lot of campaign rhetoric, but not everything went into policy formulation and execution [when Trump took office].
"The three areas I highlighted could have implications [if executed], not just for Malaysia, but also for global growth as a whole," he said.
On China’s economic stimulus package, Abdul Rasheed said while Malaysia is positive on the announcement, the details had not yet been announced.
"Hopefully, the republic could achieve a growth rate of around 5.0%. If we look at the recent World Economic Outlook, it has been downgraded to 4.8%. I believe the stimulus package could help bring it back to 5.0%, but we are closely watching the details of China's announcement.
"Another point I want to emphasise is the importance of diversification. In terms of our exports to China, they account for about 14%...we are quite well diversified, with exports to the US making up 12%, and 27% go to the Asean economies. This shows that we are quite well diversified, and not overly reliant on any single economy or country," he said.
Meanwhile, the governor noted that Malaysia is quite well integrated into the global supply chain. It led to numerous opportunities for the region, particularly for Malaysia, he said.
He explained that this is partly due to de-globalisation, which has reconfigured the global supply chain, prompting the region to strengthen its focus on areas where it has a comparative advantage.
"In Malaysia’s case, electrical and electronics is one of our key strengths. We are exploring new opportunities within the sector, particularly in high-value-added activities like artificial intelligence and advanced packaging, and others. This will create high-value jobs and foster strong domestic economic linkages," he said.
When asked about the overnight policy rate (OPR), Abdul Rasheed said decisions by the Monetary Policy Committee will depend on the data and outlook for the balance of risk, inflation and growth.
"They will depend on the data we gather, and we will assess it periodically, as we meet to determine the appropriate rate. But, since we last increased the policy rate to 3.0%, it remains supportive of growth at this time and is deemed appropriate.
"The outlook is quite challenging to predict, as it depends on global economic dynamics and domestic developments that could impact our inflation and growth projections moving forward," he said.
Commenting on the US Federal Reserve's (Fed) recent 50-basis-point rate reduction, the governor noted that such moves certainly have a ripple effect on Malaysia's economy.
"If you look at the ringgit's performance over the last two years, it has depreciated quite excessively, primarily due to the interest rate differential between Malaysia and advanced economies, particularly the US.
"Our policy rate is at 3.0%, while the Fed rates are at 5.5%. The recent 50-basis-point cut is a positive development for us, as it reduces the interest rate differential between the US and Malaysia.
"This has been beneficial for Malaysia. However, there has been some correction recently, due to positive economic indicators for the US, particularly regarding the resilience of its labour market, which has created uncertainty about the Fed's next move," Abdul Rasheed added.
Uploaded by Tham Yek Lee