Malaysia Watches Warily for Central Bank Governor’s Replacement

The projected April retirement of Zeti Akhtar Aziz, the 68-year-old governor of Malaysia’s central bank, Bank Negara, has kicked off intense speculation about who will follow her into the job. Over recent months, as the investigation into the personal finances of Prime Minister Najib Razak has droned on, Zeti is almost the sole person in authority who has not knuckled under and let the investigation die.

It appears unlikely, given the political situation, that her successor will be Muhammad Ibrahim, the deputy governor and ranking professional in the bank. That could be a mistake. Bank Negara since the 1980s has suffered crisis after crisis as politicians, particularly former Prime Minister Mahathir Mohamad, have attempted to direct monetary policy.

In October, Bank Negara, which is charged with regulating the country’s financial institutions, credit system and monetary policy, issued a statement saying it had requested a criminal investigation into the affairs of the scandal-plagued 1Malaysia Development Bhd investment fund despite the fact that Najib’s hand-picked Attorney General Mohamad Apandi Ali, to whom it had forwarded the case, said there was no reason for prosecution. Apandi Ali ultimately turned down the request.

Bank Negara, however, responded with a statement contradicting the attorney general’s office and saying 1MDB had secured permits for investment abroad based on inaccurate or incomplete disclosure of information, breaching banking regulations, and added that it had revoked three permits granted to 1MDB for investments abroad totaling US$1.83 billion (RM7.53 billion) and ordered the state fund to repatriate the funds to Malaysia

Sources in Kuala Lumpur said Zeti, one of the world’s most respected central bankers, faced the danger of blackmail by forces aligned with Najib over concerns that the government might prosecute her husband, Tawfik Ayman, because of secret overseas accounts. Rosmah Mansor, the prime minister’s wife, was reportedly involved in a campaign to drive Zeti from her position.

The Wall Street Journal last week printed a story saying Irwan Serigar Abdullah, the secretary general of the ministry of finance, was favored for the job. Serigar is considered close to Najib and his appointment would be tantamount to handing control of the now-independent institution to the prime minister. However, that has been denied and other candidates, including Awang Adek Hussain, the current Malaysian ambassador to the United States, and Abdul Wahid Omar, the former chief executive officer for Malayan Banking Bhd. who is now Minister in the Prime Minister's Department in charge of Economic Planning. Both are considered to be clean.

The bottom line is that Najib, in the fight of his life over a plethora of international and domestic scandals, will want someone he can control. Thus the job probably won’t go to Muhammad, the bank’s deputy governor, who is assumed to be too independent for Najib ‘s tastes. He is a career banker who has risen up the ranks and who is not going to compromise his integrity.

In fact, the independence of the central bank has largely been engineered by Zeti, who is widely respected and credited for pushing reforms and sound policies, as well as protecting the bank’s independence. Prior to her appointment, former Prime Minister Mahathir Mohamad used the central bank for his own personal punching bag, causing it to lose billions of dollars.

In 1985, following the so-called Plaza Accord of finance ministers in New York, which pushed the value of the US dollar down sharply, Bank Negara’s dollar reserves fell sharply when the bank was wrong-footed. The then-governor, Jaffar Hussein, began trading speculatively in an effort to make up the losses, apparently at Mahathir’s behest. The bank became a major player in the foreign exchange market, with the Federal Reserve requesting that the bank rein in its activities. At one time, the central bank’s exposure was rumored to be in the region of RM270 billion (US$66.65 billion at current exchange rates) – three times the country’s gross domestic product and more than five times its foreign reserves at the time.

In 1992 and 1993, Mahathir became convinced he could make billions of ringgit by taking advantage of a British recession, rising unemployment and a decision by the British government to float the pound sterling free of the European Exchange Rate Mechanism.

Mahathir ordered Bank Negara to buy vast amounts of pounds sterling on the theory that the British currency would appreciate once it floated. However, in what has been described as the greatest currency trade ever made, the financier and currency wizard George Soros’s Quantum hedge fund established short positions, borrowing in pounds and investing in Deutschemark-denominated assets as well as using options and futures positions.

In all, Soros’s positions alone ac­counted for a gargantuan US$10 billion. Many other investors, sensing Quantum was in for the kill, soon followed, putting strenuous downward pressure on the pound. The collapse was inevitable. Quantum walked away with US$1 billion in a single day, earning Mahathir’s eternal enmity and earning Soros the title “the man who broke the Bank of England.”

Mahathir and Bank Negara, on the other hand, walked away with a US$4 billion loss, followed by another US$2.2 billion loss in 1993, the total equivalent of RM15.5 billion. Although the disastrous trades destroyed the entire capital base of Bank Negara, after first denying it had taken place, the then-Finance Minister Anwar Ibrahim repeatedly reassured parliament that the losses were only “paper losses.”

Eventually, the Finance Ministry had to recapitalize the central bank, almost unheard of for any government anywhere. It is reliably estimated that Bank Negara lost as much as US$30 billion in this and other disastrous currency trades, costing the head of the central bank and his currency trader deputy their jobs.

If anything, that ought to be an argument for a professional from the ranks of the central bank to take over the reins when Zeti steps down. But politics, especially the politics of preserving Najib’s job, has taken precedence in Malaysia. It would be foolish to bet against a candidate aligned with the prime minister.