PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

25 March 2010

Key Highlights From Bank Negara Malaysia’s 2009 Annual

Report Briefing

◆ Household debt rose from 63.9% of GDP in 2008 to 76.6% in 2009 (see Chart 1). This was due partly to
the effect of a lower denominator as GDP contracted in 2009. Bank Negara, however, was not alarmed by the sharp
rise given that NPL ratio of household loans dropped to a low of 3.1% in 2009, from 4.1% in 2008 and 8.1% in 2005,
indicating that asset quality remained sound (see Chart 2). In addition, the Central Bank has set up a debt
negotiation agency (Credit Counselling and Debt Management Agency) to help borrowers to deal with late payments
and financial difficulties, while banks could easily check borrowers’ borrowing status before granting them any new
loans through a data system set up by the Bank Negara to capture all outstanding loans. Bank Negara also believes
that banks should have the capacity and capability to manage risks associated with rising household debts. Besides,
almost half of the household debts (46.2% in 2009) were concentrated in long-term secured borrowings to fund house
acquisitions, in line with Malaysia’s young population structure and rising new family formation. In our view, however,
this implies that household disposable income could be affected somewhat in the near term if interest rates are to
be raised. Indeed, the increase in household debt resulted in the increase in total household debt-to-personal
disposable income from 114.9% in January 2009 to 136% in December, according to the Central Bank.

◆ Bank Negara indicated that reflecting its conservative and cautious stance given an uneven global economic recovery,
its real GDP forecast of 4.65% is tilted towards the low end of a range of 4.5-5.5%. In addition, the
forecast has yet to factor in any policy measures that are likely to be announced by the Prime Minister in Invest
Malaysia by end-March. These measures are likely to be directed towards promoting high growth sector, liberalisation
of the economy and privatisation of government enterprises in a move to drive private investment in the country.
As a result, the Central Bank indicated that there could be upside potential to its GDP forecast if these measures
are taking into account. In addition, it believes that the Government Transformation Programme will contribute
positively to GDP growth through the enhancement of civil servants productivity and efficiency. At the same time,
a rise in inter-linkages with emerging economies in trade and financial activities will contribute to enhance the
country’s economic growth.

Chart 1 Chart 2
Household Debt Picking Up Household NPL Ratio Dropping

80 10
9
% of total household loans

75 8
7
70
% of GDP

6
65 5
4
60 3
55 2
1
50 0
02 03 04 05 06 07 08 09 02 03 04 05 06 07 08 09

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 25 March 2010

◆ Bank Negara is not overly concerned about the recent report on capital outflow. It attributed the outflow
to more local companies looking for business venture abroad. This is normal for Malaysia and it has been happening
for sometime. We believe this is a fair assessment as Malaysian companies have been venturing abroad in recent
years given the lack of investment opportunities in the country that could generate attractive returns for them.
Besides the position of Malaysia’s capital account could be highly influenced by the flow of foreign portfolio funds.
For example, the outflow of foreign portfolio funds rose to a high of RM84.4bn in 2008, after recoding an inflow of
RM18.4bn in 2007. This has contributed partly to a widening of the capital account deficit to a high of RM118.5bn
in 2008, compared with -RM37.7bn in 2007.

◆ Are central banks slow in policy normalisation given a pick-up in loans and property prices? Bank
Negara is of the view that they have to be very sure about a firm economic recovery is taking place before reacting
to normalising its monetary conditions. They have done it on 4 March after assessing the conditions and felt that
the recovery is for real.

◆ The capacity utilisation rate has risen to around 80% now, from 70% when the economy contracted by 6.2%
in 1Q 2009, according to the Central Bank. The low level of utilisation rate could be one of the reasons in explaining
why private investment is low in the country.

◆ What will be the level when interest rates are perceived to be normal? Bank Negara explained that a
neutral level of interest rate is when it is neither expansionary nor contractionary to economic activities. The
normalisation policy is to bring interest rates back to more neutral level. However, it has yet to reach the neutral
level, according to the Central Bank. Given that Malaysia is a high saving nation, there is a need for Bank Negara
to bring back interest rates to a more normal level to ensure a fair real rate of return for savers and prevent
excessive risks taking when savers look for better returns. This was currently happening as reported in the
newspaper about the various investment scheme scams. At the same time, Bank Negara is mindful of a need
to keep monetary policy accommodative to encourage private investment. In our view, this implies that the
normalisation of monetary conditions will likely be at a measured pace and we expect the overnight policy rate (OPR)
to be raised by another 25 basis points to 2.5% in July. The OPR will likely stay at this level until the end of the
year. Meanwhile, the Central Bank did not commit to what will be the neutral level of interest rates, as there is
no fixed level and it depends on the strength of economic growth.

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