Inve$t | Market Sentiments | 7 October 2022
According to Bank Negara Malaysia in its Financial Stability Review Report for 1H2022, businesses continued to show improvement in their financial performance in the first half of 2022 (1H2022) in line with the full resumption of economic activities and reopening of international borders. However recovery remains uneven and slower in certain economic sub-sectors. But overall business loan impairments remain low at 1.1% of total banking system loans. The share of business loans with higher credit risk has continued to decline to 14.4% of total business loans, in line with the gradual improvement in business conditions.
The share of SME (small and medium enterprise) loans under repayment assistance has halved to 13.1% of total SME loans (or 2.3% of total loans from the banking system and development financial institutions). SMEs that have exited repayment assistance programmes have largely been able to resume their loan repayments. Businesses are expected to face continued headwinds, including tightening global financial conditions and exchange rate developments. However, additional business defaults under simulated severe stress scenarios are expected to remain manageable.
1: Market remains orderly amid stronger US dollar:
The combination of aggressive policy rate hikes in the US, the military conflict in Ukraine and more moderate global growth outlook had affected most major and emerging market currencies, including the ringgit. Year-to-date, the ringgit has depreciated by 8.6% against the US dollar. Against other major trade partners, the ringgit has remained broadly stable as reflected in the marginal appreciation of 0.2% in the Nominal Effective Exchange Rate. Notwithstanding the depreciation in the ringgit against the US dollar, adjustments in the onshore foreign exchange (FX) market have remained orderly, with the one-month USD/MYR implied volatility averaging at 4.2%, below recent historical averages (2021: 4.3%; 2015-2019 average: 6.5%). Trading volumes in the domestic FX market have also remained healthy, with the onshore trading volume averaging US$13.3 billion daily (2021: US$11.2 billion). These conditions are expected to ensure that the domestic FX markets will continue to support businesses and market participants in managing their FX exposures.
2: Household debt-to-GDP at pre-pandemic level:
Malaysia’s ratio of household debt-to-GDP has reverted closer to pre-pandemic levels at 84.5% as banks continue to maintain prudent lending standards amid a sustained recovery in household lending. The share of household debt under repayment assistance has declined significantly from 18.8% in December 2021 to 2.4% as of June 2022, with a lower share of household debt reported by banks to be of higher credit risk. Household impairment and delinquency ratios increased marginally but continue to remain low and within expectations at 1.2% and 0.6%, respectively. The share of household loans classified by banks as exhibiting higher credit risk (Stage 2 loans) has continued to decline to 7.9% (December 2021: 8.5%). It is expected to decline further over the course of the year as more borrowers that have exited repayment assistance programmes complete a minimum ‘observation’ period of loan servicing. Banks have also set aside sufficient provisioning buffers against these risks.
3: Financial system well-positioned to withstand shocks:
The domestic financial system remains well-positioned to withstand shocks and support economic recovery. The strong buffers of banks, insurers and takaful operators will continue to preserve the resilience of financial institutions against potential unexpected losses. Assuming additional severe shocks applied on top of banks’ stress test, post-shock aggregate capital ratios as at end-2023 remain comfortably above regulatory minimum levels at 15.4% for banks and 209% for insurers and takaful operators. This will enable them to continue supporting households’ and businesses’ financing and protection needs as economic activities resume. The funding position of the banking system remained strong in 1H2022, with a healthy aggregate liquidity coverage ratio (LCR) of 148.3% and net stable funding ratio (NSFR) of 118.5%, which supported lending activities. Banking system deposits recorded steady growth (6.6%; 2015-2019 average: 4.4%), mainly driven by business deposits in line with the recovery in economic activities.
While the overall profitability of insurance and takaful funds declined in 1H2022, driven by weaker investment performance of life insurance and family takaful funds, for life insurance and family takaful funds, excess income over outgo was negative in 1H2022. The decline was driven by net unrealised losses from bond and equity investments, amid higher bond yields and weaker performance of global and domestic equities during the period. In contrast, income from underwriting activity improved on the back of the medical and health segment which has been a major contributor to new business growth.
4: Strong cyber defence of financial institutions remains a priority:
Financial institutions are directing significant resources to maintain strong cyber defences and technology risk controls. Financial institutions are also required to implement additional countermeasures against online banking fraud. In parallel, BNM is coordinating efforts with the industry, Royal Malaysian Police (RMP), and the Malaysian Communications and Multimedia Commission (MCMC) to further improve fraud incident response and recovery efforts and educate the public on using digital financial services safely.
State of economy goes beyond ringgit’s showing, US dollar over-reliance needs rethink – Finance Minister
According to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, it may be time to think of solutions out of an over-reliance on the US dollar as the main global reserve currency of countries. While clarifying he did not mean abandoning the greenback for another currency, he explained the reliance on the US dollar has caused countries, namely Asian economies, to be at the mercy of decisions and market fluctuations occurring continents away. Malaysia remains committed to the global financial architecture as it exists, but sooner or later, these are questions smaller trading nations must consider, uncomfortable as they may be. He was speaking in his closing speech at the Khazanah Megatrends Forum 2022.
With its 4.7 billion population, Asia is arguably the dynamo of global economic growth, now and in the future. Much of the commodities needed to make the leap to the so-called ‘digital’ and ‘green’ economies are to be found on our turf. The unique position of the US dollar as the reserve currency of the world means that the greenback often appreciates in uncertain times. Thus, a currency’s (non-dollar) position versus the greenback – especially in the short term – is hardly a yardstick of the state of the economy. A world where key countries can adversely affect the growth trajectories of others, including Malaysia, is unsustainable. Certain policies may benefit one superpower domestically, but they must not end up hurting others and potentially jeopardising global prosperity.
He suggested the creation of a viable International Monetary Cooperation Mechanism to ensure financial systems are not only effective and fair, but also consider the unique needs of small, emerging and developing countries equitably. This has been done before since the 80s with the Plaza Accords to stabilise the US dollar against the Japanese yen and the German mark. More recently this was done during the Global Financial Crisis in 2008. Here, central banks in developed countries had coordinated to prevent financial contagion from spreading to the rest of the world. And at the onset of the Covid-19 pandemic, the Global Financial Safety Net provided ample financing to quickly stabilise the global financial markets and contain the economic crisis. Existing institutions such as the Bank of International Settlements and International Organisation of Securities Commissions also had an important role in aiding developing countries and emerging economies. Meanwhile, despite the alarming fall in the ringgit at the moment, the local currency may return to being based on its economic fundamentals. This is given the strong demand for its goods and services. The ringgit has contracted against the dollar, but this has been more manageable relative to our regional peers and key trading partners.
Meanwhile it was important for Malaysia to ensure its food and energy security needs are secure amid the likely “perfect storm” for the global economy ahead. We must insulate our food and energy security from rising production and price volatility amid geopolitical conflicts, supply chain disruptions, deglobalisation movements and climate change. Given the heightened global geopolitical tensions, we must seriously consider investing in building a strong Asean-wide supply chain. This is especially for food and energy security. This could also be done by capitalising on the Asean trading bloc to invest in building strong Asean supply chains in critical industries. If Asean policymakers can coordinate and work closely together, we can identify critical industries where we can scale up and enhance to be a critical part of the global supply chain. This will benefit not just our individual economies, but also serve as a mitigating strategy against calamities such as the pandemic, and geopolitical tensions happening in other parts of the world.
Touching on Budget 2023 to be announced on October 7, he said that it will be forward-looking and people inclusive. It will be pro-investment, development, environment, empowerment; and most importantly, pro-rakyat.
Global woes cast shadow over ASEAN+3 growth – AMRO
According to the ASEAN+3 Macroeconomic Research Office (AMRO) Chief Economist Hoe Ee Khor, AMRO has revised downwards its short-term growth forecast for the ASEAN+3 region. The continuing strict dynamic zero-COVID policy and real estate sector weakness in China and potential recessions in the United States and the euro area are weighing on the region’s outlook. In its October Update, AMRO forecasts the ASEAN+3 region to grow by 3.7 percent this year—down from the 4.3 percent growth projected in July reflecting mainly weaker growth in Plus-3 economies. The ASEAN region is expected to grow strongly by 5.3 percent. The region’s inflation rate for 2022 is now projected to be 6.2 percent—a full percentage point higher than previously forecast. Growth is expected to increase to 4.6 percent in 2023 as China’s economy picks up, with inflation moderating to about 3.4 percent.
The prolonged war in Ukraine is deepening Europe’s energy crisis, pushing it closer to recession. In the United States, aggressive monetary tightening to fight persistently high inflation is intensifying fears of a hard landing. A simultaneous economic slowdown in the United States and euro area, in conjunction with tightening global financial conditions, would have negative spillover effects for the region through trade and financial channels.
In ASEAN+3, inflation is accelerating. Food and fuel prices remain elevated despite recent easing in key global commodity benchmarks. Subsidy cuts in some economies and depreciating currencies have also pushed prices higher. Central banks in the region are raising policy interest rates to safeguard price stability and support their currencies. However, the pace of monetary tightening has generally been more measured and gradual than in the United States and the euro area. AMRO’s assessment are found in the latest quarterly update of its flagship report, the ASEAN+3 Regional Economic Outlook (AREO). The next update will be published in January 2023.
Eye On The Markets
This week, on Friday (07Oct), the Ringgit opened at 4.6480 against the USD from 4.644 on Monday (03Oct). Meanwhile, the Ringgit was 3.2521 to the Sing Dollar on Friday (07Oct). On Monday (03Oct), the FBM KLCI opened at 1393.70. As at Friday (07Oct) 10:00am, the FBM KLCI is up 18.58 points for the week at 1412.28. Over in US, the overnight Dow Jones Industrial Average closed down 346.93 points (-1.15%) to 29,926.94 whilst the NASDAQ shed 75.33 points (-0.68%) to 11,073.31.