Zeti tries to rise above Malaysia’s creeping crisis

Eric Ellis
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Malaysia’s political leaders are besieged by the fall-out from the 1MDB scandal. A whispering campaign is trying to drag in the hitherto-unsullied, long-serving central bank governor, Zeti Akhtar Aziz. She staunchly defends her reputation, but is far more concerned about the potential disruption to her long-term economic planning.

ZetiFor Zeti Akhtar Aziz, the venerable governor of Bank Negara Malaysia (BNM), the country’s central bank, these should be the best of times.

Deep into her last year of what will be, by her retirement next April, 16 years at the helm of BNM, it should be a period of reflection for the magisterial Zeti, to accept the congratulations of a grateful nation to this 68 year-old trailblazer of modern Asia’s economic miracle.

"It has been an exciting time, doing a job I love for a nation I love," she tells Euromoney in mid-September in Kuala Lumpur.

And what a trail she blazed. One of the few women to run a central bank anywhere, Zeti was also the first female bank governor of a mostly Islamic nation, taking over a BNM in turmoil as the 1990s’ Asian Financial Crisis engulfed Malaysia.

On her watch, BNM can claim, and Zeti often has, to have become Asia’s most independent and transparent central bank, albeit one she took over in 2000 after doing the bidding of a politician – the dictatorial former prime minister Mahathir Mohamad – by implementing capital controls to preserve the ringgit.

That 'shut-the-door’ policy would briefly make Malaysia an international pariah, no favourite of markets or of multilaterals such as the IMF. But Malaysians argue it spared them the chaos that consumed neighbours Thailand and Indonesia, helping boost the economy by an average 5% annually since 1998 to almost double its size in a generation.

In 2005, with Mahathir three years retired and the financial system rebooted, Zeti lifted the ringgit peg, in effect marking the end of the crisis. It was a feat that helped win her Euromoney’s coveted central banker-of-the-year award that year.

Now transformed into a market darling, Zeti has snagged gong after international gong as Malaysia wins back the confidence of investors and the ringgit much of its pre-1998 strength to be one of the world’s stronger currencies. Her pièce de resistance as a central banker came in a 2009 act of parliament when Zeti secured BNM’s independence from the government, no mean feat in a country not known as a model liberal democracy.

"We had earned it," she says. "I wanted to legislate it for the next generation…we strengthened the checks and balances, the transparency."

So it has been quite a ride. And after all that, she could be excused a pause this final year to accept praise for public service well done.

Except that this last year has been anything but agreeable for Zeti.

The currency she has so carefully tended has dropped 30% this year, to be Asia’s worst performer. The cruellest cut of all, perhaps, is that the ringgit has fallen beyond even the level that Zeti had locked it to the dollar at in 1998, when she was acting BNM governor. That fall has chewed into BNM’s foreign reserves, which had risen 700% on her watch to more than $155 billion in 2011. They have plummeted to $95 billion, the lowest since 2009. Growth has slowed, the bond market has slumped, the IPO roster has tanked and the ratings agencies are circling, threatening downgrades.

It has also been a tough time personally for Zeti. Hidden hands have accused her and her family of corruption, and she is being traduced in a vicious whispering and social media campaign that seems aimed at removing her from office ahead of time.

Instead of contemplating the books and the advisory and lecture circuit that a gracious retirement might beckon, Zeti now meets with lawyers to protect her. Far from being lavished by a thankful nation, in many circles, particularly those close to prime minister Najib Razak and his controversial wife Rosmah, Zeti has almost become a hate figure, certainly one of ridicule.

How did Malaysia come to this?

The short answer is 1Malaysia Development Berhad, better known as 1MDB. That’s the scandal-ridden sovereign investment fund that many Malaysians believe is little more than a corrupt slush fund for politicians.

Founded by Najib soon after he came to power in 2009, 1MDB has been poison for Malaysia. It has little obvious commercial activity to service its estimated $12 billion in debt, much of it in bonds rated as junk. They were arranged via massive state-guaranteed issues through Goldman Sachs, which earned an estimated $500 million in fees from the deals.

Amid nagging claims of corruption, mismanagement and shady offshore dealings, which have prompted investigations in six countries, the 1MDB crisis has dragged heavily on the ringgit, adding to the pressures of an economy sputtering under the weight of a commodity bust.

In July, the Wall Street Journal brought the 1MDB scandal directly to Najib’s door, publishing official documents that showed as much as $700 million had moved through 1MDB-linked entities to end up in Najib’s personal bank account.