Malaysia turns again to the indispensable Zeti

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By:
Chris Wright
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After the challenges of Asian and global financial crises and the 1MDB scandal, Zeti Akhtar Aziz is back in the top echelons of Malaysian influence again. She tells Euromoney about her achievements as central bank governor – and what she knew and did about 1MDB.

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Permodalan Nasional Berhad's chairman Zeti Akhtar Aziz


Zeti Akhtar Aziz spent two decades at the highest levels of central banking, two decades that, more often than not, coincided with the worst possible circumstances.

Her tenure was bookended by the Asian financial crisis when she became acting governor of Bank Negara Malaysia (BNM) on 24 hours’ notice in August 1998, following the resignation of both the existing governor and his deputy; and the 1MDB scandal, during which she found herself pitted against the prime minister, attorney general and much of the power of the state.

“I’ve been right in the middle of everything quite a few times,” she says.

Today, she is talking to Euromoney in rather less stressful circumstances. She is running Permodalan Nasional Berhad (PNB), a government-linked investment company, and our interview takes place in its offices in a sprawling building complex in Kuala Lumpur.

Zeti greets Euromoney warmly; this is, we estimate, about the 12th time we have spoken for interview over the course of 20 years.

But something is different today and it’s not just the relatively reduced burden of her role.

Over the years Zeti has been a highly respected central banker, but she has always been cautious, reserved, considered. She has always had interesting things to say from a technical point of view, with a level of understanding of international finance that would be at home in the highest levels of academia, but she could rarely be accused of a punchy one-liner.

Today, however, she is as open and free-speaking as we have ever known her. And, among other things, she wants to get some of her side of the story of 1MDB across. The trial of former prime minister Najib Razak means there’s only a certain amount of ground she can cover, but she does want it known how BNM, and she personally, responded to 1MDB when it first arose. She worked very hard to build a legacy and doesn’t want 1MDB to be it.

Landmark scandal 

The 1MDB affair has been the region’s landmark scandal of the 21st century to date, but it took time to unfold.

“We knew about 1MDB quite early on, because any entity that has accumulated a debt that’s beyond RM2 billion ($474 million) would come onto our radar screen,” she says.

BNM is one of the few central banks to have not only a monetary policy committee but also a financial stability committee, which meets every quarter to discuss the risks to the financial system. The bank was also one of the first to attempt stress testing – a sense of prudence that came from surviving the Asian financial crisis.

“One of the important lessons was to also build resilience to any imminent financial crises,” she says, “and to do that, one needs to know all the risks of anything that could go wrong.”


Most people, when they see the light at the end of the tunnel, think things are going to get better. Actually, it can be an oncoming train 
 - Zeti Akhtar Aziz

Consequently she and BNM knew of 1MDB as early as 2013, and she highlighted it to the minister of finance at the time. The problem was that the minister of finance was also the prime minister, Najib Razak.

“We highlighted that this is a risk because of its potential systemic implications on the financial markets and financial institutions,” she says. “At the time, it was just a verbal assessment provided. He took note.”

But nothing changed; so in 2014 BNM documented its concerns and sent them in a letter. Again, nothing.

“It continued into early 2015,” says Zeti, “when nothing was done, and the conditions and developments relating to that entity had worsened, so we wrote a second letter.”

There are, she says, therefore two lengthy documents on record from BNM highlighting the risks of 1MDB to the financial system and to the overall economy.

(However, she notes that, since 1MDB was doing much of its borrowing internationally, the financial system itself was not in great peril. “The banking system had already become very disciplined, and there were very few that had provided loans,” she says.)

In 2015, frustrated at the lack of action, the bank decided to take legal action against 1MDB and submitted recommendations to the attorney general – Mohamed Apandi Ali, who had been appointed by Najib earlier that year to replace Abdul Gani Patail, who had been leading a multi-agency taskforce investigating claims of misappropriation by Najib.

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Zeti became a thorn in the side of former prime minister Najib Razak


BNM told the attorney general that 1MDB should be charged for irregular practices.

Apandi was never likely to be a sympathetic ear and so it proved.

“He said we didn’t have a case and rejected the recommendation to charge the entity,” says Zeti. BNM gained more evidence and made a second attempt, also unsuccessful.

There was, however, another way forward. 1MDB had obtained approvals from BNM to make investments abroad. It had needed to obtain these approvals because it had borrowed the money to make these investments; Bank Negara had given approval for three such investments.

BNM had requested further information on those investments, and when that information was not forthcoming, questions were raised about whether or not the money had gone into the activities 1MDB had said it would. So when a fourth submission came in for approval, BNM rejected it and revoked the previous three approvals.

The important thing here was that this administrative action could be taken against 1MDB without needing the attorney general’s approval. But Apandi Ali didn’t see it that way.

“At which time, the AG [attorney general] thought that we were undermining his decision and held a major press conference highlighting that the bank didn’t have a case,” Zeti says. “I had to issue a statement saying we were not undermining his decision – we accepted it – but that we were now taking administrative action to uphold the integrity of our financial system and we have the powers to do so under our central banking legislation.”

Bank Negara fined 1MDB – and was paid. That, Zeti says, was the only action the bank was able to take. Even then, the amount of the penalty had to be approved by the attorney general.

It’s at this point we run out of things Zeti can discuss about 1MDB, because of the court case underway involving Najib. Unfortunately this includes the crucial question of when BNM knew about the alleged RM2.6 billion deposits in the AmBank account of Najib, and what it did (or could do) about it.

She has said she will comment on that when the case is done; only then will it be possible to form a complete view. There are some who would have liked to have heard her say more at the time.

Thorn in the side

It is fair to say, however, that by now she had become a thorn in the side of Najib and his many acolytes in the state apparatus. The pressure Najib put on BNM and Zeti personally, and their responses to this, may well form part of the court case, so must be left alone for the moment. But by this stage in the saga it was coming up to the time for her to leave the bank anyway.

“In the meantime, my term was ending, and I had already decided three years before that this five-year term was going to be my final term,” she says.

She had planned what she wanted to accomplish during those five years.

“One thing was to prepare the central bank to have new leadership and to strengthen the central bank.”

This work was years in the making. By the time she left there was succession planning five levels down. She says it worked.

“The organization has stayed solid and has always received the respect from the political leadership, whoever was in power,” Zeti says. “They didn’t disturb the bank. They knew it stood for certain things and that it also delivered results and outcomes. It had a strong track record. Those elements also allowed for the central bank to always have the right kind of people in it.”

Looking back, would she have done anything differently with 1MDB?

After a long pause, she says: “I couldn’t think of anything else that we could have done better. At the time 1MDB had shown us documents relating to their intended investments and they involved G2G [government to government] agreements amongst others. So at that time it did not raise doubts.

“But by the fourth time they asked for approval, it was rejected. We did raise questions many times for follow-up information on their first three investments. This information was never given to us. So it was only after the fact that we learned that the investments didn’t happen.”

With the revocation of the approvals that followed, 1MDB was requested to return the money to Malaysia; that’s about as much as she could do, she says.

She has no comment on Goldman Sachs.

Pressure-cooker environment

Nobody could really have had a more difficult beginning to leading a national central bank than Zeti did. In August 1998 the Asian financial crisis was gathering pace through the region and Malaysia was very much in the firing line. It happened to have a particularly spirited pair at the helm of government, then friends, later enemies, now apparently friends again: Mahathir Mohamad as prime minister and Anwar Ibrahim as minister of finance.

“I got the call from Anwar saying the leadership decided I would take over,” she says.

It was a big step up. She was chief economist at the time and highly regarded, but had no real experience of leadership on this scale. She said she wanted to speak to Mahathir before the letter of appointment was sent to the king for royal assent.

“I went to see him and told him: ‘I don’t have expertise on controls’,” Zeti says. “Mahathir said: ‘This country doesn’t have any [such] expertise. We are all in this together.’”

Zeti later said that the secret to her legendary calm is: “Having great clarity of the central purpose of what is to be achieved.”

She showed it back then. Emotions were high and senior figures were resigning on principle at a rapid pace. She took emotion out of it, examined the range of capital control measures that were being proposed – some of them borderline ludicrous – and worked out the most positive way forward.


There was panic in their eyes because we knew the market had far more resources and ammunition than we had. So if they saw any flicker in my eye, it would create a very disorderly environment 
 - Zeti Akhtar Aziz

“Truly, it would have been quite a disaster if the whole range of measures that were being proposed [were implemented],” she says. “But I’m a lateral thinker. So instead of confronting, I looked at what was the outcome we wanted to achieve.”

What was achieved was, in the short term, stability in the foreign exchange market while speculators were trying to destabilize it. Zeti had spent time overseeing the money markets in a previous role and knew how to spot speculative attacks and to deal with them.

“I knew, because I sat in the dealing room for more than a year watching it before my eyes.”

From such a pressure-cooker environment, Zeti learned a great deal. Few people have a more nuanced understanding of what a financial crisis is and how to avoid it by building resilience, addressing vulnerabilities, enhancing surveillance and preparing for the worst.

“Most people, when they see the light at the end of the tunnel, think things are going to get better,” she says. “Actually, it can be an oncoming train.”

One should never compare a Malaysian Muslim to a poker player, but it is clear Zeti also mastered the art of keeping her fears to herself, letting nobody outside the bank know the hand she was playing.

“You must never show your emotion on your sleeve,” she says.

When she was overseeing that money market dealing room in the darkest times: “There was panic in their eyes because we knew the market had far more resources and ammunition than we had. So if they saw any flicker in my eye, it would create a very disorderly environment.”

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An education

Zeti benefited from good mentors along the way and they weren’t all in Malaysia.

One was Sir Eddie George, who was governor at the Bank of England when Zeti was based in London. George frequently invited central banks who had offices in London to events, including an annual symposium for Commonwealth governors.

Zeti remembers one, in 1997, as the Asian financial crisis got underway, when Joseph Yam, the governor of the Hong Kong Monetary Authority, was invited to speak on what the crisis was all about. Zeti, in Malaysia by then, flew overnight to London, landing at 6am, and was on the night flight back the same day, standing in for the governor.

That day, Yam stood up and said: “I haven’t the faintest idea what is happening,” (although he clearly figured it all out shortly afterwards). Eventually Zeti was called to speak. Having been in front of a screen watching markets day after day for years, she had a sharper appreciation than most. She got noticed by a lot of people that day.

“Eddie was so grateful,” she recalls. “When I became governor, he was one of the governors who would give me advice and discuss issues with me.”

One of those talking points was his relationship with then UK Chancellor of the Exchequer Gordon Brown – “which I cannot repeat! But it was an education for me to learn about how you manage difficult relationships. It is always a difficult relationship between the central bank and the ministry of finance. They have to work together and at the same time maintain their distance.”

Answering the call

Compared with what has gone before, PNB is a pretty straightforward role.

“When it comes to PNB, it has only one mandate,” Zeti says. “I always tell [my staff] if something doesn’t contribute to that mandate, we shouldn’t be in the business.”

That mandate is to enhance the wealth of PNB’s unit-holders.

One senses, however, that she misses the idea of integration that came with central banking. From the outset she was a believer in the positive impact of regional capital market integration and that if capital flows were going to come back to Malaysia, they had to be channelled into some productive investment.

“It was one of the biggest challenges that I was confronted with, but I never wavered, because I believed in that agenda of greater financial integration,” she says. “That was one outcome certainly that I really pursued unrelentingly.”

The conversation turns to the 2018 election that changed Malaysia. During the week of the election, Zeti was going around the world on speaking engagements, the last of which concluded in Egypt on the afternoon of May 7; the election was on May 9. When her work was done in Cairo she caught a flight to Dubai and a connection to Kuala Lumpur to arrive on May 8.

“It was an A380 from Dubai,” she says. “There were huge numbers of Malaysians from all over the Middle East and Europe coming back to vote. There was a vibrant atmosphere in Dubai airport. Everyone came up to me and said: ‘You’re going back to vote?’ And I said: ‘Yes, absolutely!’”

She won’t disclose her vote, but it’s not hard to guess where it didn’t go.


Everyone knew their vote was going to count. Everyone was punching the air 
 - Zeti Akhtar Aziz

By the time she got to Kuala Lumpur, she says, the atmosphere was still more vibrant: “Everyone knew their vote was going to count. Everyone was punching the air. I believe the momentum for the outcome of the elections was in the days before. The momentum increased.”

She says she thought it would be close but that the incumbent would win. Instead it was decisive in the other direction; in Zeti’s own constituency the majority was 20,000.

Shortly after Mahathir took power, he approached Zeti to be a member of what is called the ‘eminent council’, a collection of elder statesmen of Malaysia brought together to give advice to the leader. It is chaired by former finance minister Daim Zainuddin.

Zeti told Mahathir this was the third time he had called her. The first was when she was a student at the University of Pennsylvania when she was finishing her dissertation on, among other things, the way capital flows responded to interest rate differentials. It was 1978. She got a call in the early hours of the morning from the FBI, saying: “Your deputy prime minister is coming and he wants to meet some Malaysian students. You’re the only one we could find.”

“I thought it was a prank,” she says.

They met at the McNeil building where the economics faculty was located. He enjoyed the meeting, having developed an interest in capital flows.

“He said: ‘Malaysia needs people like you. You’d better come back quickly and serve the country.’”

The second call, of course, was in 1998, to be acting governor. This third call came, once again at a 20-year interval, in 2018.

“I said: ‘Do you recall when we met at the University of Pennsylvania?’ [Mahathir] said: ‘Yes.’”

This third call, she thought, was probably out of necessity.

“He called back experienced people because he had only appointed four ministers. He didn’t have a shadow cabinet, probably because he didn’t expect to win.”

The council worked for 100 days to produce a report on the reforms that were needed. Zeti, naturally, was called upon to advise on fiscal strengthening for the government and dealing with debt. There is no quick fix for that and she’s still working on it.

In the end, after all that’s happened, is she still optimistic about Malaysia?

“Yes, because we are going through a period of transition,” she says. “There is quite a lot of clean-up to do. But Malaysia has the resources to deal with the issues we are confronted with. We just need to use those resources effectively to restore order.”

Malaysia is still growing (5% is a reasonable rate, she says) and it’s just a question of moving forward.

“This period of clean-up has generated uncertainty. Very soon we are going to put all that behind us and move on,” she says. “We have a very stable financial system, the banks are highly profitable and well-capitalized, with the right people running them; and we’ve got sound macroeconomic conditions with a trade surplus on our current account and reserves more than enough for a country of our size.”


“We have great pride that we defied all odds against us, because the whole world turned against us and condemned us for the kind of policies we were implementing. We didn’t have a single friend, actually 
 - Zeti Akhtar Aziz

Asked what she is most proud of, she comes back to the Asian financial crisis. She remembers being at a conference where Paul Krugman, Nobel Memorial Prize winner in economic sciences, asserted that Malaysia didn’t need to implement the policies it did, because it recovered around the same time as other nations in the region. She put her hand up and pointed out that Malaysia recovered at the lowest cost, not just in terms of the fiscal cost to taxpayers, but in terms of labour dislocation.

“I said: ‘Surely that counts.’ And I believe it did.”

For the first time, she sounds like Mahathir – the back-to-the-wall defiance he exudes.

“We have great pride that we defied all odds against us, because the whole world turned against us and condemned us for the kind of policies we were implementing. We didn’t have a single friend, actually.”

She is also proud of financial reforms and strengthening the banking system in the 2000s and developing the bond market, not just for the public sector but the corporate sector.

She and her team once put together a master plan with 119 specific recommendations for transformation of financial services.

“I can’t believe it, but almost all of those recommendations were implemented. As an emerging economy we have one of the most developed financial systems and 90% of our population have some form of a bank account.”

Mind mapper

From time to time as we talk, Zeti gets out a piece of paper. She has done this every time we have met, going back 20 years. She calls it a mind map.

“I’m a mind mapper,” she says as though she might be talking about stamp collecting or some other nerdish hobby.

Before our meeting she has put together a mind map about lessons from crisis, whether they be asset bubbles, weak institutions or the powers of surveillance. Over the years we have seen her produce mind maps on capital flows, Islamic finance, financial inclusion, Basel III and a host of other things besides.

“I was taught this,” she says, “by the inventor himself, Tony Buzan.”

She is quite proud of this skill. She first met Buzan in London in 1992 when he held a session and set everyone a game to do during lunch in Holland Park, about when to reinforce something in the mind, with people challenged to mark on a graph when the optimum moment for mental reinforcement should fall.

Zeti was closest to being right, in Buzan’s mind, and so he took a paperback copy of his book and signed it: “To Zeti, who will be increasingly appreciated.”

Ten years later he came to Bank Negara, when she was governor, and asked her to show him her best mind map. She has a picture with him (and the mind map).

He told her: “So it came to pass.”