Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

Statement by Abdul Rasheed Ghaffour, Alternate Executive Director for Malaysia and Zainal Abidin, Senior Advisor to Executive Director, February 11, 2013

International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2013
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Information about Asia and the Pacific Asia y el Pacífico
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1. On behalf of our Malaysian authorities, we would like to thank the IMF team for the focused and constructive discussions on macroeconomic developments and policy issues in Malaysia. For the most part, there is broad agreement on almost all of the major policy thrusts. We are encouraged by the assessment that the current policy stance is appropriately calibrated to the outlook and risks facing the economy and the financial system. We are further encouraged by the FSAP assessment that the Malaysian financial system is sound, well capitalized and backed by a strong regulatory and supervisory framework. This statement will provide an update on recent developments and elaborate on selected issues mainly for emphasis and clarifications.

Economic Outlook for 2013

2. In September 2012, the authorities projected the Malaysian economy to grow between 4.5% and 5.5% in 2013, underpinned by continued strong domestic demand, particularly firm private sector activity. Staff’s estimates are in line with this assessment. Private consumption is expected to expand, driven by higher disposable incomes and favourable labour market conditions. Meanwhile, private investment will be supported by capital spending in the domestic-oriented sectors, the oil and gas industry and the on-going implementation of infrastructure projects. External demand is also expected to gradually improve and provide additional support to the economy.

Monetary Policy

3. Our authorities welcome Staff’s assessment that monetary policy strikes the right balance between supporting growth and containing inflation. Going forward, BNM will continue to carefully assess the global economic and financial developments and their implications on the overall outlook for inflation and growth of the Malaysian economy.

Fiscal Policy

4. The conduct of fiscal policy in 2013 will continue to be aimed at bringing about structural changes in the economy to support inclusive and balanced regional growth while ensuring sound public finances. Supported by stable revenue collection, the fiscal deficit is projected to be lower at 4% of GDP in 2013 with Federal Government debt to GDP ratio contained within 55%.

5. Fiscal reforms are also underway to strengthen public financial management. This includes consolidating the fiscal deficit to 3% by 2015, broadening the tax base, rationalizing subsidies and revisiting the medium term fiscal framework. Outcome-based budgeting and accrual accounting are expected to be operational in 2015. Comprehensive approaches are also being considered to better manage the Government’s long-term fiscal obligations. Areas being looked at include Federal Government debt management strategies; pension liabilities; administration of housing loan fund for civil servants and higher education student’s loan fund. Concerted efforts will continue to be made to ensure the timely implementation of development plans and reform initiatives.

Financial Sector

6. Financial stability has been preserved, supported by strong financial buffers both at the system and institutional level. In line with the FSAP assessment, the capacity of the domestic financial sector to withstand potential economic and financial shocks continues to be well supported by strong capitalization. The banking sector is also well positioned to smoothly transition to Basel III. Risk to domestic financial stability arising from household indebtedness in Malaysia remains manageable. The FSAP team expects low to medium impact on financial stability arising from any potential higher unemployment, slowdown in economic growth or decline in property prices. This is based on:

  • Sustained growth in income levels and conducive employment conditions;
  • Sound aggregate household balance sheet position and financial buffers, with financial assets-to-debts ratio of more than two times, sustained high savings rate and growth of deposits (2012: 11.3% yoy);
  • Strengthened risk management infrastructure (comprehensive credit information via the Central Credit Reference Information System, use of credit scoring in loan approvals, robust administration and monitoring of loans) and sustained underwriting practices of banks;
  • Majority of borrowings are for wealth accumulation purposes, while unsecured financing only accounted for 20% of household debts or 8% of bank loans; and
  • Positive trend in loan repayments and low levels of delinquencies.

7. Developments on the following areas continue to be under BNM’s close surveillance:

  • Borrowers earning less than USD1,000 a month – these individuals have higher leverage positions than other classes of borrowers, although loans to this group only comprised 12.7% of bank loans, with potential loss of RM2.3 billion or 1.3% of the capital base of banking institutions; and
  • Lending activities of non-bank entities (e.g. building society and cooperatives) to households, particularly in the personal financing segment.

8. The Government and BNM have undertaken comprehensive measures (monetary, macroprudential, supervisory, fiscal, financial education and debt resolution) to manage the rising trend of household indebtedness, house prices and the higher cost of living in urban centres. These measures have shown some positive outcomes, as evidenced by the substantial decline in multiple housing loan accounts and improvements in the repayment behavior of credit card holders. The effectiveness of these measures continues to be assessed by the authorities. Moving forward, BNM is establishing a database to match borrowers’ debts and income data for more granular analyses, in collaboration with several Government agencies.

9. BNM’s assessment revealed that risks from foreign bank deleveraging and the regional presence of Malaysian banks remain manageable, in line with the FSSA.

  • While claims of foreign banks on Malaysia are relatively large, 80% of such claims comprise the Malaysian operations of locally-incorporated foreign banks;
  • Overall domestic credit growth and financial intermediation were sustained even when foreign claims on Malaysia fell during the global financial crisis; and
  • The financial positions of major overseas establishments of Malaysian banks are strong, supported by strong capitalization, profitability and local currency funding.

10. As part of BNM’s consolidated supervision of financial institutions, potential risks from overseas operations are assessed regularly. This is supported by ongoing exchange of information and supervisory assessments and actions through existing home-host supervisory arrangements (e.g. Memorandum of Understanding with Indonesia, Cambodia, Vietnam and China; and supervisory colleges for three domestic banking groups). BNM also leverages on multilateral platforms e.g. Executives’ Meeting of East Asia Pacific (EMEAP) Central Banks to discuss and cooperate on international regulatory and supervisory issues, as well as crisis management and resolution.

11. The FSAP assessment recognises that the regulatory and supervisory regimes for banking, insurance, securities and financial market infrastructures in Malaysia are well developed and exhibit a high degree of compliance with international standards. Similarly, Malaysia’s deposit insurance framework and AML/CFT regime conform to international best practices. BNM wishes to highlight that remaining legislative shortcomings in the banking and insurance supervision frameworks, such as those relating to consolidated supervision, are eliminated with the coming into force (in 2Q 2013) of the Financial Services Bill and Islamic Financial Services Bill – both legislations were passed by the Parliament on 19 December 2012.

12. While the FSAP assessment opined that the Government has significant equity ownership in the main Malaysian financial and banking groups via Government Linked Investment Companies, the FSAP team recognised that these entities are operationally independent and commercially run with no interference from the Government. The authorities wish to highlight that these financial institutions are held to the same high standards of governance and risk management as other financial institutions. The board members and senior management are also subject to similarly stringent and robust fit and proper criteria and due diligence in the appointment and reappointment processes.

13. FSAP stress tests indicate that the banking system is resilient to economic and market shocks. Although some smaller banks could be more affected under adverse conditions, this is due to the capital management strategy of the group which allocates relatively smaller capital at the subsidiary level with the commitment that the capital needs will be met when needed. The parents of these banks have strong capacity and capital positions. The FSAP team indicated that recapitalization needs of banks under the adverse macroeconomic scenario (S2) of the Top-Down stress test are limited at RM2 billion (0.2% of nominal GDP in 2011) under the existing Basel II requirements. While the recapitalization needs are higher based on Basel III standards, these capital requirements are only taking effect in 2019, in line with the global implementation timeline.

14. The FSAP assessment opined that the building blocks for a comprehensive crisis management framework are in place, including deposit insurance, emergency liquidity assistance arrangements and powers to resolve financial institutions. The Financial Stability Executive Committee (FSEC), set up in 2010, enables BNM to address risks to financial stability arising from entities outside its regulatory sphere. In December 2012, the Minister of Finance has approved the appointment of the Executive Chairman of the Securities Commission Malaysia as an ex-officio (permanent and voting) member of the FSEC – hence enhancing the role of FSEC as a platform for coordinating domestic crisis management and resolution measures.

15. The FSAP team recognised that the prudential and systemic risks spillovers on the onshore financial system may be modest, although reputational risk remains, due to the current size of the Labuan International Business and Financial Centre. The authorities have initiated a number of steps to address these areas, including legislative and regulatory reforms in 2010. The FSAP team recommended for further enhancements to the legislative, regulatory and supervisory frameworks for the Labuan International Business and Financial Centre and recognized the steps that are already being taken towards this end. These include the formation of the Financial Stability Committee in 2012 with representatives from BNM and Securities Commission Malaysia, to strengthen the risk management and surveillance practices.

16. The FSAP team recognised that the authorities are addressing potential challenges relating to the growth of profit sharing Islamic finance products, such as market perception of the level of protection for depositors and investors, and other regulatory, supervisory and market conduct issues. While the FSAP team highlighted that tax incentives granted to Islamic finance are significant, the authorities wish to highlight that these are commonly used in other jurisdictions to compensate for extra issuance costs associated with Islamic products. In some other cases, these incentives are finite and time-bound and are accorded to specific contracts to promote new markets.

Reforms to Boost Growth and Enhance Inclusiveness

17. Initiatives to transform Malaysia into a high-income economy by 2020 are progressing well. The second phase of the Government Transformation Programme was launched in mid-2012, building on initiatives that have already been put in place as well as the introduction of new initiatives. Under the Economic Transformation Programme, total committed investments have amounted to USD71 billion, with most of these going into the oil, gas and energy sector.

18. To achieve a more inclusive financial sector, BNM had also introduced a framework for agent banking which will allow financial institutions to reach out to the underserved segments, in a more cost efficient manner through the use of non-bank retail outlets whilst still maintaining prudent and responsible banking practices.

External Sector Assessment

19. Our authorities would like to reiterate that the current account gap is not rooted in currency undervaluation. This is evidenced by the notable absence of symptoms of undervaluation; there is no evidence of overheating, inflation has been low, there are no financial imbalances, trade balances are shrinking and intervention has been two-directional. Besides the absence of these symptoms, it is also important to note that notwithstanding the depreciation pressure during the global financial crisis, the ringgit has generally been on an appreciating trend since the adoption of the managed float regime in July 2005. In fact, the ringgit has appreciated by 22.6% against the U.S. dollar and 7.5% on a real effective basis.

20. The authorities agree that estimates of the current account gap likely reflect structural factors of the economy, which are not present in the econometric analysis of the current account. It is important to note that the bulk of the high savings in Malaysia is accounted for by the business sector. Household savings are mainly in the forms of mandatory contribution to the Employees’ Provident Fund and other forms of private savings and financial assets to address the partial availability of social safety nets in Malaysia. Meanwhile, private investment has been on a strong trajectory since 4Q 2011 and into 2012. This development has been facilitated by various structural reforms to improve the domestic investment climate.

21. Indeed, our authorities have asserted through our Chair that the EBA and ESR should not only be quantitative exercises, which are highly sensitive to the choice of models and assumptions, but should aim to establish country-specific explanations behind the changes in the country’s current account, REER, and external balance in general. In this instance, we are encouraged to note that the technical discussion between Staff and the authorities on EBA methodology recognised the limitations of the methodology and encompassed discussions on structural characteristics of the economy and the structural reforms needed to address the desired outcome.

Final Remarks

22. While Malaysia continues to implement its long-term reform agenda to elevate it to the next stage of growth and development, the authorities remain mindful of the downside risks posed by the current challenging global economic and financial environment. As a highly open economy, Malaysia is not insulated from the uncertainty in the global environment. Nevertheless, the economy is expected to remain resilient, underpinned by favourable macroeconomic and financial fundamentals and policy flexibility. The authorities will closely monitor developments in the external environment and will respond as appropriate.

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