Posted Date: April 04, 2020

In its Annual Report unveiled on 3 April 2020, Bank Negara Malaysia (BNM) painted a subdued outlook for the Malaysian economy in 2020. It projects economic growth to be in the range of 0.5% and -2.0% due to the impact of the coronavirus disease (COVID-19) pandemic on both the global and domestic economies.

BNM expects the pressure on headline growth to come from both external and internal demand (net exports: -27%; domestic demand: 1.1%). It sees private consumption, Malaysia's pillar of growth, moderated due to job losses and wealth erosion but somewhat cushioned by fiscal support (+2.5 percentage point contribution to growth). Against this backdrop, private consumption growth is expected to moderate to 4.2%.

We share BNM's view regarding the expected sharp downturn of the Malaysian economy in 2020. This is especially true because businesses will be hard hit by the current pandemic. In our view, with a material decline in business sentiment and the implementation of the movement control order (MCO) – a necessary measure to curb the virus outbreak – small businesses have come under great pressure and will likely exhibit dismal performances. Admittedly, the government has provided some relief to individuals and businesses to help them weather these challenging times through its latest stimulus package, PRIHATIN, valued at RM250 billion or 17% of GDP.

Given the government's limited fiscal space, we feel the private sector can play a critical role in ensuring the Malaysian economic fabric remains intact in the long term. For example, commercial banking institutions can help support the economy by effectively utilising the liquidity made available by BNM by lending to businesses that are in need of lifelines (e.g. SMEs with good prospects). This is because experience from the Global Financial Crisis (GFC) shows that a slow pick-up in lending growth (in the US) was a key reason behind the sluggish economic recovery despite the massive liquidity injections by the US Fed through its quantitative easing policy.

With BNM already lowering its SRR by a total of 150 basis points in recent times, ample liquidity has been flushed into the banking system. These funds are useful for businesses struggling to make ends meet especially at a time when there is high cash burn rate (declining revenue and having fixed costs to pay). History shows that in the 2009 recession, loan approvals for businesses in the banking system fell on an average of 28% y-o-y between mid-2008 and mid-2009. As such, the economy is in need of an injection of fresh funds by banks through business lending in order to recover.

We note that the banking sector is in much better shape than it was prior to the 1998 and 2009 recessions. In February 2020, the sector's total capital ratio stood significantly higher at 18.4% (2008: 12.6%). Asset quality had remained relatively steady last year with the gross impaired loans (GIL) ratio at year-end coming in at 1.5%.

Based on the current scenario, however, impaired loans could rise and lending to businesses come with risks. Notwithstanding this, it is important to note that if businesses do not get the necessary lifelines they need, there could be a more pronounced economic implication. Banks' GIL could be pushed to even higher levels and this will place a heavier economic burden on banks. This is where analysing good business prospects to lend to becomes a critical task.

Our experience during the Asian Financial Crisis (AFC) shows that BNM's lending growth target of 8% imposed on banks to complement the National Economic Recovery Plan (NERP) which was implemented in 1998 helped the economy recover in the subsequent years. The setting up of Dana Modal, Dana Harta and the Corporate Debt Restructuring Committee (CDRC) had helped banks to re-capitalise and restructure bad debt so that they could continue lending to businesses. This is critical especially when history shows that even during a shallower recession in 2009, total loan approvals in the banking system fell by an average of 19% y-o-y between September 2008 and May 2009.

MARC takes comfort from BNM's disclosure that households are in a position to face the challenges going forward given their financial asset-to-debt ratio of 2.2 times. However, with the likelihood of a spike in the jobless rate this year, household balance sheets could come under pressure as incomes deteriorate and lending from banks decline. History testifies to this; in the midst of the GFC, the amount of approved loans to households fell by an average of 1.5% y-o-y between October 2008 and May 2009.

In conclusion, with the economy going through its most challenging period since the GFC, commercial banks have a critical role in sustaining long-term economic prosperity. They have done a great job supporting Malaysia's economy in the periods post the AFC and GFC; they can surely continue to do so.

Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my;
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my.