GENERALLY, Finance Ministers are meticulous in their messaging. This is because what they say – even in passing – is taken seriously. It has been proven time and again – both locally and overseas.
On this score, the capital markets were rattled by the use of words such as “windfall tax” by Finance Minister Lim Guan Eng. Even though he clarified later that his statement was taken out of context and that the government would not impose a windfall tax on banks, it nevertheless was the topic of discussion even in analyst research reports.
The “windfall tax” remarks overshadowed the subject matter on why Lim had said what he had said in the first place during the Invest Malaysia 2019 conference.
Lim urged banks to be more flexible in their lending since they are already making a lot of money, mentioning a “windfall tax” in passing.
If only he had stopped at just urging the banks to lend, it would have been fine. The Finance Minister has the prerogative to encourage financial institutions to lend because it helps stimulate economic activities, which is his responsibility.
But to prod them into easing their lending guidelines because they are profitable and lace the comments with a phrase such as a “windfall tax” does not come across as a gentle nudge. It seems more like coercion instead of gentle suasion.
Lim is right when he talks about banks slowing down in lending activities. The numbers are there to show that loan growth has slowed down in the last three years.
The Malaysian banking system’s loan growth in January this year was 5.6% compared to 4.8% in the corresponding period a year ago. It has improved but is much lower than the 11% registered in January 2013 and 11.7% in January 2014.
It is not only property developers who are complaining about the difficulty in getting loans. Even companies involved in the real economy say they have difficulty in securing loans for their projects.
But financial institutions have reason to be careful in lending.
Firstly, the external economic environment is uncertain. Even the US Federal Reserve (Fed) has made a dramatic U-turn in its monetary policy because of the slowing US economy. The Fed has decided against any hikes in interest rates this year.
The United Kingdom is still undecided on Brexit, which is causing problems in Europe, while the US-China trade dispute is a problem for China, the US and global trade.
A sign of banks turning cautious is the narrowing spread between the two-year and 10-year US Treasury debt papers. The spread is now at about 11 basis points compared to more than 100 basis points two years ago.
When the spread narrows, the profits of banks are hit because they take advantage of collecting deposits for the short term and lending for the long term.
Hence, banks tend to be more cautious when the yields between the long and short-term debt papers narrow.
Secondly, out of the top-four banks in the country, three are controlled by entities linked to the government. Malayan Banking Bhd has Permodalan Nasional Bhd as its major shareholder, Khazanah Nasional Bhd calls the shots at CIMB Group Holdings Bhd and the Employees Provident Fund is the largest shareholder in RHB Bank Bhd.
If the government wants banks to be more aggressive in their lending activities, all it needs to do is send the message to these banks. These banks tend to toe the line of the government of the day.
But it would be at the expense of increasing the risk profile of their assets. The banks may have more bad loans in their books than their peers and this would impact their profitability and ability to pay out dividends in the future
Do we want to see this happening? Finally, the banks are well supervised by Bank Negara. The central bank has done a commendable job in the last 20 years to ensure that the banking system is intact. Malaysia has sailed through the 2008 financial crisis, the 2014 crash in oil prices and the present trade war without major hiccups to the banking system.
Bank Negara embarked on measures to curb lending to some segments of the property sector three years ago due to over-building. It came out with a damning report on the huge overhang in office and retail space, high-end condominiums and service apartments.
Bank Negara’s proactive measures have paid off. The banking system is not over-stretched now during the global slowdown.
The central bank is the guardian of banks and it has done an excellent job so far. Let it continue to do what it has been tasked to do. There really is no need for strong words to pressure banks into lending.
What finance ministers say impacts the capital market. If there is a special message the Finance Minister wants to send to the capital markets, it must be done carefully with extreme caution on the choice of words.
Former Finance Minister Tun Daim Zainuddin caused the euphoria of the 1993 stock market bull-run to come down with a thud when he gave a special interview telling investors to take their money out.
The interview was done over a weekend to prepare investors before the trading started.
Many remember former Fed chairman Alan Greenspan for his “irrational exuberance” remark to describe the “dot-com” bubble in 2000. Shortly after, the bubble burst.
After the Prime Minister, the Finance Minister is the most important person in charting business direction. It is a position that comes with a huge responsibility. What the minister says, even in passing, is taken seriously.
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