Tuesday, January 3, 2012

November 2011 Monetary Conditions

Quite unlike October, money supply in November rose largely based on higher FD’s but saw currency in circulation and current deposits fall (log annual and monthly growth; seasonally adjusted):


There was also a pretty sharp jump in banking system forex deposits (log annual and monthly changes):


At the equivalent of RM71.6 billion, that’s the highest level recorded…ever. It’s also more than twice the average for 2008, and the second highest reading as a share of M2 (6.0%). I don’t want to read too much into this, but it’s certainly some indication of foreign interest in Malaysian markets, especially since international reserves didn’t budge in November.

Turnover in the local forex market however has continued to drop (RM millions):


Bear in mind that we’re still looking at a pretty elevated level of trading activities.

Interbank rates held steady in November except for a mild drop at the long end, but MGS yield spreads continued to widen:


Funnily enough, the yield curve is steepening mainly at the short end, and kinking in two places to boot. Since the only MGS tender for November was for a RM3 billion five year maturity issue, that suggests higher demand for shorter term government securities.

Reading between the lines, it looks to me like there’s been a steady return of foreign risk appetite in Malaysian securities…but not too much thank you. The concentration of demand at the short end (indicated by lower yields) means investors going long think short term interest rates might be coming down and/or they’re primarily interested in securities with high liquidity. The upshot is still that the government has been seeing borrowing costs steadily decreasing throughout the year – ironically just as they’ve been starting to reduce borrowing.

Malaysian credit supply remain solid (log annual and monthly changes):


There’s been some changes in the structure after the past few months though (log annual changes):


While we’re seeing loan growth moderating slightly across the board, business lending is growing more firmly than household borrowing…at least from the banking system. Underscoring this, loan applications are up for the past three months, but not for household borrowing purposes. Both car and mortgage applications in November are around the same level as in 2010 – meaning, no growth.

Nor are the prospects looking good going forward, at least for the short term. Don’t be shocked if total loan applications plummet over December and January – there’s a strong seasonal effect related to CNY.

Going forward, in my mind there’s still nothing here to prompt a further easing in monetary policy. Even as inflation has moderated, core inflation is still running pretty high. Credit growth is recovering from the initial uncertainty surrounding Europe, and GDP numbers surprised on the upside. The Monetary Policy Committee will be meeting at the end of this month, but I expect no change in the policy stance.

Technical Notes:

All data from the November 2011 Monthly Statistical Bulletin from Bank Negara Malaysia


  1. Have you ever calculated the money multiplier? I'm going to embark on it just to see how it looks like.

    In light what you wrote earlier about L/D ratio, I'm thinking maybe the multiplier would provide better message than what L/D would usually give out in from microperspective.

    Further, for monetary base with respect to the BNM bulletin, should I just take money in circulation or include only "other reserve"? I know reserve at the central bank should be included in the monetary base but "other reserve" isn't a very helpful label.

  2. I've tried in fact - but I'm not sure how useful the information would be. The money multiplier is just the inverse of the reserve ratio.

    The problem is less in the calculation of reserves, but because FI's keep deposits at BNM far in excess of required reserves. Is that high-powered money? I'd certainly take it as such, if you go back to the underlying definition of "reserves" under fractional reserve accounting. But adding those "excess reserves" only shows an incredibly volatile effective reserve ratio (and hence money multiplier).

    I'm no longer convinced that fractional reserve really applies in today's banking system. From my own experience, banks do not take reserves into account at all when making credit decisions - the CAR ratio, single customer limits, and macroprudential guidelines factor in, but not reserves.

    Reserve requirements are met ex post, not a priori. Deposits are not required to make loans. When a loan is approved and disbursed, the bank's balance rises on both sides - the amount owing to the bank (the loan) on the asset side; and a corresponding deposit amount in the customer's account on the liabilities side. In short, loans become their own deposits, which kinds of blows up the whole idea of "loanable funds".

    The liquidity issue (and the need for reserves) arises when there is more than one bank in the financial system, and the customer uses the loan proceeds to pay a counterparty with an account in another bank. The loan orginating bank then becomes short of deposits, but the receiving bank long of deposits, an imbalance that is adjusted through money market transactions. Hence the aggregate LD ratio doesn't really yield useful information - and nor would the aggregate reserve ratio.

    A second problem - do you include bank investment in private debt securities in the numerator of the money multiplier? Since this is not "created" money, we shouldn't, but it's still lending to the private sector. Or how about MGS?

    It's a little frustrating working this out in the context of economic theory, because there's almost no guidance on this at all. To my eyes, much of post-graduate economic theory (not to mention public discourse) on how the financial system works seems like holdovers from the era of the Gold standard.