Mohd Afzanizam Abdul Rashid Chief Economist 03-2088 8075 afzanizam@bankislam.com.my BNM Annual Report 2014 & Financial Stability and Payment Systems Report 2014 1.0 Introduction We attended a briefing on BNM Annual Report 2014 yesterday. The macro backdrop leading to the briefing was rather interesting as Bank of Thailand (BOT) just reduced their policy rate by 25 basis points to 1.25% during mid day. Meanwhile, Malaysian Ringgit (MYR) depreciated to more than RM3.70 before closing at RM3.69. We are hopeful of certain guidance on BNM s stand on monetary policy this year given that a series of interest rate cut across major economies such as China, India and Indonesia. In the same vein, the implementation of Quantitative Easing (QE) measures by the European Central Bank (ECB) last Monday does give a gloomy picture on the external front with a total of 1.1 trillion worth of financial assets will be purchased between now until September 2016. Table 1: Series of policy rate cuts across the globe No. Country Key targeted Current BP change rate rate since Jan 1 Sweden Repo Rate -0.10% -10 2 Israel Bank Rate 0.10% -15 3 Denmark Lending Rate 0.05% -15 4 Indonesia Reference Rate 7.50% -25 5 Jordan Repo Rate 3.75% -25 6 Peru Reference Rate 3.25% -25 7 Thailand One-day Repo rate 1.75% -25 7 Australia Cash Target Rate 2.25% -25 8 Norway Deposit Rate 1.25% -25 9 Canada Overnight Rate 0.75% -25 10 China Cash Target Rate 5.35% -25 11 Egypt Deposit Rate 8.75% -50 12 Romania Key Policy Rate 2.25% -50 13 Switzerland Target Rate -0.75% -50 14 India Reverse Repo Rate 6.50% -50 15 Poland Repo Rate 1.50% -50 16 Turkey 1W Repo Rate 7.50% -75 17 Pakistan Discount Rate 8.50% -100 18 Russia Key Rate 15.00% -200 Source: Bloomberg Page 1
2.0 Macro forecast In general, the macro economic forecast is pretty much in line with what has been communicated during the tabling of the revised Budget 2015 in January. The GDP growth in 2015 is expected to be in a range forecast of between 4.5% and 5.5% with 5.0% growth as their mid-point target. Forecast for inflation rate, which is anticipated to reach between 2.0% and 3.0% in 2015, was quite interesting. The earlier projection was between 4.0% and 5.0% when the government issued its Economic Report 2014-15 in October last year. For obvious reason, the adoption of managed float fuel pricing mechanism since December 2014 has been cited as the key factor for such revision. Apart from that, the effect of Goods and Services Tax (GST), which is schedule to go live next month, on general prices are likely to be contained. This was premised on two factors. First, basic necessities such as fresh food and utilities are zero-rated or exempted from GST, thereby reducing the extent of price pressure. Second, some items such as clothing and electrical appliances are already subjected to the same or higher tax rates under the Sales and Services Tax (SST). As such, one should expect prices for some of these items remain relatively stable. Meanwhile, the current account is expected to have a narrower surplus balance of RM21.4 billion or between 2% and 3% of GNI in 2015 (2014: RM49.5 billion or 4.8% of GNI). Lower current account surplus balance reflects the narrowing of savings and investment as domestic demand continue to remain supportive to overall growth amidst moderation in the external sector. Table 2: Macro forecast Actual BNM Bank Islam Consensus 2014 2015F 2015F 2015F GDP growth 6.00% 4.5% to 5.5% 5.30% 4.80% Inflation 3.20% 2.0% to 3.0% 3.50% 3.50% Current account balance % of GDP 4.60% 1.90% 3% - 4% 3% Current account balance % of GNI 4.80% 2.0% - 3.0% na na Source: BNM & Strategic Management, Bank Islam & Bloomberg 3.0 Malaysian ringgit (MYR) pegged? The weakening of MYR has also garnered strong interests among the attendees. Question was raised whether BNM could opt for a currency peg since MYR is deemed to be one of the worst performing currency in this region. Tan Sri Zeti candidly replied that We ve moved on. This simply means that such policy option is off from the table. We glad that this could clear the air as uncertainty over the possibility of the return of fixed exchange rate regime could add further downward spiral on market sentiments. The ongoing liberalization of capital account which has promoted the two-way capital flow was well received by the export-oriented businesses especially when the weakening of MYR has increased their product appeal to the international market. Page 2
Also, strong participation of non-resident indicates that foreign investors are more incline to have certain exposure in our bond market and the two-way flow will certainly facilitate the development of Malaysia s capital market. Therefore, the benefits of reverting to the peg system are not so compelling under the prevailing condition. Further, the current macro economic backdrop is different compared to the Asia Financial Crisis 1997/98 whereby the twin deficits issues (current account and fiscal deficits) were very much prevalent then. Table 3: Financial integration and financial market depth Singapore Hong Kong Malaysia Indonesia Thailand South Korea Banks external 116.9 20.2 21.4 4.2 n.a. 15.6 asset position (% share of GDP) Bond market capitalization 81.9 68.3 103.8 15.2 76.3 123.2 (% share of GDP) NR holdings n.a. 7.4 28.3 37.3 17.3 10.6 (% share of govt. bonds) Source: BNM 4.0 Household indebtedness well contained As mentioned in our report (OPR unchanged at 3.25% dated March 6), household debt-to-gdp ratio has risen to 87.9% in 2014. While the ratio is high, a gradual slowdown in the household debt growth to 9.9% in 2014 (2013: 11.5%) suggests that the macro imbalances are being addressed. The BNM has engineered a soft-landing in household indebtedness growth through series of macro prudential measures which were first introduce in 2010. Additionally, the existence of Agensi Kanseling dan Pengurusan Kredit (AKPK) since 2006 has complemented the policy in dealing with such issue. Borrowers are more open to come and discuss their financial predicaments and this could preempt the potential impairment in the financing facility. While debt remain at elevated levels, the quality of the borrowers have actually improve. According to the Financial Stability and Payment Systems Report 2014, about 80% of new loans have a debt service ratio (DSR) of less than 60%, while half have a DSR of less than 40%. Apart from that, borrowers whose monthly earnings are less than RM3,000 and below, the share of new loans with a DSR of less than 60% is higher at 91.8% (July 2013: 85.9%). Therefore, households appear to have buffers and flexibility to withstand financial challenges. Page 3
Chart 1: Household debt as percentage of GDP 90.0% 85.0% 80.0% 76.2% 74.5% 75.0% 72.4% 81.2% 86.6% 87.9% 70.0% 65.0% 60.0% 66.4% 66.3% 63.6% 60.4% 55.0% 50.0% Y05 Y06 Y07 Y08 Y09 Y10 Y11 Y12 Y13 Y14 Source: CEIC Chart 2: Household debt growth 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 15.1% 13.9% 13.5% 11.5% 10.9% 10.0% 9.9% 6.9% Y07 Y08 Y09 Y10 Y11 Y12 Y13 Y14 Source: CEIC 5.0 Our view We believe that the current weaknesses in MYR continue to remain as markets are grappling with the timing for the first interest rate hike in US. In addition, the existence of noises would rub salt to the wound, causing MYR to remain weak in the foreseeable future. On the flipside, MYR depreciation bodes well for the manufacturing sector especially the Electrical and Electronic (E&E) sector given that global demand for semiconductor is expected to remain steady in 2015 and 2016. Apart from that, macro imbalances such as household debt and fiscal deficits have been addressed by the policy makers which are good for long-term sustainability. Meanwhile, stability in the labour market condition, income growth and lower fuel prices would ensure consumer spending to remain healthy, providing a strong buffer to the economy. This is particularly important since private consumption accounted for more than half of Malaysian economy. As such, OPR is expected to remain stable at 3.25% throughout 2015. Nonetheless, bias is now on the downside as external sector looks somewhat mixed, judging from the policy responds by the monetary authority. Page 4
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