BNM Annual Report 2015

Transcription

1 Dr. Mohd Afzanizam Abdul Rashid Chief Economist BNM Annual Report 2015 We attended analyst briefing held at Bank Negara Malaysia (BNM) yesterday in conjunction with the release of their annual report for Much of the macro forecasts were already in the public domain when the government announced the Recalibration of Budget 2016 in January this year. Therefore, the briefing was relatively none event to the analysts and fund managers. Furthermore, monetary policy is more or less at status quo (for now) as the BNM is of the view that the current Overnight Policy Rate (OPR) is still appropriate and supportive to growth. This suggests the BNM seems not inclining to provide additional stimulus apart from the latest cut in the Statutory Reserve Requirement (SRR) which was enacted in January this year. On the exchange rate, the BNM reiterated their stand and belief that it is not their policy instrument. Therefore, Malaysian Ringgit (MYR) will be determined by the market forces although occasionally, the BNM may come and intervene in order to ensure an orderly adjustment to the prevailing exchange rate. However, we were told that session between Tan Sri Zeti with the press was rather lively as questions were directed largely on one of the Malaysia s sovereign funds. Below are some of the key points which were discussed during the questions and answers session. 1. Balanced of risk One of the audiences asked about the emergence of upside risks under the current environment. The immediate response was downside risks have been extensively discussed and debated among the staff and therefore, the upside potential would be a welcome surprise element in their scenario building. Dr. Sukudhew Singh cited above trend growth in advanced economies as well as China strong performances are the primary examples of potential upside risks. However, this would be too good to be true under the prevailing condition whereby advanced countries are running out of policy options to support the economy. As such, downside risks are more prevalent and this will dictate BNM s policy direction in 2016 and perhaps, 2017 too. 2. Non-residents holdings in government bonds The composition of non-residents holdings in government bonds were revealed during the presentation. It appears that the majority of non-residents investors were mostly have longer term investment horizon. Additionally, regional central banks are also an active participants as they seek to diversify their international reserve assets. Given that, the nature of their investment is very sticky and therefore, concerns on sudden outflows by the non-residents are rather contained at this juncture. Page 1

2 Chart 1: Distribution of Non-residents holdings in government bonds as at end-january 2016 Asset Management 44% Centrak Bank / Government 29% Pension Funds 13% Banks 10% Insurance Companies Nominees / Custodian Others 2% 1% 1% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 3. Corporate debt level at 104.8% of GDP in 2015 The Financial Stability and Payment System Report 2015 indicated that corporate debt is currently stands at 104.8% of GDP. Such level is higher compared to average of 94.1% of GDP. The report says that the rise in corporate gearing was due to largely of higher external debt following the weakening of MYR during the year. Exchange rate valuation accounted for 75% of the increase in corporate external debt recorded for the year. Consequently, total corporate external debt as a share of GDP increased to 24.8% of GDP in 2015 from 20.5% previously. Hence, one may need to tread carefully when dealing with corporate in view of elevated levels of indebtedness. Based on Chart 2, it appears that Metal and Oil & Gas are at the lowest quartile in terms of Interest Coverage Ratio (ICR), signalling challenging prospect for debt servicing ability relative to other sectors. Chart 2: Interest Coverage Ratio (x) by sector Rubber products 26.5 Electrical and electronics Chemical & petroleum related product Real estate activities Palm oil Oil and gas Metal Page 2

3 4. Higher inflation rate for more urbanised states and for lower income group In one of the Article Box in the BNM Annual Report 2015, there was a study on inflation rate across the states in Malaysia. The chart below shows that inflation rate tend to be higher in urbanised states and for lower income. Apart from that, aggregate household income has increased by 8.8% CAGR during and it is exceeding aggregate household expenditure CAGR of 8.5% during the same period. For the record, CPI in 2015 stands at 2.1% and one should refers this figure when looking at the Chart 3 below. Chart 3: CPI inflation by States and Income Groups in 2015 (Annual Change %) However, a more detailed analysis shows three categories of households: i. Dissaver households mainly from lower income groups that spend more than their income ii. The bottom 40% of households financial obligations of these households, including loan repayments, has registered relatively strong growth. As a result, these households, who only have a relatively small amount of savings, re vulnerable to both income and price shocks iii. Households earning fixed incomes, including pensioners while aggregate income grew at an average of 8.8%, there are segments f the total population who experienced a much lower or no income growth. Page 3

4 Hence, policy should be multi-dimensional which will take into account improving productivity levels, connectivity in public transport and financial education. 5. Positive output gap is narrowing The BNM estimated that output gap will narrow to 0.00% in 2016 from +0.21% and +0.32% in 2015 and 2014 respectively. This would mean that the actual and potential GDP is almost the same in This could be the reason for BNM to maintain the OPR since there is no slack in the economy. However, this could also mean that the economy is poised to register negative output gap should the external sector continue to deteriorate which would result the actual GDP sliding down below the potential GDP. In the event of negative output gap emerges, the reduction in OPR is warranted in order to stimulate the aggregate demand. Conclusion We are maintaining our call that the BNM may cut the OPR by 25 basis points in the 2H2016. As indicated earlier, the main intention for the reduction is to facilitate industries which continue to expand their production capacity such as those in the rubber products and electrical & electronics and to some extent, healthcare industry. We understand as some may have reservation since it will result in household to increase their leverage once the OPR is cut. However, we beg to differ to such argument as we believe decision to take on more debt is independent of the level of interest rates. Page 4

5 Appendix - Macro forecast by BNM Growth F GDP 4.7% 6.0% 5.0% 4% to 4.5% Domestic Demand 7.3% 5.9% 5.1% 4.3% Consumption 7.0% 6.4% 5.6% 4.5% -Public 5.9% 4.4% 4.3% 2.0% -Private 7.2% 7.0% 6.0% 5.1% Investment 8.2% 4.8% 3.7% 4.0% -Public 1.9% -4.7% -1.0% 1.1% -Private 12.8% 11.0% 6.4% 5.5% Exports 0.3% 5.1% 0.7% 3.2% Imports 1.7% 4.2% 1.3% 3.4% Net Export -9.8% 12.8% -3.7% 1.1% Other macro variables Consumer Price Index 2.1% 3.2% 2.1% 2.5% - 3.5% Unemployment rate 3.1% 2.9% 3.2% 3.3% - 3.5% Current acc % of GNI 3.6% 4.4% 3.0% 1% - 2% Fiscal balance % of GDP -3.8% -3.4% -3.2% -3.1% Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any purpose without Bank Islam s prior written permission Page 5