ECONOMIC activities were picking up momentum, but all are hit by the recent surge in Covid-19 infections.
The interest rates are already very low with the overnight policy rate (OPR) at 1.75%. Will there be another cut if the lockdown were to lower growth?
Savers and retirees are feeling the pinch of current low levels of savings rates although the more sophisticated ones can turn to high-yielding bonds but some fall prey to investment scams offering higher returns.
Reduced OPR will lower banks’ net income margin as there is a time lag for deposit rates to be adjusted lower, while financing rates are lowered almost instantly when the rate changes.
“Financing growth could be slower but there are avenues for banks to mitigate the risks of a lower OPR, ’’ said Bank Islam Malaysia Bhd CEO Mohamed Muazzam Mohamed.
Non-fund or fee-based income (in particular the trading books of sukuk where prices are inversely related to interest rates), could help to mitigate the reduction in fund-based income that is derived from interest earned on loans.
The longer the lockdown drags on, the greater the likelihood of a rate cut although other tools may also be used to help stimulate the economy.
Every two weeks of slowdown could shave off 0.7% from gross domestic product (GDP) growth, said Hong Leong Bank managing director, global markets, Hor Kwok Wai.
“The longer it drags on, the more negative will be the impact, ’’ said Hor, adding that the OPR may be cut if the lockdown lasts beyond a month.
A rate cut could occur when fiscal response from the government is not strong enough to offset the slowdown, due to issues on affordability.
While phase one of the lockdown would last for two weeks, the reopening of even a few sectors could depend on whether the number of Covid-19 infections flattens.
There is a possibility of an OPR cut in the near future if the country cannot flatten the curve for Covid-19 cases, said Alliance Bank Malaysia chief economist Manokaran Mottain.
Given the low base effect, a contraction is not likely for now, however, if the lockdown lasts for more than two months, it is possible that the OPR will be cut, according to Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.
“Otherwise, they may run out of bullets and also incur diminishing returns from each OPR cut, ’’ said Eng.
Leaving OPR unchanged at 1.75% last month, Bank Negara said there is more room for monetary policy to support the economy.
Since the pandemic, it has cut OPR four times from 3.0% to 1.75%.
Going by the baseline scenario of a two-week lockdown, OCBC Bank Malaysia sees the economy shrinking by 2.5% on a sequential basis in the second quarter, and 4% for the whole year.
If the export sector, which has been powering growth in recent quarters, starts to show signs of buckling, the chances of Bank Negara cutting the OPR will naturally go up.
While some manufacturing sectors can stay open with 60% of their workforce, the exempted sector is the electronics and electrical sector which contributes around 40% of Malaysia’s total exports.
Helping to limit the damage is the continued operations of the oil and gas and chemical sectors, as well as those producing personal protective equipment such as rubber gloves.
Our baseline case is that Bank Negara will remain on a wait-and see mode and the fly in the ointment is the ongoing resurgence in virus cases and counter measures that would weigh on growth a lot more than expected, according to OCBC Bank Malaysia economist Wellian Wiranto.
The room for fiscal policy in terms of government aid for the struggling groups and sectors may be limited, as the debt to GDP ratio is already at 58.5%, hitting near to the 60% statutory limit.
“We see a rising possibility of Bank Negara cutting the OPR in its monetary policy committee meeting on July 8, ’’ said Wiranto.
But Bank Negara is not likely to undertake massive rate cuts beyond 25 to 50 basis points adjustments at this stage.
In looking to lower rates, the government will have to consider supply-side inflation (caused by rising prices of product inputs) trending up.
“Bank Negara will be cautious to prevent it from spilling over into a demand-pull inflation (when consumers have more discretionary income to spend), ’’ said former RHB Research Institute chief Asean economist Peck Boon Soon.
It also has to be careful to prevent a further build-up in financial imbalances.
Cashflow problems have to be addressed, as prices of sugar, palm oil, cocoa, steel and other commodities have gone up.
Many small and medium enterprises (SMEs) cannot pass through the costs for those products under supply contracts, while those in the consumer goods sector have started to pass on the costs.
“The loan moratorium is more meaningful as there is now a cashflow issue for survival, ’’ said Small and Medium Enterprises Association national secretary Yeoh Seng Hooi, adding that rental rebates and wage subsidies are also big ticket considerations.
It is better to reserve the arsenal of rate cuts as the banks’ continued targeted repayment assistance with simplified documentation would help to ease borrowers’ cashflow burden, according to Socio Economic Research Centre executive director Lee Heng Guie.
Monetary policy, as in lowering of rates, may not be an adequate response although it helps the government to reduce its debt servicing charges at a time when GDP growth is muted and debt is surging.
“The appropriate action plan is to vaccinate, vaccinate and vaccinate, ’’ said former Inter-Pacific Securities head of research Pong Teng Siew.
With a sustainable flattening of the Covid-19 cases, it is hoped that a sharper-than-expected return in business and consumer confidence can help pull up GDP growth once again.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.