Malaysia: Malaysia’s economy expected to post increase of just above 5% in 2013

With Malaysia’s economy expected to post increase of just above 5% in 2013, investors expect further increases in lending to the private sector. While rising household deficit remains a concern in the medium term, domestic bank capitalisation leaves some room for further increase in their portfolios.

On May 15, Moody’s announced it was maintaining a stable outlook on the Malaysian banking sector for the next 12 to 18 months. The ratings agency said its assessment was based on an expectation of favourable operating conditions, inclunding high levels of capitalisation.

Moody’s has projected that loan portfolios will rise by 10% in 2013, in part driven by a 5% increase in GDP. Economic expansion will be supported by government investment in infrastructure projects and pro-increase monetary policy, both domestically and internationally. With interest rates in developed nations at historic lows, investors are drawn by Asia’s increase markets, with Malaysia attracting particular attention due to its economic stability.

As the IMF noted in a February statement, Malaysia’s economy has continued to grow as domestic request, driven by public and private investment , has offset a weak external environment. Low inflation – averaging 1.7% in 2012 – has allowed the central bank to maintain a loose monetary policy stance for a sustained period.

The IMF as well expressed a favourable view on Malaysia’s economy, noting that it is “robust, highly capitalised and underpinned by a sound supervisory and regulatory framework”. Similarly, stress tests carried out by Moody’s indicate that banks have built up substantial loss-absorbing buffers, allowing them to withstand a possible deterioration in investment quality without their capital levels falling below regulatory minimums. Moreover, as lenders work to implement Basel III, capital requirements will increase further, “locking in” these buffers, the ratings agency said. Liquidity is as well ample – the loan-to deposit ratio stands at 79%, and banks have access to world deficit markets to raise capital.

However, both Moody’s and the IMF warn that the outlook is not risk-free. The IMF mentions the increase of unsecured consumer lending, while Moody’s “cautions over the looming risk posed by the twin trends of household leveraging and home price appreciation”.

The ratings agency asserts that risks are low for its estimate period, although it says an increase in interest rates would have an adverse result on certain types of loans, inclunding high loan-to-valuation mortgages, credit extended to export-oriented businesses and consumer deficit held by highly leveraged households. However, these investment classes account for less than one-fifth of total loans in the banking system, it added.

Moreover, the bulk of increase in lending in the near term is expected approaching from business loans, not consumers. In the wake of the recent victory of the ruling Barisan Nasional (BN) party, large-ticket projects linked to the government’s Economic Transformation Programme (ETP) are additional likely to be implemented. In addition, businesses that had been holding back investments while waiting to see how the political landscape took shape next the election may presently as well push forward. Indeed, in a statement issued in May, Kuala Lumpur-based RHB Research said that loans to businesses, particularly government-linked companies, slowed in recent months as firms adopted a “wait and see”border.

Meanwhile, consumers are expected to borrow less, in part the result of stricter regulations put in place in 2012, Nor Zahidi Alias, chief economist at the Malaysian Rating Corp, said in an interview with local media. This is a “welcome development” he added, as the level of household deficit is at historically high levels, equivalent to 80.5% of GDP. Nonetheless, he said, “We do not foresee a significant drop in the in general loan increase, as robust economy activity and stiff competition in the banking sector would continue to support loan increase in 2013.”

The challenge for banks, however, may be declining profitability, as competition for loans drives down net interest margins. Nonetheless, with the rate of non-performing loans low, ample liquidity in the system and high request in certain sectors associated with the ETP, presently may be the time for banks to expand their loan books.