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PP 7767/09/2010(025354)

Malaysia

••M

ARKET DATELINE

Economic Highlights

Malaysia •• M • ARKET DATELINE Economic Highlights 25 March 2010 Key Highlights From Bank Negara

25 March 2010

Key Highlights From Bank Negara Malaysia’s 2009 Annual Report Briefing

Household debt rose from 63.9% of GDP in 2008 to 76.6% in 2009 (see Chart 1). This was due partly to

the effect of a lower denominator as GDP contracted in 2009. Bank Negara, however, was not alarmed by the sharp rise given that NPL ratio of household loans dropped to a low of 3.1% in 2009, from 4.1% in 2008 and 8.1% in 2005, indicating that asset quality remained sound (see Chart 2). In addition, the Central Bank has set up a debt negotiation agency (Credit Counselling and Debt Management Agency) to help borrowers to 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 the Bank Negara to capture all outstanding loans. Bank Negara also believes that banks should have the capacity and capability to manage risks associated with rising household debts. Besides, almost half of the household debts (46.2% 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 our view, however, this implies that household disposable income could be affected somewhat in the near term if interest rates are to be raised. Indeed, the increase in household debt resulted in the increase in total household debt-to-personal disposable income from 114.9% in January 2009 to 136% in December, according to the Central Bank.

Bank Negara indicated that reflecting its conservative and cautious stance given an uneven global economic recovery,

its real GDP forecast of 4.65% is tilted towards the low end of a range of 4.5-5.5%. In addition, the forecast has yet to factor in any policy measures that are likely to be announced by the Prime Minister in Invest

Malaysia by end-March. These measures are likely to be directed towards promoting high growth sector, liberalisation

of the economy and privatisation of government enterprises in a move to drive private investment in the country.

As a result, the Central Bank indicated that there could be upside potential to its GDP forecast if these measures

are taking into account. In addition, it believes that the Government Transformation Programme will 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 will contribute to enhance the country’s economic growth.

Chart 1 Household Debt Picking Up 80 75 70 65 60 55 50 02 03
Chart
1
Household
Debt
Picking
Up
80
75
70
65
60
55
50
02
03
04
05
06
07
08
09
% of GDP
Chart 2 Household NPL Ratio Dropping 10 9 8 7 6 5 4 3 2
Chart
2
Household
NPL
Ratio
Dropping
10
9
8
7
6
5
4
3
2
1
0
02
03
04
05
06
07
08
09
% of total household loans

Please read important disclosures at the end of this report.

Peck Boon Soon (603) 9280 2163 bspeck@rhb.com.my

A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com

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25 March 2010 ◆ Bank Negara is not overly concerned about the recent report on

25 March 2010

Bank Negara is not overly concerned about the recent report on capital outflow. It attributed the outflow

to more local companies looking for business venture abroad. This is normal for Malaysia and it has been happening for sometime. We believe this is a fair assessment as Malaysian companies have been venturing abroad in recent years given the lack of investment opportunities in the country that could generate attractive returns for them. Besides the position of Malaysia’s capital account could be highly influenced by the flow of foreign portfolio funds. For example, the outflow of foreign portfolio funds rose to a high of RM84.4bn in 2008, after recoding an inflow of RM18.4bn in 2007. This has contributed partly to a widening of the capital account deficit to a high of RM118.5bn in 2008, compared with -RM37.7bn in 2007.

Are central banks slow in policy normalisation given a pick-up in loans and property prices? Bank

Negara is of the view that they have to be very sure about a firm economic recovery is taking place before reacting to normalising its monetary conditions. They have done it on 4 March after assessing the conditions and felt that the recovery is for real.

The capacity utilisation rate has risen to around 80% now, from 70% when the economy contracted by 6.2%

in 1Q 2009, according to the Central Bank. The low level of utilisation rate could be one of the reasons in explaining why private investment is low in the country.

What will be the level when interest rates are perceived to be normal? Bank Negara explained that a

neutral level of interest rate is when it is neither expansionary nor contractionary to economic activities. The normalisation policy is to bring interest rates back to more neutral level. However, it has yet to reach the neutral level, according to the Central Bank. Given that Malaysia is a high saving nation, there is a need for Bank Negara 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 look for better returns. This was currently happening as reported in the newspaper about the various investment scheme scams. At the same time, Bank Negara is mindful of a need to keep monetary policy accommodative to encourage private investment. In our view, this implies that the normalisation of monetary conditions will likely be at a measured pace and we expect the overnight policy rate (OPR) to be raised by another 25 basis points to 2.5% in July. The OPR will likely stay at this level until the end of the year. Meanwhile, the Central Bank did not commit to what will be the neutral level of interest rates, as there is no fixed level and it depends on the strength of economic growth.

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