BNM Watch: 2012 Annual Report

[UPDATE: Links to box articles are now available]

You can get the news summary here. My own notes focus less on the economic outlook and more on the financial stability part, as well as the liberalisation of forex and changes in the payment system that were  announced concurrently:

1. Household debt ratio – the ratio to GDP increased 4 percentage points to 80.5% from 76.6% in 2011. This isn’t quite as bad as it looks, as household borrowing growth actually slowed. The higher ratio was due to slowing nominal income growth, not accelerating borrowing. Loan impairments (i.e. loans going bad) are still trending down, to 1.9%.
2. Household real estate borrowing – BNM’s policy focus is a balancing act between maintaining property prices (i.e. collateral and equity values) while limiting speculation. Some interesting breakdowns were also provided, such as a slowdown in lending for purchases of shop lots for investment purposes, but an increase in the number of borrowers with multiple housing loans. For the latter, the number of borrowers is a fairly small proportion of the whole (about 3% of borrowers and 13.7% of value).
3. Non-bank household lending – still worrisome, and getting worse. Growth rates are double that of the banking sector, and most of it is in personal financing (80% of the total), not collateralised credit. Loan approvals amounted to 600,000 for new facilities worth RM43 billion in 2012, an increase of 63.7% (!!!!!). The majority of borrowers are in the low income segment and also within the government service (salary-deductions). The average personal loan is an amazing RM68,000, with a tenure of 20-25 years, despite income levels under RM3k per month. This is ridiculous. BNM can do little about this as none of these institutions fall under BAFIA or DAFIA. The new Financial Services Act (FSA) which has been passed by Parliament would give more powers to BNM to regulate this type of lending (if it acts like a bank, it can be regulated like one), but will only come into force in May or June this year. There’s actually little systemic risk involved, as from an institutional standpoint the credit risk is small and there are few linkages with the broader financial system.  Yet there remains the impact of over-extended borrowers on low incomes and minimal savings.
4. Stress-testing the banks – A full section of the Financial Stability Report was devoted to stress tests of the banking system (pg38-43). Capital ratios are more than adequate, even under severe stress (multiple downside shocks happening all at once, modelled over 3 years), although smaller Islamic banks appear more susceptible to credit losses. Possible contagion effects through the interbank network (2 potential bank failures) are also limited. BNM and other regional central banks (including Australia, New Zealand and Japan) have also put in place a protocol for cooperating and dealing with a region-wide crisis.
5. High foreign holdings of MGS – BNM thinks the risk is minimal as two-way flows of capital mitigate the risk of a sudden-stop scenario. Back-stopping the market are local funds which would come in as prices become more attractive, and official sector holdings (code for central bank international reserves). That last one was a titbit that isn’t in the published document.
6. Forex market – BNM continues to restrict Ringgit trading to the onshore market, but apart from that there are almost no restrictions on actual flows. Regulations defining the type of allowable transactions will continue to be liberalised.

There’s some very interesting box articles in both reports:

1. Growth drivers – It’s really hard to tease out the contribution to growth from various demand side sectors from the gross numbers alone. This article looks at growth after adjusting for import absorption, and largely confirms that the external sector was a significant contributor to Malaysian growth from 1970s to mid 2000s, something which can’t be seen otherwise. However since 2005, domestic demand has taken over.
2. Potential Output – The latest estimates suggest potential output growth at 5.0%-5.5%, about in line with market estimates. That suggests that the economy is at about full employment in 2012 and for 2013 based on BNM’s forecast (i.e. small output gap).
3. Private consumption – MPCs are estimated for various income brackets, ranging from over 0.8 for income levels below RM1k to under 0.2 for income levels over RM10k. Just as fascinating, the household savings rate is charted out, at below 10% for households under RM3k and about 25% for households over RM10k. The sensitivity of low income households to income shocks is confirmed and the impact of the 2012 BR1M payout on private consumption is also estimated.
4. Impact of minimum wage implementation – About a quarter of the labour force are expected to benefit. 90% of affected companies say they will not retrench, while only a quarter will slow down hiring.
5. Housing market drivers – House price determinants were modelled for Malaysia, with growth, demographics, inflation, building costs, interest rates, and RPGT being found to be significant. Macroprudential measures and RPGT were also found to have some effect in arresting house price increases. However, the model conclusions suggest the best approach to tackling house price inflation is through supply-side measures.

I’ll deal with the liberalisation measures in a separate post, because they are interesting in and of themselves. Links to the briefing presentations will be added below, when they become available.

Technical Notes:

1. 2012 Bank Negara Malaysia Annual Report
2. 2012 Financial Stability and Payment Systems Report