Credit seen not crunching... yet

PETALING JAYA: Despite growing concerns that Malaysia may fall into a credit crunch trap, economists are not waving red flags yet as the country’s fundamentals are still intact.

Economists contacted by StarBiz said although to an extent there are some signs of a credit crunch, on the whole, it is still remote, judging from the absence of any liquidity disruptions and the country’s non-dependence on the inflow of hot monies amid the current low US interest rates.

AmBank Group chief economist Anthony Dass said there are fears that the impact of the United States Federal Reserve (Fed) rate hikes and its balance sheet shrinkage and rising short-term money market rates could cause a slow credit crunch.

Although this may be overdone, given that interest rates are still close to multi-century lows and loans are still being made freely, the ground is definitely starting to shift, he said.

“As the US interest rates keep moving, the tectonic friction will grow stronger and some wobbly market ‘buildings’ will undoubtedly collapse.

“Our base case suggests global growth will continue in 2019 moderately.

“This should see central banks’ monetary policies being less exciting for Asia ex-Japan, as they may not raise rates since the US Fed is likely to end with one to two rate hikes.

“Hence, we are playing down the risk of a financial crisis or credit crunch,” he noted.

Dass alerted that a financial crisis or credit crunch may happen if there is liquidity disruptions, a decline in assets because of diminutive inflows and further exacerbated by the US-China trade war, resulting in the sudden collapse of the global markets.

Should it happen, he said this would pose risks to countries with twin deficits and high US-dollar debt exposure.

“Some of the emerging-market economies will be vulnerable. In the case of Malaysia, its vulnerability is less serious, as the economy is being supported by a current account surplus and favourable reserves,” he added.

Nomura Research, in its recent 2019 outlook report, cautioned that a credit crunch may hit Asia as early as next year, with Malaysia likely to be one of the Asian economies at the centre of the crisis.

It, however, said the credit crunch would not be a long-drawn-out affair, as the region’s economy would likely recover after July next year.

The research house warned that a number of countries in Asia, especially the current account surplus and export-reliant economies, could experience a sudden shortage in the availability of money for lending, leading to a decline in loans available.

Dass said what the country should be concerned about, among others, is the changes to monetary policy that would affect the bond market and pose risks throughout the asset classes. Besides this, the accumulation of high debt is a vulnerable risk for financial institutions, which could lead to higher interest rates, especially if the US dollar were to increase, he noted.

“The level of global debt could have a detrimental impact on the 2019 financial crisis, as it reached a total of US$164 trillion in 2016, a significant growth of US$50 trillion, prior to the 2008 financial crisis,” he said.

Nor Zahidi: Malaysia continues to churn out current account surpluses.
Nor Zahidi: Malaysia continues to churn out current account surpluses.

Meanwhile, Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said Malaysia would not likely fall under the credit crunch trap.

“Malaysia continues to churn out current account surpluses, notwithstanding the recent narrowing of quarterly surplus balances as a percentage of gross national income (GNI). For example, for the second quarter of this year, the surplus balance was 1% of GNI,” he said.

Furthermore, he said the country remained a net international creditor and was not dependent on inflows of hot money to support growth.

In any case, Zahidi does not expect Malaysia’s current account balance to turn negative and is unlikely to experience a credit crunch even if foreign fund inflows slowed down because of external uncertainties.

The central bank, in addition, has an array of macro-prudential policy instruments to prevent a credit crunch from happening, he noted.

Based on the Malaysian Investment Development Authority figures, Malaysia continues to attract foreign direct investment. Over the January to June 2018 period, approved private foreign investment came in at RM26.5bil, about half of 2017’s RM54.4bil.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid noted that concerns about a credit crunch seemed to be valid, as the country is highly open to external trade and foreign fund flows in equities and bonds.

Afzanizam: Concerns about a credit crunch seem to be valid.
Afzanizam: Concerns about a credit crunch seem to be valid.

However, he said banks are at the same time very liquid, judging from the liquidity coverage ratio (LCR), adding that the latest LCR stood at 147% as of October compared to 138% a year ago.

“So, Malaysian banks can always meet the demand for deposit withdrawals. That should give us the comfort that the risk of a credit crunch is quite remote at the current juncture,” he said.

As for projections of the country’s gross domestic product (GDP) growth for this year and next, Afzanizam is projecting a GDP growth of 4.8% and 4.5% in 2018 and 2019, respectively.

“We expect private consumption to normalise next year after recording stellar growth in 2018.

“Real export would continue to soften, while private investment would remain cautious next year. At the same time, the government will remain mindful of its finances, resulting in moderate spending next year,” he noted.

Dass is forecasting 2018 and 2019 GDP at 4.6% and 4.5%, respectively, adding that growth would be coming from private expenditure, that is, private consumption as well as private investment in manufacturing and services.

Exports would continue to grow but at a moderate pace, coming from semiconductors as well as resource-based activities, he noted.

Zahidi, however, said its in-house forecast for 2019’s real GDP growth remains at 4.6%, mainly due to a slowdown in the external sector.


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