Friday, January 3, 2014

November 2013 Monetary Conditions

Happy New Year!

I’ve taken a break from writing about Malaysia’s monetary environment for a few months now, as it was getting boring and a bit too much like work. But a lot has happened in the last couple of months, and things are getting interesting again.

Interest rates have taken a roller coaster ride since April 2013, when the rumours about the Federal Reserve planning a pullback in its QEIII program started circulating. Speculation has now turned to reality, though since the formal announcement occurred in mid-December, we won’t see the full impact until the December figures are in at the end of this month.

Nevertheless, heightened expectations might be responsible for the following (log annual and monthly changes; seasonally adjusted):


M1 growth was pretty stable, and the acceleration in growth is consistent with higher cash balances at the end of the year – BNM issued more currency, while demand deposits also rose. M2 growth however fell off a cliff, recording the slowest growth in annual terms since July 2009, and in monthly terms since March 2007.

The source of the contraction came from basically just two sources – a sharp drop in fixed deposits of about RM11.3 billion and a RM5 billion fall in repos. The only other component to see a decrease in absolute terms were NIDs, which together with the drop in repos is consistent with a tightening of liquidity conditions in the interbank market.

That may or may not be due to tapering talk. It might be, but if it is, it appears that foreign investors aren’t really driving this movement – foreign currency deposits actually rose, while foreign holdings of government securities was only slightly lower than in October (RM millions; ex-monetary debt):


Domestic interest rates certainly bolster the case that domestic participants are as jittery over Fed tapering as foreign investors are:


Spreads at the long end are rising – again consistent with tighter liquidity. The MGS market was even more dramatic:


Not only are yields up, but so are spreads:


Yields on benchmark issues are currently 5bp-15bp higher than shown in the charts above. Things are not as dismal as they were this summer, but its getting there – as the Carpenters song goes, “We’ve only just begun…”

Before anybody starts panicking however, bear in mind that the low yields and spread compression we’ve seen over the past couple of years are well outside the historical norm. Take the last chart above; if you extend it back to 2000, it’ll look like this:

06_mgs spread

So what we’re seeing is more akin to a normalisation process, rather than a descent into crisis. I’d hate however to try and forecast what interest rates will do going forward. The only thing I can predict is that volatility is probably going to increase as the market tries to figure out what the new norms will be.

Tighter liquidity does mean banks are becoming more cautious, but loan demand remains strong:


Credit has been tightening since 2Q2013 pretty much across all sectors (with the funny exception of passenger cars). This is more likely due to the new Financial Services Act which came into force in July, and BNM’s subsequent moves to improve bank asset quality, rather than the threat of a withdrawal of US monetary stimulus.

So we’re still early days yet in terms of assessing the impact of QEIII withdrawal (pun intended).

Technical Notes:

Data from the November 2013 Monthly Statistical Bulleting from Bank Negara Malaysia


  1. Happy new year Hisham and family

    1) out of topic but would like to ask ur views on Cola

    1. @anon

      Thanks for the new year wishes and the same to you too.

      I have to agree with the employers on this one - COLA sounds nice in principle, but most companies don't really have the national scale for COLA to be usefully implemented i.e. we shouldn't necessarily have a blanket national policy on this.

      In fact, cost of living differences is one of the arguments used for a regional approach to the minimum wage, where urban areas would have a higher rate.

      There are a number of issues involved with such a policy, mainly having to do with enforcement. I don't think its an avenue worth pursuing at this juncture. Getting the minimum wage fully implemented and enforced should be the first priority, before we start tinkering further with the labour market.

    2. I can understand the too early to start tinkering again view. Tho I don't see why we couldn't introduce regional approach to COLA and starting implementation with big companies.

      Is there any quick programs (can be implemented within 1-2 months) the govt can do to alleviate cost of living increase?

      my suggestions: Look at carpooling programs (eg Zipride, tax rebate for companies implementing carpool programs with higher reduction for inter-organizations rideshare network) and encourage food stalls and mobile food business (eg food truck) near office complex.

    3. @anon

      1. From my personal experience, big companies already generally have COLA. It's an obvious incentive to add in a tight job market.

      2. Again from personal experience, quick programs generally get very poor results, even with government tax incentives. Remember 2007. The best response to higher prices is higher wages, not cost cutting measures or price controls.

    4. 1) the really helpful benefits are petrol and food allowance. I think most companies only allot to middle management onwards

      2) I can agree the effectiveness of encouraging rideshare programs and affordable food stalls/mobile food may not be satisfactory. but increase in wages/salary , for the general public, is at snail pace. govt gotta do something. perhaps commiting BR1M for the 4-7k household is not fiscally feasible. but smaller programs like I mentioned cost doesnt hurt fiscally. worst case scenario, you burn rm5-10 million

    5. @anon

      In the previous places I worked, COLA was across the board, although somewhat higher for management level.

      2. Based on household surveys, income growth is around 5%-6% per annum across all income levels, and somewhat higher for the bottom 40%.

    6. 1) for my observation, starting executives get medical and EPF. that's about it.

      2) Based on Household Income Survey 2012 1.6iii, bottom 40% selangor individuals make at most RM2.5 k (4000/1.78),

      looking this source rental in PJ averages round RM400-500

      with cars being necessity (lack of good public transport, car ownership is a much. thats RM500/month on car instalment

      so you have a situation where almost 40% of monthly income wiped by car installment and room rental alone.

      perhaps one can argue salary is starting a very low base taht 6% increment is not enuf

    7. @anon

      1. In the two large companies (operations nationwide) I worked for prior to my present job, COLA was part of the scheme of service. In my present job (KL only) COLA is not.

      2. Right. But a 6% annual increase is a far cry from a "snail's pace"

    8. 1) Yes. I can relate to that from my own experience. there's no petrol and toll allowance for KL only jobs. but the cost of daily inter city commute consume a lot of one's salary.

      2) I think what people are feeling is that since salary is low, a 6% increase is proportionately small, hence, the 'snail pace' description. They do have a point: if we compare, Singapore's average annual increment last year is 4.4% but their median salary is SGD7k, whereas Malaysia's median salary is RM1.5k, a 6% annual increment increase seem small in comparison, especially that some retailer prices are cheaper in Singapore than Klang Valley. Not to mention public transport is well-planned in Singapore where you are not so dependent on cars for daily work commute.

      As much as I feel Malaysians need to readjust expectations (eg owning a house is not a must, carpooling is possible, Starbucks is a luxury, ppl need to learn to cook), I do sympathize when they complain about small annual increment.

    9. If you read Singaporean blogs, you'll find the complaints there are virtually identical with ours. In fact, the situation there might be more acute, as Singapore suffers from a higher rate of inflation and lower income growth.

      Also, don't be misled by retail prices. When you look at consumer consumption, it breaks down to two classes of goods - tradeable or nontradeable. Most tradeable goods will (after adjusting for transport costs and taxes) be virtually identical in price across the globe. Non-tradeables (e.g. services such as health) tend to be more dependent on local factors, particularly the cost of land and labour. As incomes rise, the ratio of spending tends to shift towards non-tradeables, as these cost more.

    10. Anon @ 8.09, the stated median salary SGD7k, how did you arrive at this? Please refer to this article for median salary in Singapore , it is between SGD1.9k to 2.1k only.

    11. @anon 9.48

      Actually both figures are correct. The SGD7k figure is on a household basis. yawningbread used the per household member figure, which is considerably lower.

      Same source for both:

    12. Thank you for the verification Hisham. very much appreciated.

      btw.. for Malaysia's median salary. I recall RM1.5k from a presentation. tho cant recall was it for household or per household member. should be the latter.. I feel.

    13. @anon 10.33

      The summary contains the data you're looking for. Note that this is quite different from the household income surveys, so the numbers might not match.

    14. Thank you for the source.

      It seems the Salaries & Wages Survey is per individual basis (median salary for citizen RM1.5k). while the Household Income Survey national median income is round RM3.6k -- if we divide by 2.4, shall get around RM1.5. Not too bad eventho the data don't match.

      Tho I still believe Malaysian salary is too low compared to Singaporean's that our higher (but still average) increment is not sufficient, esp given cheaper retail price and better public transport down south, but admittedly I have over exaggerated the difference.

    15. @anon

      1. The data doesn't match because not all household income comes from wages and salaries. Some of it is "mixed" income i.e. income from sole proprietorship or partnerships, and some of it comes from capital income (dividends, capital gains, rental income).

      2. Based on the latest IMF data, the implied PPP difference is around 1.8 compared to an exchange rate of 2.60, so you're probably right.

    16. @anon

      Basically, the difference in the price level is not as great as the difference in the exchange rate. Therefore, Singaporeans have a real income higher than implied by a straight comparison of relative wages - essentially the point you were making.

  2. 1) Agreed. Cost of living is a global problem. but I think Malaysians are having a harder time due to lower salary coupled with average annual increment (just round 2% higher than Singapore's already low increment), poor public transport and higher retail price. which is why i really hope there is assistance for the middle class and the poor to tide through the hard times. right now hoping for salary increase alone may not be sufficient. IMO

    I agree healthcare and education is definitely more affordable in Malaysia.

    AnonymousJanuary 10, 2014 at 9:48 AM

    I used this source

    thank you for the link. shall digest it