PETALING JAYA: A looming financial crisis in the wake of rising global debt can be averted if the present monopolistic structure of the Malaysian financial system is removed, the Asian Shadow Financial Regulatory Committee (ASFRC) says.
ASFRC member and Jeffrey Cheah Institute on South-East Asia president Woo Wing Thye said ending the monopoly was one of the three proposed recommendations that would lead to better financial stability for the country in the event of a financial crisis.
“One thing about Malaysia... If you look at any one of the existing bank groups, they account for a substantial portion of the financial system. If any one of them fails, it’s a big shock to the financial system,” he said at a briefing titled “Rising debt and the next financial crisis” yesterday.
“Licences should be issued to create small and medium-sized banks. We will have more institutions so that if any one of them makes a mistake in foreign borrowing, it would not be such a big shock to the system.”
Woo pointed out that this would also mean higher chances of financing for small and medium enterprises (SMEs).
“After the Asian Financial Crisis in the late nineties, what we did was assorted all the small banks into a number of big bank groups. That’s a mistake in retrospect because we know that SMEs have great difficulty in getting financing – the reason being that big banks are not interested to lend out to small businesses. That’s true all over the world.
“You cannot put a bunch of bureaucrats in charge of lending to SMEs. We need to break the monopoly banking system.”
The ASFRC comprises a group of experts on financial markets and related policy issues within the Asia-Pacific region. The event briefing yesterday was hosted by Sunway University, Kuala Lumpur.
Apart from removing the monopolistic structure of local banks, Woo said Malaysia could also avert a financial crisis by undertaking policies to ensure that one doesn’t originate within the country.
“We cannot be the spark that starts the fire. When the government borrows too much and is unable to service its debt, that’s when financial panic starts and the exchange rate gets affected.
“So the government’s current focus on containing the budget deficit is very much in line with prudent management... for example, postponing big infrastructure projects because now is not a good time to undertake them.”
Woo said one way to reduce spending is to cut deficits.
“There should be greater use of open tenders and less direct negotiation, as in the past, to keep costs low.”
Alternatively, if a crisis were to originate offshore, Woo said the government would need to have policies in place that will make Malaysia resilient to the shocks from the outside.
“The deficit is under control, but the financing of the deficit has to be watched very carefully. The fact that the government is borrowing not just from China, but also from Japan, diversifies our sources of financing.
“That is certainly a prudent thing to do – cutting the deficit and diversifying the financing.”
Meanwhile, New Zealand-based Massey University’s Professor of Finance Martin Young said global debt levels are higher today than nine years ago during the global financial crisis.
“Global debt levels continue to rise, currently standing at approximately US$244 trillion, up US$27 trillion since 2016. These levels have significant implications for financial market stability and the likelihood of a crisis.
“Relative to gross domestic product (GDP), global debt exceeded 318% today, though this ratio was higher in 2016 at 320%. In 2008 this ratio was 290%.”
The ASFRC said the biggest borrowers are the United States (125% of GDP), China (300% of GDP), eurozone (close to 100% of GDP) and Japan (237% of GDP), which together account for 67% of the world’s household debt, 75% of global corporate debt and nearly 80% of government debt.
Young said it was difficult to say what level of debt was “too high”.
“In practice, growing debt correlates with growing economies, however excessive debt can be a significant drag on economies if borrowers cannot service the debt. Since the 2008 financial crisis, borrowing has increased substantially and this overhang of global debt is starting to be stressed.
“The Federal Reserve has been moving interest rates up, albeit slowly, and while the US economy continues to grow strongly, others such as the eurozone, Japan and China are starting to see signs of weakening growth.”