Zeti Akhtar Aziz, governor of the Bank Negara Malaysia, sits for a photograph at the Bloomberg Asean Business Summit in Bangkok, Thailand, on Wednesday, Dec. 3, 2014.© Dario Pignatelli/Bloomberg Zeti Akhtar Aziz, governor of the Bank Negara Malaysia, sits for a photograph at the Bloomberg Asean Business Summit in Bangkok, Thailand, on Wednesday, Dec. 3, 2014.

By Chong Pooi Koon, Bloomberg

Embattled Malaysian Prime Minister Najib Razak gets the chance to remove a thorn in coming months when central bank Governor Zeti Akhtar Aziz steps down after 16 years at the helm.

Zeti has been uncharacteristically blunt about a funding scandal involving the premier and alleged financial irregularities at a state investment company, saying they hurt confidence in the country. As investors wait to see who Najib, also the finance minister, nominates to succeed her in May, some are concerned the next chief may be subjected to political influence.

“Any signs that politicians will renege on the political commitment to never interfere with monetary policy decisions or hold too much influence over the appointment of the next central bank governor will be detrimental to investor trust,” said Anders Faergemann, a fund manager in London at PineBridge Investments, which oversees $77.7 billion globally. Foreign investors view “Zeti as a safe pair of hands and will be looking for her replacement to have similar experience and market nous.”

See a list of potential candidates here.

Mandate Tested

Appointed in 2000 by a prime minister who rejected the notion of an independent central bank, Zeti won more powers and autonomy for Bank Negara Malaysia during Najib’s premiership with a mandate to ensure financial stability. That focus has been tested this year with the ringgit tumbling to a 17-year low after Najib’s multi million-dollar funding scandal came to light and investors grew wary of risks posed by 1Malaysia Development Bhd. Both the premier and 1MDB have consistently denied any wrongdoing.

“Maintaining investor confidence, containing ringgit volatility and supporting growth would be the immediate challenges” for the next central bank chief, said Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch.

Najib’s office did not reply to requests for comment. The central bank said there would be a “definite advantage” in a candidate who understands the workings of central banking and financial systems.

‘Undue Influence’

“Such a person must possess not only the capacity and capability but also the impeccable integrity to make decisions with independence in accordance with the best interest of the country,” it said in an e-mailed response to questions. “This would thus require the ability not to be subject to undue influence from any quarters that are proposing the adoption of their interest” which may not be in line with the financial and economic interests of the country, it said.

The governor hasn’t said who she would like to see replace her when she leaves after her term ends at the end of April. She told reporters in November she believes there is a candidate within the central bank who can succeed her.

The past year has been one of the most volatile for Malaysian markets since Zeti, 68, became the nation’s first woman governor. Falling commodity prices, uncertainty over when the Federal Reserve would raise interest rates and concern over 1MDB have weighed on sentiment. The ringgit is Asia’s worst performer, while foreign funds have pulled 34.7 billion ringgit ($8.2 billion) from stocks and bonds in 2015, the most since 2008.

Official Probe

In July, the Wall Street Journal reported an official probe alleged about $700 million may have moved through government agencies and companies linked to 1MDB before ending up in accounts bearing Najib’s name. The central bank was part of the investigating task force. Amid calls by opposition politicians and some within his own party for Najib to step down, he removed detractors including his deputy and the attorney general co- heading the task force.

“Najib’s track record has shown very little concern for the integrity of state institutions,” said Ooi Kee Beng, deputy director of Singapore’s ISEAS-Yusof Ishak Institute. “Over time, his struggle to stay in power has worsened this disregard for the independence of such institutions. There is no reason to assume that he might choose someone as BNM head who is not willing to do his bidding.”

Zeti alluded to the volatile political atmosphere in an August press conference.

“I have to be very careful what I say, that it has to be within the confines of the law,” she said. “Otherwise, the moment that I step out of this door, I will face arrest for talking about an individual account.”

Political Upheaval

The upheaval continued as an estimated 300,000 anti- government protesters took to the streets at the end of August demanding Najib’s resignation. “We don’t need any more scandals, we don’t need political uncertainty. When they resolve all the issues relating to 1MDB, then we will see a recovery in our currency,” Zeti said in September.

Requests by Bank Negara to the attorney general to start criminal proceedings against 1MDB for allegedly breaching Malaysia’s Exchange Control Act were denied, prompting the central bank to revoke some investment approvals. Zeti said it did so to protect the integrity of the financial system. She said this month there has been “some progress” in actions taken relating to some approvals, without giving more details.

“She’s just become a bit of a nuisance” to Najib after they “coexisted peacefully for several years,” said Chia Shuhui, an Asia analyst at BMI Research in Singapore.

No Peg

Still, Zeti and the Najib government are on the same page when it comes to supporting the economy, unlike neighboring Indonesia, where the central bank came under pressure from the government this year to cut rates. Zeti and Najib have repeatedly said Malaysia’s fundamentals are strong and there are no plans to restrict capital flows or move to a less flexible currency regime.

Nominees from within and outside the central bank will be vetted by Bank Negara’s board governance committee before Najib’s administration picks a candidate and seeks the king’s endorsement. That’s unlike the U.S. where the Senate holds confirmation hearings for Fed board nominees before voting on them. Zeti has said she hopes the board will conclude its assessment at least three months before the appointment.

The central bank has seen political interference in the past. Two previous governors resigned because of policy differences with the prime minister or finance minister in the 1980s and 1990s. Zeti was acting governor for a week in 1998 after Ahmad Mohd Don quit following months of bickering with then-Prime Minister Mahathir Mohamad over the nation’s rate policy during the recession.

Increasingly, “nobody who is not a trusted part of the governing circle — or of the same mindset, enjoying the confidence of its key, continuing players — has much chance of being even considered for appointment,” said Clive Kessler, a sociology professor at the University of New South Wales who has studied Malaysian politics since 1965.

To contact the reporter on this story: Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net To contact the editors responsible for this story: Shamim Adam at sadam2@bloomberg.net Stephanie Phang

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