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Showing posts with label Yap Leng Kuen. Show all posts
Showing posts with label Yap Leng Kuen. Show all posts

Monday, April 10, 2023

Any contagion from US banking crisis?

 


THE collapse of four banks in the United States and Europe has sent fears of systemic risks throughout the global banking system.

Currently, the risk of contagion in Malaysia is low, given the limited direct and indirect exposure of the domestic banking system as well as the swift action taken by United States and Swiss regulators to contain their respective banking crises.

Banks in Malaysia are also generally well-capitalised with healthy liquidity positions, underpinned by a stable and diversified funding base.

Moreover, Bank Negara keeps a close watch on all banks operating locally as compared to the two-tier system in the United States, said RHB Banking Group regional sector head, group wholesale banking David Chong Voon Chee.

The United States has a dual banking system, with national banks regulated on the federal level and state banks regulated by each state.

Still, we should monitor for second and third order effects from these events, where possible cause-and-effects could lead to market volatility, tighter access to credit and ultimately, slower global growth.

In the United States, Californiabased Silicon Valley Bank (SVB) and New York’s Signature Bank, collapsed due to heavy losses on their bond portfolios and a huge run on deposits.

San Diego-based Silvergate Bank, which catered largely to cryptocurrency companies, had voluntarily wound down its operations.

As investors began ditching out anything related to banking risks, Switzerland’s scandal-ridden Credit Suisse also collapsed as its largest shareholder, Saudi National Bank, stopped investing in it.

As a result of the banking crisis in March, 2023, the jump in risk indicators – credit default swaps of major US and European banking names as well as US sovereign credit default swaps – has become worrying.

However, their levels are still far from the highs of the global financial crisis of 2008.

A credit default swap is a financial derivative that allows investors to offset their credit risks with that of another investor.

But volatility outside of rates – in other asset classes like foreign exchange, equities and commodities – remain relatively modest by historical standards, implying that the crisis is not systemic, said United Overseas Bank in a report.

In the case of Malaysian banks, beyond the minimum level of 8% for total capital ratio (TCR), excess capital stands at about Rm196bil, as of January.

Meanwhile, TCR (the ratio of total capital to total risk-weighted assets) at 18.9% in January is way above the prescribed level of 8%.

This means that banks have substantial buffer in their capital levels where they are able to absorb a significant amount of loans impairment and market volatility, said Bank Muamalat chief economist and social finance, Mohamed Afzanisam Abdul Rashid.

Despite external uncertainties, this indicates that borrowing and lending activities can be conducted seamlessly, while households and businesses are able to access credit from the banking sector without hassle.

Nevertheless, every financing application will be subjected to their eligible criteria including repayment history and the level of indebtedness.

Malaysian banks also usually have a relatively smaller portion of assets in investments while interest rate increase is less drastic, and hence, the mark-to-market losses would be comparatively smaller, said Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.

If a security was bought at a certain price and the market price dropped later, it would result in an unrealised loss, marking the security down to the new market price would lead to mark-to-market losses.

Malaysian banks also have a large portion of household depositors, while business depositors are diversified across different industries.

Hence, the need for a large amount of liquidity to fund withdrawals is less urgent.

While there will be jitters, banks in Malaysia are well-regulated besides having a diversified depositor base, they also have retailers who are more loyal, said Etiqa Insurance and Takaful chief strategy officer Chris Eng.

The funding base of the Malaysian banking system remained strong, with an aggregate liquidity coverage ratio (LCR) and net stable funding ratio of 154% and 118.2% respectively, at the end of 2022.

The LCR seeks to ensure that banks hold sufficient high-quality assets, while the net stable funding ratio calculates the proportion of available over required stable funding.

More than 80% of banks’ high quality liquid assets are in the form of placements with Bank Negara and government bonds, which banks can access and pledge in the interbank market or with Bank Negara for additional liquidity, according to Maybank Investment Bank in a report.

Foreign currency external debt-at-risk was manageable, at Rm80.4bil or 20.3% of total banking system external debt.

Loans under repayment assistance programmes declined to 4.2% of total banking system loans at the end of 2022, from 5.7% at the end of June, 2022.

Loan loss coverage ratio (which indicates how protected a bank is against future losses), including regulatory reserves, remained high at 118.2% at the end of 2022.

Since the Asian Financial Crisis in 1997, Malaysia’s banking industry has gone through a significant consolidation which brought down the number of banks from more than 60 to about 10 banks by early 2020.

Non-performing loans had led to the creation of Danaharta Nasional to address non-performing accounts while banks concentrated on running their businesses.

Risk management oversight was implemented at a robust pace and Malaysian banks were required to run multiple scenarios for the stress testing of their balance sheets.

This resulted in well-capitalised and highly liquid banks as well as sound credit underwriting standards.

Following the recent banking crisis, banks especially those in the United States and Europe, now need to defend and fight for their credit worthiness.

While fears of contagion are being allayed for now, caution and constant monitoring will prevail. 

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Tuesday, October 15, 2019

Budget that braces for tough times


Broad measures spelt out under Budget 2020 will likely sustain the economy, if there is no further escalation in trade fights.

A glimmer of hope emerged after the US outlined the first phase of a deal to settle some issues related to trade, but there is a lingering suspicion that China could be just buying time as it will most likely not concede to any loss of sovereignty.

China is developing its own ecosystem that could be “outside the reach” of the US, and it is possible that the time bought with such rearguard actions may allow China to achieve its aims.

Malaysia, a trade dependent economy, can only hope that it all works out well, if it can integrate into both ecosystems, said Inter-Pacific Securities head of research Pong Teng Siew.

More stimulus measures would be undertaken should the global economy worsen and in the worst case scenario, Malaysia would have room to spend more if it increases the budget deficit, currently at 3.2% of the gross domestic product (GDP).

The worry is that a further deterioration in global trade tensions may push the global economy into recession. If that does not happen, these Budget 2020 measures should be able to sustain the economy, according to RHB Research Institute chief Asean economist Peck Boon Soon.

Given the external headwinds that continue to pose more downside risks, it looks like Budget 2020, which attempts to spread out its positive effects, has been designed to brace for rough times.

Some positive impetus could be derived from measures to support tourism, construction and infrastructure, as well as small and medium scale enterprises (SMEs), said AmBank Research head Anthony Dass.

Tourism-related businesses such as food and beverage, accommodation, travel and transport, shopping and entertainment will likely benefit.

Recognising the importance of SMEs in driving growth, a string of measures to facilitate their financing needs, ease of doing business, faster adoption of high technology and green initiatives, should also bode well.

The bottomline is that resources are limited while the government still aims for fiscal consolidation and repayment of all debts.

Spreading out these scarce resources will probably succeed in paring off any broad-based slowdown, but it will be hard to make a dent when the sense of a loss in economic momentum is gradually settling in, said Pong.

More measures are required to stimulate the economy but in view of the gloomy global outlook and domestic issues, it is still overall, a good budget.

However, the allocation between capital and operating expenditure is still imbalanced; there is too little capital expenditure and there appears to be ‘little effort’ to reduce operating expenditure.

This will have a long term effect, especially in an aging society, according to Areca Capital CEO Danny Wong. In view of concerns over the lack of investments and falling revenue, efforts to boost foreign direct investments and tourism are welcome but more robust steps are required.

A correction in property prices may be a remedy for the overhang and inaffordability issues especially among young people.

The budget tries to forestall a price pullback, which would affect developers stuck with high land prices, by allowing foreigners to fill the demand gap.

But demand has evaporated, partly caused by the migration of mid-level talent and delays in household formation, the driver of long term demand and new home construction. Developers, lulled by the padding of demand through low interest rates for borrowers, high financing margins and easy access to debts, find it hard to lower prices.

They had thought the elevated level of demand was sustainable but it was not. Reduced prices may mean less profits but possibly a lifeline by way of cashflows, and may help restore delays in household formation and loss of talent, said Pong.

A worrying trend is that more and more young Malaysians are moving out of the country in search of jobs.Even mid-level expertise and talent is migrating; previously, it was mostly those who were highly mobile internationally.

A major cause is the lack of growth in real purchasing power.

Is the projected GDP growth of 4.8% achievable?

With the government continuing its spending and development initiatives, growth should remain robust, supported by services and construction, higher production from agriculture and mining. But manufacturing is expected to moderate.

Malaysia can achieve its 4.8% growth target, said Hong Leong Bank chief operating operating officer, global markets, Hor Kwok Wai.

However, in view of slower world GDP growth of 2.8%, AmBank Research expects growth of 4.0% with an upside of 4.3% for Malaysia.

Coming up with a further set of stimulus, should things worsen, may be a challenge.

Columnist Yap Leng Kuen is watchful of the tech war. The views expressed are the writer’s own.

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Ending the trade war benefits whole world

Both China and the US still have resources to sustain a trade war, but further consumption of those resources is unnecessary since their goals have proved naive and absurd. The situation is still highly uncertain, but the historical indicators will gradually be corrected. China and the US will not get lost and the world will benefit from the implementation of the consensus reached by the two heads of state, assuming the responsibility to both countries and the world and moving steadily towards the final end of the trade war in stages.


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Monday, July 1, 2019

Recession fears hit Asian region including Singapore

Malaysia may, to a certain extent, be less vulnerable with the revival of major construction projects which in view of the country’s strained finances, have been shrunk to cut costs. The Singapore economy may undergo a “shallow, technical recession” in the third quarter.

TALK of recession has hit the region, and near home, Maybank Kim Eng Research is flagging that possibility for Singapore in the next quarter.

Export-reliant economies are hard hit by slowing growth and supply chain disruptions caused by the prolonged US-China trade and tech war.

There may be a ceasefire now in the fight between the US and China following talks between President Donald Trump and President Xi Jinping at the Group of 20 Summit in Osaka last Saturday.

Existing US tariffs on Chinese imports still remain; additional tariffs on the remaining US$300 bil worth of Chinese imports, as threatened, will not be imposed for now

However, the new timeline for truce remains elusive; the suspicion is that of a “creeping” imposition of tariffs, as “each truce is followed by new tariffs and then, another truce.”

In December last year, Trump and Xi had struck a truce following which talks broke down in May this year, and tariffs on US$200bil of Chinese imports leaped from 10% to 25%.

Will there be light out of this tunnel, with harder issues involving tech and supremacy not tackled? Smaller economies with the fiscal and monetary space may be able to cushion their economies somewhat from the downdraft on growth.

Malaysia may, to a certain extent, be less vulnerable with the revival of major construction projects which in view of the country’s strained finances, have been shrunk to cut costs.

The Bandar Malaysia and East Coast Rail Link projects to be revived, are now downsized to RM144bil and RM44bil respectively.

Works for the Light Rail Transit (LRT) 3, from Bandar Utama in Petaling Jaya to Johan Setia in Klang, will resume in the second half of the year, at a reduced cost of RM16.63bil.

Talks are said to be ongoing to revive the Mass Rapid Transit Line (MRT) 3, or MRT Circle Line round the city centre, at possibly RM22.5bil which is half the original cost.

“The timing (of the revival of these projects) has been very good for Malaysia,’’ said Pong Teng Siew, the head of research at Inter-Pacific Securities. “These projects will go on for several years and positively impact the economy over that period.’’

Domestic spending and activities will provide ‘some comfort’ to the local economy but we should ensure that any further monetary easing actually goes into the real economy to support these activities, according to Anthony Dass, head of AmBank Research.

Malaysia’s private consumption was at a record 59.5% of its nominal (calculated at current market prices) Gross Domestic Product, which hit US$88.5 bil in March, 2019, according to CEIC Data.

Benefits from trade diversion from China, the current US tariff hotspot, are offset by downward pressure on global trade where volume was flat in the first quarter, the weakest since the financial crisis.

Global semiconductor sales also declined in February and March, the first back-to-back double digit contraction since the financial crisis.

In view of this decline, the volatile global trade environment and rising geopolitical tensions, open economies “should be prepared for the unexpected,’’ said Nor Zahidi Alias, the associate director of economic research of Malaysian Rating Corp.

The Singapore economy may undergo a “shallow, technical recession” in the third quarter, said Maybank Kim Eng, pointing to possible intensification of supply chain disruptions and US export controls on more Chinese tech firms.

Following the Trump-Xi talks, the US has reversed its equipment sales ban on Huawei but will that ease fears of other similar bans down the road? Defined as two consecutive quarters of negative quarter-on-quarter growth, a recession will prompt further easing of monetary policy in Singapore.

Manufacturing in Singapore, which accounts for a fifth of the economy, fell 2.4%, with electronics dropping 10.8% in May from a year ago; output is expected to decline again in June.

Hong Kong has also been issued warnings of recession, as its economy experienced the largest contraction since 2011, declining by 0.4% in the first quarter against the previous quarter.

Thailand’s economy grew at its slowest pace in four years, in the first quarter, hitting 2.8% from 3.6% in the same period last year; exports remain weak.

Taiwan’s economy avoided contraction in the first quarter but private consumption and gross capital formation slowed significantly while government consumption declined.

In the US, a mis-calibration in interest rate policy by the Federal Reserve can cause a sharper slowdown than expected or bring on a recession.“Monetary policy affects the economy with unpredictable lags, it could be hard for the Fed to time its policy (rate cut) that can prevent a downturn this and next year,’’ said Lee Heng Guie, the executive director of Socio Economic Research Center.

Columnist Yap Leng Kuen notes the reminder to ‘expect the unexpected.’

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