Expansionary budget critical for recovery, says BNM

 

Bank Negara says it is confident the recent measures introduced by the government will ensure employment creation and income growth.

KUALA LUMPUR: Budget 2021, to be tabled on Nov 6, will see the government remaining supportive of expansion and growth as it seeks to recover from the impact of the Covid-19 crisis, Bank Negara Malaysia (BNM) said.

“For this year, the government has already stated that we will have a fiscal deficit of 5.5% to 6% and that is to be expected because fiscal measures are necessary,” BNM deputy governor Jessica Chew said during a virtual briefing for business editors in conjunction with the release of the Financial Stability Review – First Half 2020 today.

Chew said the measures are critical in the current environment to support the country’s recovery, and the government remains committed to the consolidation over the medium term and it has a strong track record of delivering results over the medium to long term.

She said while the central bank is concerned over the increase in Covid-19 cases, it is confident of the measures introduced by the government, coupled with the open economy advocated by the country, which has been instrumental in employment creation and income growth.

“By and large, the economy is operating unlike before. And the external sector is also recovering. So, we might see in some countries the resurgence in the number of cases but if you look at the macro numbers, they are generally improving globally.”

Malaysia has recently raised its debt-to-gross domestic product ceiling to 60% from 53% and the revision was made following the anticipation of a higher fiscal deficit this year amid a fiscal injection into the economy, which stands at 20% of its GDP.

Putrajaya has rolled out stimulus packages worth RM305 billion since the start of the pandemic to help the people and businesses tide over its impact.

Business conditions to improve in 2H2020

In the Financial Stability Review – First Half 2020, BNM said it expects business conditions to improve in the second half of the year (2H2020) in line with the gradual improvement in economic activity.

“The extension of targeted financial relief measures will continue to help support businesses alongside corporate and SME guarantee schemes as the recovery takes a stronger hold,” it said.

“More importantly, greater visibility on loan performance from the transition to more targeted repayment assistance remains important to reduce risk aversion and improve credit supply during the recovery phase.”

The report provides Bank Negara’s assessment on current and potential risks to financial stability and the resilience of the Malaysian financial system to sustain its financial intermediation role in the economy.

Corporate sector external debt increased 4.9%, mainly driven by additional borrowings by firms in the oil and gas-related sector and valuation effects following the weaker ringgit during 1H2020 against selected major and regional currencies.

Nevertheless, the central bank said risks to financial stability from external borrowings remained manageable as borrowings are mostly medium to long term in nature and hedged against exposures to currency movements.

Recovery in household loan growth

BNM also said banks are expecting some recovery in household loan growth in 2H2020 amid low borrowing costs and improving labour market conditions.

It said financing conditions have been further supported by lower borrowing costs following recent monetary policy easing.

“In contrast to business loans, demand for financing by households was generally weaker, reflecting more uncertain income and employment prospects,” it said.

The report also revealed that the banking system continues to be well-positioned to support credit flows to the real sector as the economy gradually begins to recover.

Banking system loans recorded an annual growth of 4.1% as of June, mainly driven by growth in outstanding business loans in the wholesale and retail trade, hotels and restaurants, and manufacturing sectors.

Household financial stress

The report also said some households are facing increased financial stress, despite a cautious stance that reflected in the weaker loan growth amid movement restrictions and lower discretionary purchases.

As of June, household debt moderated to 4% compared with 5.5% in 2019.

“This was mainly reflected in the weaker loan growth for the purchase of residential properties and motor vehicles in the first half 2020 (7.2% and -0.9% respectively; 2019: 8.5% and -0.4% respectively),” it said.

Household leverage increased the most among borrowers earning less than RM5,000 per month in the first half of 2020, amid income prospects that are more uncertain and liquidity buffers for borrowers earning less than RM3,000 are already stretched, it said.

The central bank said the higher leverage has been mainly attributable to an increase in borrowings for the purchase of homes earlier in the year and in June following the reintroduction of the Home Ownership Campaign. - FMT