By Sherilyn Goh
Malaysia’s economy is poised for steady growth despite multiple external and internal headwinds, moderate outlook in major economies and emerging markets next year as it is supported by a sound banking system and well-developed capital market with ample liquidity to withstand volatile capital outflows, according to the Finance Ministry’s economic report 2015/2016.
Due to the strengthening of the US dollar amid improving US economy and expectation of US interest rate hikes, the ringgit – along with most major and regional currencies – went on a depreciating trend in the first nine months of 2015, compounded by uncertainties in Greece as well as growing concerns over China’s slowing economy and the yuan devaluation in August.
The report cited plunging crude oil prices and unspecified domestic factors in justifying the sharper declines experienced by the ringgit relative to its peers.
From January to September 2015, the ringgit depreciated against the US dollar by 21.4%, the Japanese yen (by 21.1%), the pound sterling (by 19.3%) and the euro (by15.1%). The ringgit also softened between 7.3% and 19.4% against other regional currencies.
On the other hand, interest rates in the banking system remained stable in line with the unchanged overnight policy rate in the first eight months of 2015.
As at end-August 2015, the average base rate declined by five basis points to 3.85% since it was introduced on January 2, 2015. However, the base lending rate of commercial banks held steady at 6.79% during the same period, according to the report.
Monetary aggregates continued to grow during the first eight months of 2015. M1 or narrow money increased at a faster pace of 8.8% to RM351.5 billion as at end-August 2015, mainly supported by increase in demand deposits, which rose by 7.8% amounting to RM276.1 billion.
Meanwhile, M3 or broad money expanded at a slower pace of 4.6% to RM1.563 trillion as at end-August 2015, attributed to the decline in net foreign assets and net claims on the government. The report noted that the moderation in M3 is mitigated by higher credit extended by banking institutions to the private sector, which increased by 9.3% to RM1.513 trillion.
Resilient banking system
Despite increasing downside risks to global growth and heightened volatility in international financial markets, the report states that the Malaysian banking system has remained well-capitalised.
As at end-August 2015, the common equity tier 1 (CET1) capital ratio, tier 1 capital ratio and total capital ratio were reported to be well above the minimum regulatory levels at 12.1%, 12.7% and 14.8% respectively, as compared to 12.8%, 13.6% and 15.5% as at end-2014.
More than 80% of the banks’ total capital consist of high quality capital in the form of retained earnings, paid-up capital and reserves. Total capital buffers were sustained at above RM98 billion as compared to RM97 billion end-August 2014, in excess of minimum regulatory requirement.
Similarly, liquidity in the banking system is said to have remained ample. As at end-August 2015, the banks’ surplus liquidity placed with Bank Negara Malaysia remained in excess of RM110 billion.
For the first eight months of 2015, the banking system recorded a slightly lower pre-tax profit of RM19.7 billion, as compared to RM21.7 billion in the corresponding period last year. This is attributed to competitive pressures particularly of that in the retail financing market.
Loan quality in the banking system improved further with the level of net impaired loans at 1.2% of net loans as at end-August 2015, compared to 1.3% in the same period last year.
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Malaysia continues to dominate sukuk market
The report adds that Malaysia remains well placed to make further strides in Islamic finance, leveraging on its role as the lead issuer in sukuk and pioneer in innovative products, accounting for 54.9% of global sukuk outstanding at US$312.9 billion as at end-June 2015.
However global issuances of sukuk was affected by weaker sentiment in financial markets over concerns on global growth outlook and declining commodity prices. During the first six months of 2015, global sukuk issuance was down by almost half compared with the corresponding period in 2014, according to the report.
Meanwhile, the Islamic banking industry has shown significant growth over the last five years. Islamic banking assets, including that of development finance institutions, grew at a compounded annual growth rate of 15.5% to RM625.2 billion as at end-2014 from RM351.2 billion as at end-2010.
As at end-August 2015, the total assets of the Islamic banking system grew by 13.7% to RM672.6 billion, compared to the 12% growth recorded by end-2014. Total deposits of the Islamic banking system increased by a slower pace at 6.6% to RM497.1 billion, as compared to the 13.4% growth recorded last year.
Fund raising activity moderates in capital market
Gross funds raised in the capital market decreased by 9.8% to RM119.9 billion from January to August 2015, in contrast with the 21.2% growth and RM132.9 billion raised in funds in the corresponding period last year.
The private sector saw lower fund raising activity, with gross funds raised declining by 26.1% to RM50.2 billion. Gross funds raised by the public sector increased at a faster pace of 7.3% to RM69.7 billion.
During the same period, funds raised in the equity market declined by 38.5% to RM9.8 billion, as the number of initial public offerings (IPOs) decreased. As at end-August 2015, there were eight new listings of IPOs with two notable IPOs listed in the energy and construction sectors, compared to 14 IPOs making their debut on Bursa Malaysia last year.
The report attributed the lower funds raised in the equity market to companies holding back due to cautious market sentiment.
The Malaysian Government (MGS) yields declined across all tenures on the back of strong demand by investor during the first seven months of 2015.
The report noted that MGS yields increased in August 2015 as concerns over the impact of a sharp decline in global crude oil prices, ringgit depreciation as well as increased expectations of an interest rate hike by the US Federal Reserve led to the liquidation of non-resident holdings, amounting to RM8 billion.
Overall, the five-year and ten-year MGS yields increased by 15 basis points and 25 basis points respectively, while the three-year MGS yields recorded a decline of 12 basis points in the first eight months of 2015.
As at end-August 2015, foreign investors’ holdings in MGS amounted to RM157.4 billion, accounting for 46% of total MGS outstanding. Meanwhile, in the private debt securities market, yields on the 5-year AAA-rated, AA-rated and A-rated securities increased by five basis points, nine basis points and 33 basis points respectively.
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