A slowing Malaysian economy

Data released by Bank Negara on the monetary and financial developments for January showed that M3, the most inclusive definition of money supply, was lower compared to the same month last year. The growth in M3 for January was even weaker than for December, when it grew by 2.7% and this has been weakening since last October.

 

PETALING JAYA: Businesses and consumers remain wary of the economic outlook, judging from the money supply gauges of M3, also known as broad money, and M1, a narrower definition, used to measure the amount of money circulating in the economy. What is interesting to note is that M3 has shrunk by more than 86% over a span of four years.

Data released by Bank Negara on the monetary and financial developments for January showed that M3, the most inclusive definition of money supply, was lower compared to the same month last year. The growth in M3 for January was even weaker than for December, when it grew by 2.7% and this has been weakening since last October.

M3 includes physical cash circulating in the economy, current and savings accounts, fixed deposits, institutional money market funds (funds that invest in Government bonds and private-sector securities), short-term money market loans (used for borrowing, lending, buying and selling for terms ranging from a few days to under a year) and other larger liquid assets.

M1, usually referring to physical cash as well as easily accessible money in accounts, expanded in January, but has also been on a declining trend since last October. Both gauges are also measurements of liquidity in the economy and are used as indicators for monetary policy.

Taken together, both gauges show that businesses and consumers are still cautious, with businesses not expanding and consumers not spending. A combination of cost-of-living pressures, slowing economic growth and low-wage pressures have also weighed on sentiment.

Alliance Research chief economist Manokaran Mottain told StarBiz that the first half of the year was going to be very tough. “Even if there’s no recession, the pressure is going to be felt by businesses, consumers and households,” he said.

Most analysts pointed to the recent cut in the statutory reserve requirement (SRR) by Bank Negara as giving the banks a bit of breathing space where liquidity is concerned. The central bank cut the SRR by 50 basis points to 3.5% effective Feb 1. The SRR refers to a regulation that requires commercial banks to have an amount of funds kept with the central bank, interest-free, and used to manage liquidity in the banking system.

Manokaran said if the banks responded by cutting the base rate, which means transferring some of the liquidity gain by making loans less expensive to customers, then it would make a difference. “By right, there should be a reduction in the base rate,” he said, not discounting further reductions in the SRR this year.

Meanwhile, Overseas Bank (M) Bhd economist Julia Goh said the weak money supply growth underscored slower economic expansion in the near term, but believes that the pre-emptive measures taken by the central bank and the Government will help support the economy.

She said the drop in broad money growth could likely continue through the first half of this year, although it could be mitigated by inflows of foreign funds.

“A reversal of capital flows alongside the stable ringgit and foreign reserves has also helped to improve domestic liquidity conditions. As such, we saw excess liquidity in the banking system edging higher to RM151bil in January,” Goh said, adding that foreigners were net buyers of Malaysian Government Securities, with holdings totalling 47.9% in January, which was just shy of the 48.5% from June 2 last year.

She said there was evidence that liquidity conditions had eased up following the SRR reduction. In particular, the three-month KL Interbank Offer Rates have continued to decline from 3.84% at end-2015 to 3.79% at end-January, 3.74% at end-February, and currently at 3.73%.

“In view of this, we think Bank Negara is inclined to keep both the overnight policy rate and SRR on hold at the coming monetary policy committee meeting,” she said.

Seen from a span of four years, that is, from Feb 29, 2012 to Feb 29 this year, the amount of money circulating in the economy as measured by M3 has fallen 86.25%. Goh said part of the decline could be explained by the range of non-conventional investment products that have come into the market in recent years.

“These products are not guaranteed by Perbadanan Insurans Deposit Malaysia and hence not captured in the system when calculating broad money. That’s why you have the sharp decline in M3, but the money is still in the economy,” she said. The more recent decline in M3 can be explained by the drop in conventional deposit growth, which Goh said had come off markedly.

Manokaran said M1 was a better gauge for business activity. “If there’s a drastic drop in M1, then there’s a story there,” he added. However, Manokaran expects there to be more volatility ahead, as liquidity remains tight and economic data in the coming months will reflect the domestic slowdown and the external uncertainties.

Kenanga Research said in a March 1 report that current money and credit conditions reflected financial market volatility and pointed to worsening consumer and business sentiment. “Due to slowing economic growth, we do not expect to see a change in the current situation in the near term,” it added.

However, it noted that the outflow of short-term capital had slowed and there were some early signs that investor confidence was returning to the market, but the divergence in monetary policy could make the financial markets more volatile.

It expects to see money supply gradually return to more normal growth and for the loan-to-deposit ratio to gradually fall alongside increased liquidity in the banking system. The research house forecasts banking system loan growth to average between 5% and 6% this year, slower than the growth of 7.9% in 2015.

 

http://www.thestar.com.my/business/business-news/2016/03/07/a-slowing-economy/