Banks remain prudent

PETALING JAYA: The overnight policy rate (OPR) cut has thrust both banks and potential lenders in a state of limbo.

As much as banks would like to disburse more loans, they are being prudent as they brace for a spike in non-performing loans (NPLs), especially when the six-month loan moratorium ends in September.

Households and businesses are also holding back from applying new loans on fears of uncertain economic conditions led by the Covid-19 pandemic.

While the rate cut is a relief to those who are currently financing their loans, UOB Kay Hian head of research Vincent Khoo noted that there is just not enough demand for loans.

“The economy has been hit hard, evident in the layoffs and pay cuts. The OPR cut is not a significant measure to revive the economy, ” he said.

In May, loan applications fell 39% year-on-year (y-o-y). Total loans approved sank 54.4% y-o-y, while loan disbursement declined 25.8% y-o-y in May.

It was previously reported that application for consumer loans fell 58.5% y-o-y as consumers were not spending on big ticket items, such as houses and vehicles, while business loan applications were down 13.9%.

AmBank Research chief economist and economic action council secretariat member Anthony Dass (pic below)concurred that banks would remain prudent.

“Typically, OPR cuts will entice businesses to borrow more, but this depends on their business prospects. Loan applications will be high but disbursements will be low, ” he said.

Economists are expecting a pause in rate cuts this year and suggest that other policy levers could be considered to reinvigorate the economy instead.

The economy has been dampened by weak demand as a result of the weak job market, which in turn requires different policy prescriptions, they say.

According to CGS-CIMB, the cue for further monetary policy action rests on the pace of recovery in household and business demand, as well as the labour market in the second half of 2020.

Malaysia’s unemployment numbers climbed to 5% in April, and this figure could potentially rise, given that retrenchments filed with the Social Security Organisation’s (Socso) Employment Insurance Scheme rose in May and June.

“With the latest cut bringing the cumulative reduction this year to 125 basis points, we think monetary settings have been sufficiently recalibrated to reflect the severity of the economic downturn caused by Covid-19.

“While we think the monetary policy stance has shifted to neutral, policymaking will be heavily data-driven due to significant uncertainty surrounding Covid-19’s trajectory and economic recovery, ” said CGS-CIMB.

The research house expected a sharp but incomplete recovery in the second half of 2020, with gross domestic product (GDP) to contract by 3.5% in 2020 before expanding 7.5% in 2021.

This implies that the economy will continue to operate at a negative output gap until the second half of 2021.

On Tuesday, Bank Negara cut its overnight policy rate (OPR) for the fourth time this year, bringing it to a record low of 1.75% from the previous 2%.

The central bank is of the view that the OPR cut of 25 basis points will provide additional policy stimulus, on top of the other financial and monetary measures announced, to accelerate the pace of economic recovery.

Meanwhile, PublicInvest Research highlighted that an interest rate environment that is too low may be counterproductive as it could encourage excessive risk taking in speculative investment, a seed for inflation to spiral. “Successive stimulus programmes rolled out should produce tangible results in the third quarter, which forms the basis of our expectation for interest rate normalisation in the first half of 2021.

“Our engine of growth is expected to recover more strongly in the third quarter before accelerating further in the fourth quarter, barring unforeseen circumstances like a new outbreak of new cases that could lead to periods of closure, persistent weakness in the labour market and weaker-than-expected recovery in global growth, ” the research house said, as it expects the OPR to remain status quo until year-end.

Conversely, Dass opined that the door for further monetary easing remains open, noting that there is ample room for Bank Negara to reduce the policy rate.

Dass’ view is that the second quarter of 2020 will report the worst performance, in view of the movement control order (MCO) in Malaysia and lockdowns in other countries in a move to contain the spread of the pandemic virus.

“The outlook for the second half of the year remains challenging, despite the easing of lockdowns and the MCO. With political noises and trade war still very much in the cards, uncertainties remain. The risk of a second wave of virus infections cannot be ruled out.

“Also, it remains unclear if Covid-19 will be contained or will there be another round of lockdown. The focus will also be on Oct 1 when the six-month moratorium on loan repayment ends.

“Will there be an extension or will it be a targeted measure?” he said.

Dass also expected the base case for 2020 GDP to contract around 2%, with the downside at 5%, as monetary policy continues to play an important role, supported by fiscal and financial measures.