Persian Hindi
Anar Anaar pomogranate
Chaghoo Chaku knife
Chai Chai tea
Darya Dariya sea
Dil Dil heart
Doost Dost friend
Galat Galat wrong
Hamishe Hamesha forever
Nan Naan a type of bread
Paneer Paneer a popular Indian cheese
Rang Rang color
Ruz day Roj daily
Sabzi Sabji vegetable
Safed Safed white
Sakht Sakht hard, tough
Shekar Shakkar sugar
Sust Sust lazy
Vilayat Vilayat foreign land
This list is just the tip of an iceberg. I am hardly qualified to provide a comprehensive list. Well then, what is the point of this snippet? - I guess it is just the thought that there is more that binds us, that belongs to our common hertiage, than we may know. Now, over to the subject of this post ...
Yours, thinking about the Malaysian banking system Analyst,
AA
Disclaimer: The figures below are approximate. While the general argument stands, I would encourage the use of other sources of statistical data, particularly if you are using it for your professional work.
The Current Household Sector Indebtedness in Malaysia
Consider this - Malaysia's household debt stood at 39% of its GDP in 1997 - the year the Asian Financial Crisis (AFC) hit the Asian Tigers of the 1990s. In Aug-2010 it reached 78% of the Malaysian GDP. 55% of the household sector debt is due to residential mortgages, over 80% of which is financed at a variable rate with (often) a 3-5 year initial fixed rate period. 23% of the household debt and is due to auto loans. The vulnerability of households to interest rate shock is therefore high. And, it continues to rise - there are no regulatory restrictions on the maximum LTV ratio for loans extended to finance the purchase of residential properties in Malaysia except for a guideline that came into force in November 2010 that the LTV ratio for a loan intended to finance the third residential property must not exceed 70% (yes, it is not a typographical error; I mean 'third'). Banking system assets in the household sector have grown in locked steps with the growth in household sector debt and today comprise 60% of the total banking system assets against just 33% in the period just prior to the AFC. The argument that retail loans are less risky due to the comparative absence of size concentrations (the Malaysian banking sector certainly thinks so) does not quite hold when taken to the limits - what may not be lost to size concentrations could well be lost to 'policy concentration' [1] and high leverage. How did Malaysia's household sector become as leveraged?
Consider this - Malaysia's household debt stood at 39% of its GDP in 1997 - the year the Asian Financial Crisis (AFC) hit the Asian Tigers of the 1990s. In Aug-2010 it reached 78% of the Malaysian GDP. 55% of the household sector debt is due to residential mortgages, over 80% of which is financed at a variable rate with (often) a 3-5 year initial fixed rate period. 23% of the household debt and is due to auto loans. The vulnerability of households to interest rate shock is therefore high. And, it continues to rise - there are no regulatory restrictions on the maximum LTV ratio for loans extended to finance the purchase of residential properties in Malaysia except for a guideline that came into force in November 2010 that the LTV ratio for a loan intended to finance the third residential property must not exceed 70% (yes, it is not a typographical error; I mean 'third'). Banking system assets in the household sector have grown in locked steps with the growth in household sector debt and today comprise 60% of the total banking system assets against just 33% in the period just prior to the AFC. The argument that retail loans are less risky due to the comparative absence of size concentrations (the Malaysian banking sector certainly thinks so) does not quite hold when taken to the limits - what may not be lost to size concentrations could well be lost to 'policy concentration' [1] and high leverage. How did Malaysia's household sector become as leveraged?
The Tiger Years (1988-'97)
For nearly a decade prior to the AFC, Malaysia’s annual real GDP growth rate clocked 9.5%, several million new jobs were created, credit to private corporations rapidly expanded and in the 10 years, house prices grew by 125%. Export growth was strong. The growth in imports was even stronger as Malaysia sustained a trade deficit in order to build the industrial and transportation infrastructure necessary for its capital intensive growth model. That growth model found a receptive international environment:
Macro Indicators During the AFCFor nearly a decade prior to the AFC, Malaysia’s annual real GDP growth rate clocked 9.5%, several million new jobs were created, credit to private corporations rapidly expanded and in the 10 years, house prices grew by 125%. Export growth was strong. The growth in imports was even stronger as Malaysia sustained a trade deficit in order to build the industrial and transportation infrastructure necessary for its capital intensive growth model. That growth model found a receptive international environment:
- the Plaza Accord of 1987 drove Japanese capital overseas, particularly to the emergent, low-cost, resource-rich and geographically proximate countries - Indonesia, Malaysia and Thailand.
- The fall in interest rates in the US during the latter part of the Volcker Era which was later sustained through the Greenspan years paved way for outwards investments from the West and,
- the wind down of the Latin American debt crisis in the late 1980s boosted risk appetite amongst American investors.
The AFC of 1997 brought an abrupt end to the extraordinary growth years in East Asia. The visible beginning of the crisis was marked by speculative currency attacks that started with the Thai Baht in May 1997 and spread to the Malaysian Ringgit in July 1997. During the crisis, Malaysia’s GDP growth rate, the KLSE index, its property price index and the MYR/USD rate experienced a peak-to-trough fall of 15%, 53%, 60% and 65% respectively and, the unemployment rate, overnight lending rate and the CPI had a trough-to-peak rise of about 5%, 32% and 22% respectively. The crisis left a profound impact on Malaysia and its inflation-adjusted asset prices have not quite recovered yet to their pre-crisis values. More of interest to us here however is how the AFC contributed to the post-1997 surge in household debt which still continues to outpace the country's nominal GDP growth rate.
Retail Lending Becomes the New Mantra
The Malaysian government affected sweeping changes to mitigate the systemic crisis and build the policy foundations of a sustainable recovery. It introduced capital controls, banned offshore trading in the ringgit, established the policy and regulatory infrastructure needed to deepen the local bond markets and spearheaded efforts to diversify the international investor base [2]. The right policy efforts met with a benign international trade environment - US’s appetite for trade deficits was huge and expanding and the emergence of the Euro Area created trade efficiencies and resulted in a surge in consumer demand, particularly in its Southern European member states. Also contributing to the benign external environment was a recovery in global commodity prices in 1999 that helped commodity rich nations such as Indonesia and Malaysia in SE Asia. As a result, the downturn in Malaysia was short-lived. Household savings rate rose to reach back to their pre-crisis figures and retained earnings surged at corporations. Government receipts jumped with rise in taxes. Capital investments fell sharply resulting in a lower need for new issuances of public debt. Rising exports and commodity prices lifted corporate profits and reduced their reliance on government support for recovery. The sharp fall in capital investments, higher commodity prices and the elastic impact of Ringgit devaluation on the demand for imported consumer goods boosted Malaysia’s external reserves position. In short, within less than two years of the worst financial crisis it had faced since independence, Malaysia was ready for a new round of credit expansion.
The question at the time was then - which sector would offer the most promising long-term potential for credit growth? The emergence of local corporate bond markets lead to disintermediation of the banks from some of the most highly lucrative fee-based transactions. The structural fall in capital investments had further lowered the demand of corporate sector for loans. Fiscal consolidation, the short-lived nature of the crisis, large jump in tax receipts and structural fall in capital investments made the government an unlikely growth segment for credit. Besides, and perhaps most importantly, the crisis lead to an organic emergence of an industry-wide view in banking that collateralized lending is a poor mitigant for size concentrations. Thus, neither the corporate nor the government could be viewed as a growth-segment for credit.
Therefore the forces of aversion to exposure concentrations, disintermediation, government policy and a benign international environment coupled with a low base of household sector debt [3] created conditions necessary for rapid expansion of household credit.
[1] In this case, an interest rate hike
[2] Malaysia’s efforts at diversifying its international investor base have been remarkably successful in this regard. From the point of view of understanding the economic consequences of the geopolitical events of September 11, 2001, it is an interesting counter-factual to consider whether Malaysia would have been anywhere nearly as successful without an external trigger for a coordinated and pressing need for investors from the oil-rich Middle Eastern economies to diversify away from US-based assets.
[3] 39% of the GDP around the crisis period
[2] Malaysia’s efforts at diversifying its international investor base have been remarkably successful in this regard. From the point of view of understanding the economic consequences of the geopolitical events of September 11, 2001, it is an interesting counter-factual to consider whether Malaysia would have been anywhere nearly as successful without an external trigger for a coordinated and pressing need for investors from the oil-rich Middle Eastern economies to diversify away from US-based assets.
[3] 39% of the GDP around the crisis period