Although the Coronavirus recession has started to rear its ugly head everywhere, including in Malaysia, it is not expected to leave a wound as deep as that which was left by the Asian Financial Crisis (AFC) of the late 1990s.
This is partly because banks which are largely the cornerstone of economies, are now in a much stronger financial position than they were back then and can, - for now, at least - withstand larger shocks.
That said, the current recession is certainly something to be worried about.
In fact, Chua Hak Bin, senior economist at Singapore’s Maybank Kim Eng believes that while this pandemic recession will “probably not” be as bad as the AFC, it will be worse than the 2008-2009 Global Financial Crisis (GFC) which started off as a subprime mortgage crisis in the United States.
Across global economies, gross domestic product (GDP) expectations have been lowered to levels not seen in a long time as the pandemic continues to result in job losses and business closures, resulting in poor consumer sentiment and demand for goods and services - the world over - drying up.
The International Monetary Fund (IMF) expects GDP per capita to shrink across close to 200 countries this year and has said that a fresh wave of the Coronavirus could set economies back for a very, very long time.
Notably, just this week, alarm bells were set off in export-reliant Singapore when it was reported that the city-state had fallen into a recession in the second quarter of this year.
In Thailand, where close to 15% of its GDP is made up of tourism activities, expectations are that its economy will be “impacted severely”, declining by at least 5% this year.
According to the World Bank, it will take more than two years for the country to recover to pre-Covid19 GDP output levels.
In the context of Malaysia, one of the areas of concern is that come Sept 30, bank borrowers will have to start making their loan payments again.
Recall the government had initiated a six-month moratorium period which started in April where borrowers do not have to make their monthly loan payments to banks.
The move was initiated to relieve the burden of those directly affected by the impact of the pandemic.
The worry now is that many borrowers including corporates will not be able to make good on those payments as they continue to deal with the impact of the pandemic.
Some have seen their businesses close altogether while others, individuals and companies alike, continue to struggle to get back on their feet.
Notably, unemployment crept up to 5.3% in May, higher than the 5% reported in April.
Last year, it averaged just slightly over 3%.
“The pandemic recession may not be as deep as the AFC but may last just as long, ie, four quarters of year-on-year contraction, ” Chua tells StarBizWeek.
Debt will swell
Indeed, post-moratorium, there are expectations that debt will swell, says Sunway University professor of economics Yeah Kim Leng.
Yeah, who used to be an external member of the central bank’s monetary policy committee (MPC), says although the banking system’s non-performing loan (NPL) ratio remained stable in May at 1.6%, he expects an increase in the number of financially distressed firms, businesses and individuals due to the nation-wide shutdown during the movement control order or MCO, and depressed spending thereafter.
“The various fiscal and financial relief measures as well as the loan repayment moratorium ending in September have kept a lid on bankruptcies, defaults and delinquencies, but the banking system’s NPL ratio is expected to spike up after the end of the six-month moratorium, ” Yeah tells StarBizWeek.
That said, he believes that despite the expected rise in the NPL ratio, Malaysia is not expected to face a banking crisis akin to the 1997/1998 AFC - where a couple of banks needed recapitalisation and bad loan carve-outs - or the more recent GFC where local banks were relatively unaffected.
“In fact, going into the Covid-19 crisis that is still developing, banks’ capitalisation and liquidity ratios, loan asset quality and loss provisions are in a much healthier position than before.”
He points out that in a severe stress simulation scenario reported by Bank Negara in April this year, banks’ total capital ratio, which is an indication of a lender’s financial strength, was estimated to decline from 18.3% to 12.3%, which is still above the regulatory requirement of 8%.
“While mechanisms and special-purpose vehicles were created to recapitalise, carve out bad loans and enable orderly large-sized debt workouts during the AFC, they are unlikely to be activated unless the pandemic crisis takes a turn for the worse, ” Yeah opines.
Still, even though the banking system has the capacity to absorb NPL losses, Yeah adds there will be negative effects on the economy, as banks could reduce lending and become even more risk-averse than they already are.
“This will impede credit creation and flows that are necessary to finance business expansion and capital investment.”
Maybank Investment Bank group chief economist Suhaimi Ilias agrees.
“One implication to the economy is a cautious lending stance by banks amid risk management and mitigation, as post- moratorium, banks may have to undertake restructuring and rescheduling of loans, which is perhaps a more sustainable solution than extending the moratorium, ” he tells StarBizWeek.
There have been calls by some quarters for the government to extend the moratorium after September, but most lenders have come out to say that they will not do that, as six months should be adequate for parties to get their finances in order.
However, most banks have said that they will take on a targeted assistance approach mainly for customers who are from sectors that are deemed particularly vulnerable to the pandemic such as tourism and airlines.
MIDF Research head Imran Yusof says he does not believe that we will see a repeat of the AFC or the GFC, given that banks are generally well-capitalised and are facing the current difficult situation from a position of strength.
“However, the potential impact would be higher NPLs, as troubled borrowers may not be able to start servicing loans when the moratorium ends.
“Nevertheless, we expect banks to put in a lot of effort in restructuring and rescheduling potential troubled loans and this may moderate the level of NPLs.”
It is worth noting that Malaysia’s household debt to GDP at 82.7% remains one of the highest in the region.
Sunway’s Yeah points out that highly-indebted borrowers with meagre savings and disposable income are highly vulnerable to job and income losses.
“While hard to deny credit access to the vulnerable groups, perhaps better financial literacy and planning could have deterred them from overloading credit risk.”
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