BNM’s review provides interesting insights

KUCHING: Bank Negara Malaysia’s (BNM) 2009 annual report revealed key findings that will shape the nation’s economy in the near term.

REBOUNDING ECONOMY: Bank Negara Malaysia indicated that its real Gross Domestic Product (GDP) forecast was 4.65 per cent.

RHB Research Institute Sdn Bhd (RHB Research) reported that Bank Negara Malaysia indicated that its real Gross Domestic Product (GDP) forecast of 4.65 per cent was tilted towards the new low end of a range of 4.5 to 5.5 per cent reflecting its conservative and cautious stance given an uneven global economic recovery.

In addition, the forecast had yet to factor in any policy measures that were likely to be announced by the Prime Minister in Invest Malaysia by the end of March, the research house revealed.

It added these measures were likely to be directed towards promoting high growth sector, liberalization of the economy and privatisation of government enterprises in a move to drive private investment in the country.

As a result, BNM indicated that there could be upside potential to its GDP forecast if these measures were taken into account, the research firm revealed.

Besides, RHB Research stated BNM believed that the Government Transformation Programme would contribute positively to GDP growth through the enhancement of civil servants’ productivity and efficiency.

At the same time, a rise in inter-linkages with emerging economies in trade and financial activities would contribute to enhance the country’s economic growth, it suggested.

In other developments, the research firm said that BNM was not overly concerned about the recent report on capital outflow as it attributed the outflow to more local companies looking for business ventures abroad, which was normal for Malaysia and had been happening for some time.

It added this was a fair assessment as Malaysian companies had been venturing abroad in recent years given the lack of investment opportunities in the country that could generate attractive returns for them.

Other than that, the position of Malaysia’s capital account could be highly influenced by the flow of foreign portfolio funds, the research house mentioned.

It cited an example where the outflow of foreign portfolio funds rose to a high of RM84.4 billion in 2008 after recording an inflow of RM18.4 billion in 2007.

RHB Research stated that had contributed partly to a widening of the capital account deficit to a high of RM118.5 billion in 2008 compared with minus RM37.7 billion in 2007.

Furthermore, BNM was of the view that they had to be very sure about a firm economic recovery was taking place before reacting to normalising its monetary conditions, it suggested.

The research firm said BNM had done it on March 4 after assessing the conditions and felt that the recovery was for real.

In addition, it reported the capacity utilisation rate had risen to around 80 per cent now from 70 per cent when the economy contracted by 6.2 per cent in the first quarter of 2009 (1Q09) according to BNM.

The low level of utilization rate could be one of the reasons in explaining why private investment was low in the country, the research house pointed out.

It suggested BNM explained that a neutral level of interest was when it was neither expansionary nor contractionary to economic activities and the normalisation policy was to bring interest rates to a more neutral level.

However, it had yet to reach the neutral level according to BNM and that given Malaysia was a high saving nation there was a need for BNM to bring back interest rates to a more normal level to ensure a fair real rate of return for savers and prevent excessive risks taking when savers looked for better returns, the research firm mentioned.

RHB Research reported BNM was also mindful of a need to keep monetary policy accommodative to encourage private investment.

It added this implied that the normalisation of monetary conditions would likely be at a measured pace and expected the overnight policy rate (OPR) to be raised by another 25 basis points to 2.5 per cent in July.

The OPR would likely stay at this level until the end of the year, the research firm pointed out.

Additionally, the research house suggested BNM did not commit to what would be the neutral level of interest rates as there was no fixed level and it depended on the strength of economic growth.

To recap, RHB Research reported household debt rose from 63.9 per cent of GDP in 2008 to 76.6 per cent in 2009 which was partly due to the effect of a lower denominator as GDP contracted in 2009.

However, BNM was not alarmed by the sharp rise given that the nonperforming loan (NPL) ratio of household loans dropped to a low of 3.1 per cent in 2009 from 4.1 per cent in 2008 and 8.1 per cent in 2005 indicating that asset quality remained sound, it pointed out.

In addition, the research house mentioned BNM had set up a debt negotiation agency known as the Credit Counselling and Debt Management to help borrowers deal with late payments and financial difficulties while banks could easily check borrowers’ borrowing status before granting them any new loans through a data system set up by BNM to capture all outstanding loans.

BNM also believed that banks should have the capacity and capability to manage risks associated with rising household debts, it stated.

Besides, the research firm added almost half of the household debts translated as 46.2 per cent in 2009 were concentrated in long-term secured borrowings to fund house acquisitions in line with Malaysia’s young population structure and rising new family formation.

In its view, RHB Research this implied household disposable income could be affected somewhat in the near term if interest rates were to be raised.

According to BNM, the increase in household debt resulted in the increase in total household debt-topersonal disposable income from 114.9 per cent in January 2009 to 136 per cent in December, pointed out the research house.