Thursday, March 22, 2012

BNM Annual Report 2011

Yesterday saw the release of Bank Negara’s annual report for 2011. The big news of course is the lower official forecast for the year, with GDP growth for 2012 downgraded from 5.0%-6.0% to 4.0%-5.0%. Given all that’s happened the past few months, and the initial data that we’ve seen in January, it’s come as no surprise to anybody. External demand is expected to be weak (again, no surprise), while investment is expected to pick up some of the slack, particularly public investment.

All in all though, I do think we might see growth this year on the upper side of that forecast bracket.

The briefing was kind of interesting, mainly because the Governor was being unusually candid, by central banker standards.

But here are some of my notes on both the presentations and Q&A, in no particular order:

  • Household debt increased slightly as a ratio to GDP, largely due to higher non-bank borrowing.
  • The co-ops, DFIs and MBSB were “persuaded” to adopt the guidelines on prudential lending to households, that banks have had to adopt since this January. Big thumbs up for this.
  • What I suspected was true – there’s considerable heterogeneity in household borrowing. BNM was kind enough to gather statistics on household debt by income level and believe me, its an eye-opener. Something like 23% of household debt is carried by households earning less than RM3,000 a month, with a concentration in auto and consumption loans, and leverage ratios to income of between 4.4-9.6 times their income. Leverage ratios for higher income households is just 2.3 - 3.3 times income. BNM also included expenditure breakdowns by household income levels, which means we now have a rule of thumb guide to household marginal propensity to consume at different income levels.
  • BNM claims the “legal” limit of a 55% ratio to GDP for public debt actually only refers to MGS/GII issues and not total public debt. The ratio currently stands at just 46.7% to GDP, well below the total public debt ratio of 53.8%.
  • BNM views an unemployment rate of 4% as the full employment rate, which implies that they consider the level of activity in the economy as being above long term potential. Translation: don’t expect a rate cut this year, unless the unemployment rate starts moving towards and past 4.0%.
  • The Governor revealed that there was considerable discussion and cooperation between Malaysia and China over the dual unpegging of the Renminbi and the Ringgit to the USD in 2005. BNM actually received a couple of days notice before China unpegged, which allowed for a coordinated move by both central banks.
  • To a question from the floor, the Governor revealed that BNM has bee diversifying its international reserves (i.e. anything but the USD) since the early part of the last decade. Names were named e.g. China, Singapore, India, Korea, Japan, and Thailand (though that last one sounded like an afterthought).
  • A full box in the report was devoted to exploring the impact of credit on private consumption growth – less than 10% apparently.
  • There’s a nice acknowledgement of the changing structure of Malaysia’s trade, something I’ve noted before.
  • The Governor went on a bit of tirade on IMF “experts”, noting that they’ve been pushing the adoption of inflation targeting as the basis of monetary policy, despite the, quote “incomplete transmission mechanism”, unquote, in Malaysia (some details on that in this link).
  • In commenting on the minimum wage proposals, BNM has priced this into their forecasts, though they expect little to no inflationary impact and noted that business margins are high enough to accommodate the wage increase.

Technical Notes:

[I’ll post the link to the presentations as soon as they’re up]

  1. BNM Annual Report 2011 (press statement)
  2. BNM Annual Report 2011 (full document)
  3. 2011 Financial Stability and Payment Systems Report (press statement)
  4. 2011 Financial Stability and Payment Systems Report (full document)


  1. brilliant summary!


  2. I was there ... Brilliant summary indeed... Gonna share this with my staff


  3. Read thru the whole book n looking specifically for expenditure breakdown by income level...can't find that white box.Hope u can refer me to Pg..sorry.

  4. The breakdown of expenditure isn't there, but what they have is expenditure, savings and debt repayment by income level (chart, bottom of pg 14 of the FSPS report).

    Sorry if I implied there was a breakdown of expenditure. Average expenditure patterns can of course be obtained from DOS:

    but they don't give income levels here.

  5. Just curious about how accurate the unemployment rate of 4% is since there appears to very little incentive to disclose one's unemployment status in this country. Can you shed some light on this?

  6. The 4% rate is BNM's assessment of the inflation-neutral unemployment rate. Whether the rate accurately depicts the true unemployment rate is probably immaterial for policy purposes. In any case, given how the unemployment rate is actually measured in this country, I don't think it's truly accurate - both employment and labour force numbers are estimated. Even if the actual number of unemployed has a downward bias, the rest of the calculation is kinda fuzzy too.

    In any case, for monetary policy purposes, whether the unemployment rate is truly accurate isn't relevant, as long as the inaccuracy is consistent, if you get my meaning.

  7. Yep, understood. Thanks for clarifying.

    P.S. Glad to see you're still writing this blog. For a moment there, I thought you were going to do a Brad Setser on us when you posted in late 2011 about possible changes.

    Hope that doesn't happen anytime soon as you're the only local blogger on economics that I follow regularly :)