Thursday, March 20, 2014

BNM Annual Report 2013

I think I’ve finally settled down enough to start writing for the blog again, but posts will be a little sporadic still until I feel like I’ve got all the pieces of my new job in place. That might still take some time, so I’ll be focusing less on day-to-day data releases, and more on big picture stuff for now. I’ll probably go back to more regular posting in a few months or so.

In the meantime, Bank Negara released their annual report yesterday. There’s no big surprises in terms of their view on the economic outlook – better recovery in advanced economies (leading to higher export demand), and moderating growth in emerging markets. They’re less pessimistic on growth prospects for the latter than many others are. The Governor for instance was quite emphatic that China will be able to overcome their structural and financial imbalance issues, and avoid a hard landing.

What it boils down to is a growth forecast of 4.5%-5.5% for the Malaysian economy in 2014, with private consumption slowing but trade picking up. They think the current account will remain in surplus, though imports of “lumpy” capital goods might cause a deficit in one or two quarters. No big surprises there.

The part I was more interested in was financial stability, and here BNM provided a wealth of data and a lot of comfort. The bad news first – household debt climbed to 86.8% of GDP, more due to the sharp slowdown in nominal GDP growth we saw last year than any jump in borrowing. HH borrowing in fact slowed down quite a bit, to 11.7% in 2013 from 13.5% in 2012.

More to the point, the coming into force of the Financial Services Act in the middle of the year has allowed BNM to lower the boom on non-bank financial institutions (NBFIs), which have been most responsible for the sharp rise in personal financing over the last few years. Lending to households by NBFIs halved in 2013, dropping below 10% for the first time in yoinks. Macroprudential measures are working.

Leverage is still distressingly high for the lower income group (7 times income for households earning less than RM3000 a month), but at least the situation isn’t deteriorating further (useful nugget of info: 80% of over-leveraged borrowers in the sub-3000k segment are civil servants).

There was also a plethora of information presented on the stability of the banking system, including the results of stress testing of the banking system. These pretty much say that the banking system won’t be jeopardised by anything less than a downturn on the scale of the 1997-98 crisis, and even then it should pull through without needing any bailouts.

I’m impressed with the range of approaches BNM used – it’s as if they’ve taken on an almost MMT or Minskyian attitude to analysing financial stability.

There’s the recognition that credit is an economy-wide risk factor, and not just at the level of households, firms or government alone. There’s the attempt at measuring contagion risks from one or more trade partners. There’s the simultaneous announcement on the new banking reference rate framework, which should ensure that banks don’t underprice credit risks and strengthen the policy transmission mechanism from the OPR to lending rates. They’re even looking at monitoring household debt service ratios on an almost real-time continuous basis, by hooking up with Inland Revenue and EPF. Both the Annual Report and Financial Stability Report have box articles that would satisfy any wonk.

In short, there’s nothing to fault here.

If I have a worry, it’s this – the current leadership of BNM and most of the financial system, are the generation that lived through 1997-98. But within the next ten years or so, they will start to retire – the Governor for instance will be 67 this year. Within 15-20 years or so, senior leadership will start being passed on to individuals who’ve never experienced a major crisis first hand (no, 2008-2009 doesn’t count).

Much of current stability of the banking system is based on the caution and prudence of people who’ve learned their lessons the hard way. Their successors won’t have that benefit and 30 years from now, we could be having our own Minsky moment.

Technical Notes:

  1. 2013 Bank Negara Annual Report
  2. 2013 Financial Stability and Payment Systems Report


  1. Whats your take on the OPR this year. Some research houses have now revised their call on a 25-50 bp hike this year after the report was released.

    1. @anon

      I don't see any reason to raise it at the moment. There's no evidence of any pass through of subsidy cuts into other prices (CPI should return to its former growth path); and the government's fiscal consolidation needs to be counterbalanced by softer monetary policy.

      That might change as we get into the second half, but not asthings stsnd now.

  2. Very well written as usual. I'm concerned the pace of 'slowing down' is insufficient and we'll be in real trouble before things start getting better. If growth rates decelerate, not only will government revenue be hamstrung, but also household debt servicing capability and stability of financial institutions. We are living on borrowed time for a recession and 2009 doesn't count.

  3. Hi mr.hishamh, there is a concern that wages makes only 28% of the GDP which is lower compared to advanced economies at 30%+.This indicate low productivity and inherent weakness in the labor market. What is your take on this and will Malaysia's wage share of GDP ever increase as historically is fluctuates between 28-32%.

    1. @anon 1.01

      The latest number is 32%.

      I disagree with the notion that the low number is indicative of low productivity. There are countries at similar labour shares, with wildly different productivity levels. If productivity was the main cause, I would expect to see the labour share gradually improve over time, but that's not what we see here in Malaysia or elsewhere.

      I think ( but I've yet to test) that its more a demographic and institutional (tax and transfer) issue.

    2. Id like to request you to give an opinion with regsrds this issue. Apparently wages in Malaysia is considered abysmal that share of eages of GDP is small and is a reflection of the middle income. This is is supported by claim that 78% of EPF contributors earns RM3000 below(or maybe just as you a majority of contributors are entry level workers) while the minimum wage earner can only earn 26% of the average GDP per capiya value. To sum up, there is alot of concerm that the majority of Malaysians earns below average and reflects the structural weaknesses of an economytoo dependemt of subisidies especiallymon fuel to mask reality if living quality and refoects that there is a lack of high income jobs in Malaysia to absorb our graduates.

    3. Apologies for the typo as Im using an ancient tablet, in the first part I meant that this low share of wages to GDP reflects the claim of a middle income trap situation.

    4. @anon 3.33

      If I were to statistically test the hypothesis that labour share is related to income levels, it would fail abysmally. Labour shares for almost all countries I've seen are relatively constant across time, and countries with similar income and productivity levels can have very different employee compensation shares.

      Just for example, Taiwan and Singapore have very similar absolute labour productivity levels, but the labour share of national income is 52% and 41%, and individual wages in Singapore are supposedly twice as high. The US has a labour productivity level that is 40% higher than either country, but the labour share of income is 53%.

      Thailand is the country that I would most likely agree to be in a middle income trap, and it has a per capita GDP level half of Malaysia - yet Thailand shows a steady increase in the labour share of income (from 30% in 1990 to 37% in 2011).

      Moreover, drilling down by sector, there appears to be no relation with absolute wage levels. For Malaysia, the highest paying manufacturing industries also tend to have much lower employee shares of income, and vice-versa. I'm trying to find detailed surveys in other countries to see if the same thing happens there.

      In any case, the relationship between absolute pay and labour share of income is pretty tenuous. High paying jobs could mean high labour productivity but in capital intensive industries, which in turn mean low labour income shares relative to total value-added.

      I can't really comment on this issue, because I'm still trying to figure it out. And it beats me how to improve the situation.

    5. Hisham and anon,

      Maybe I can offer an alternative (or more crazy) view. This could be a demographic dividend playing out. Our trend in the age-dependency and employment-to-population ratios suggests that there are a lot more workers now relative to the previous generation. Average real wages may stagnate in this type of scenario.

      But I'd like to play around more with the new DOS capital stock data first before I come up with any crazier hypotheses.

      P/s: I obviously share anon's concerns that subsidies and the like over-distort the labour market.

    6. Jason,

      I agree that demographics are probably a major factor, but I don't want to depend on Malaysia's own experience to over-generalise. Our employee compensation ratio to GDP has been more or less constant since 1970. In the sense that the LFPR will be increasing going forward, that would support a scenario of relatively lower growth in individual wages.

      But I'd be really interested to see what you come up with.

    7. Dear Hisham,

      Where does one get data on wage share of GDP for the past 10 years for Malaysia? DoS doesn't seem to provide this data.

    8. aidan,

      It's not easily accessible, nor is it up to date:

      The published data is only for 2006-2009. I've seen estimates for previous years elsewhere, but I can't recall where at the moment. If I remember, I'll post it.

    9. Many thanks. Is the capital share of Malaysia's GDP around 48%? (I assume taxes are around 20%)

    10. @aidan

      Taxes at the aggregate level are much lower than that - about 11%. But the (pure) capital share you surmise is pretty accurate. The missing 10% goes to "mixed income" which represents non-corporate business owners, which covers everything from burger stalls to partnerships like PwC.

  4. I donno if I agree with the Minsky moment for Malaysia just because the current leadership is retiring. I think the new generation will hold the view that the financial sector matters to macro stability, whereas previous, especially before the 2009, I think the conventional wisdom was that finance didn't matter much.

    The newer generation will rise up with the mentality that finance matters, debt matters, which can mean, more regulations for banking/finance sector.

    Hell, I may be too young but before 2009, I don't remember economists/central banks talking too much home prices being central to macro. We didn't even care about debt, and Minsky was... who?

    Now, everybody knows Minsky. Well, sort of. So, I think it's too soon to condemn us all!

    1. Hafiz,

      Economic history littered with lessons that have had to be relearnt, of recurring financial crises, of dead economic ideas coming back to life (or vice versa). Take Glass-Steagall for instance.

      Modern financial systems are, to borrow the book title, fragile by design. I'm still going to worry about it.

  5. Hishamh,

    You have mentioned before there is no such thing as a middle income trap, why Thailand is in one?

    Zuo De

    1. How do you define "middle income" anyway?

      And just what is a "high wage high skills economy"? Economics gobbledygook or a logical extrapolation of current trends (free markets, globalisation, the " information economy " etc)?

    2. @Zuo De

      I don't think Malaysia is in a middle income trap, not that middle income traps don't exist at all.

      Consider Thailand though. Relative to US living standards, GDP per capita is still below the ratio it reached in the mid-1990s. Unlike Malaysia, Thailand is well past the demographic dividend stage - there's no growth boost from a lower dependency ratio. Structurally, Thailand never quite got out of the initial stage of development, where rising agricultural productivity released excess labour for industrialisation. The share of primary industries in GDP is still too high.

    3. @Olek,

      I've always had a jaundiced view of a "high-productivity" economy.

      But classification is straightforward:

    4. In Malaysia's case, what will happen if you take Petronas out of the picture? Will there be a significant GDP hit?

      Japan and Singapore are examples of rich developed countries that also have rapidly ageing populations.

      Yet, by judicious imports (at least in Singapore's case) of foreign labour and talent, such a country can manage to stay ahead of the development curve.

      Malaysia has a relatively young population, but is it being used to the fullest?

    5. @Olek,

      1. Approximately 10%, although growth contribution has effectively been negative for the past decade or so, and sharply negative in the 1980s. Reliance on natural resources is precisely the reason why Malaysia has fallen behind countries such as Korea and Taiwan.

      2. Income level and income growth are two different things. Japan has made essentially no progress in the last 30 years or so; Singapore only stays "ahead of the curve" through imports of labour (I won't mention base shifting), a strategy no larger country can follow. Nor should they; increasing the income level of a country should not be confused with increasing the income level of citizens. Unfortunately, Singapore's government seems to think they are one and the same.

      As to whether Malaysia is fully utilising its potential talent - don't be ridiculous, of course not.