Malaysia
2009 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Malaysia

This 2009 Article IV Consultation highlights that Malaysia has been hit hard by the global downturn. The economy is set to contract for the first time in 10 years. Global turbulence has spilled into the domestic financial markets. Executive Directors have commended the Malaysian authorities for sound macroeconomic management in difficult circumstances. Directors have also emphasized that, although the financial sector appears sound and benefited from the growth of Islamic finance, volatile global markets put a premium on crisis preparedness and proactive supervision.

Abstract

This 2009 Article IV Consultation highlights that Malaysia has been hit hard by the global downturn. The economy is set to contract for the first time in 10 years. Global turbulence has spilled into the domestic financial markets. Executive Directors have commended the Malaysian authorities for sound macroeconomic management in difficult circumstances. Directors have also emphasized that, although the financial sector appears sound and benefited from the growth of Islamic finance, volatile global markets put a premium on crisis preparedness and proactive supervision.

I. Introduction

1. Malaysia has been hit hard by the global downturn. The impact has been mostly through the trade channel but global financial market turbulence has also been felt. Exports have plunged, capital inflows have reversed, and local financial markets have experienced heightened volatility. The economy is now set to contract for the first time in ten years. Continued weakness in export demand and investor confidence weighs on the outlook.

2. Encouragingly, Malaysia is coping with the crisis from a position of strength. It has ample foreign exchange reserves and a net international creditor position; financial supervision has been proactive; and the balance sheets of banks, corporates, and households are generally in good shape. Moreover, external trade has become more diversified with respect to both products and markets, and internal demand has gained importance as a driver of growth over the last decade.

3. The 2009 Article IV discussions focused on macroeconomic and financial policies to cushion the impact of external shocks and on reforms to meet medium-term challenges. The recession has added urgency to outstanding structural issues—fiscal consolidation and strengthening domestic-oriented activity. In fact, the crisis presents an opportunity to revisit the development model that has served Malaysia well but may need adjusting as the global economic landscape changes.

II. Economic Developments

Background

4. Since mid-2008, GDP growth and inflation have slowed sharply.

  • GDP contracted by 10½ percent (q/q saar) in 2009Q1, after a decline of about 12 percent in 2008Q4 (Figure 1 and Table 1). The drop in GDP was driven by faltering external demand: exports—which account for about 110 percent of GDP and are concentrated in electronics and commodities—have fallen by more than 15 percent y/y in the first quarter. Domestic demand, which showed resilience last year, has also been affected by the inward spillovers of external shocks: private consumption fell by nearly 1 percent (y/y), and gross fixed investment by some 11 percent, in 2009Q1.

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Contribution to Real GDP Growth: Domestic Demand and Net Exports

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: CEIC and IMF staff calculations.
Figure 1.
Figure 1.

Malaysia: Real Sector Developments and Outlook

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Sources: IMF, World Economic Outlook, and APD databases.
Table 1.

Malaysia: Selected Economic and Financial Indicators, 2004–10

Nominal GDP (2008): US$222 billion

Main export (percent of total, 2008): Electronics (45)

GDP per capita (2008): US$8,006

Unemployment rate (2008): 3.2 percent

Inward FDI (2008): US$6.6 billion

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Sources: Data provided by the Malaysian authorities; and Fund staff estimates and projections.

Excludes financial public enterprises and nongovernment-guaranteed domestic debt of the NFPEs.

By remaining maturity.

  • Inflation reached a 26-year high in mid-2008, but has since declined as commodity prices have collapsed and slack in demand has put a lid on pricing power. Core inflation has also edged down.

  • The reduction in employment has been relatively small so far. Manufacturing employment has fallen by 7¾ percent y/y in the first quarter (compared with a contraction in industrial production of about 15 percent), and the overall unemployment rate has increased modestly to 3.2 percent in the first quarter. Lags may still have to play out fully, but there is survey evidence that foreign workers (not fully captured in labor market statistics) have borne the brunt of the adjustment. Furthermore, unlike what happened during the Asian Crisis, many export-oriented companies have reportedly been able to lessen the blow of shrinking orders through shortened workweeks rather than labor-shedding. As a result, consumer confidence has generally held up.

uA01fig02

Monthly Inflation: Headline and Core

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: CEIC and IMF staff calculations.

5. Global turbulence has spilled into the domestic financial markets.

  • The benchmark equity price index declined by more than 30 percent between mid-2008 and March 2009, although it rebounded by some 25 percent in April-May. The market rally has reflected renewed optimism about near-term prospects and an upturn in commodity prices.

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Kuala Lumpur Stock Index and Volatility

(January 1, 2008 = 100)

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: Bloomberg and IMF staff calculations.
  • Government bond yields have remained broadly stable, but sovereign spreads have declined with the recent pickup in risk appetite. The EMBI spread is now below 200 basis points, just over one-third of its level in October 2008. The spread on sovereign credit default swaps (CDS) and the CDS spread on Maybank, Malaysia’s largest bank, are also off last year’s peaks.

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Sovereign and Bank CDS Spreads in Basis Points

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: Bloomberg.
  • Money markets have remained orderly. Interbank rates have edged down in line with the cuts in the overnight policy rate. Bank Negara Malaysia (BNM) injected liquidity as global financial conditions tightened last fall.1 To safeguard short-term funding, the BNM announced in October 2008 its willingness to back interbank lending, if needed. Credit has continued to decelerate, but its growth remained at a reasonable 10½ percent y/y through April, well above nominal GDP growth.

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Credit Growth: Percent Change from Previous Year

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: Bank Negara Malaysia and IMF Staff Calculations.
  • The ringgit has appreciated slightly vis-à-vis the U.S. dollar since April, after experiencing depreciation pressures last fall and early this year as capital outflows intensified (Figure 2). The real effective exchange rate (REER) has strengthened by about 10 percent between mid-2005 (when Malaysia exited a fixed exchange rate regime) and September 2008, owing to both a nominal appreciation and relatively higher domestic inflation. Since then, the REER has depreciated by about 1½ percent.

uA01fig06

Nominal and Real Effective Exchange Rates

(January 2007 = 100)

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: IMF INS.
Figure 2.
Figure 2.

Malaysia: Exchange Rate and Monetary Developments

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Sources: IMF, World Economic Outlook, and APD databases.

6. Despite capital reversals and the unwinding of the commodity boom, Malaysia’s external position remains strong (Table 2).

Table 2.

Malaysia: Indicators of External Vulnerability, 2004–09

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Sources: Data provided by the Malaysian authorities; and Fund staff estimates.

Excludes unguaranteed domestic debt of the NFPEs.

Discount rate on three-month treasury bills.

Includes net external position of banking system, portfolio investment, and errors and omissions.

  • The current account surplus reached 17 percent of GDP in 2008, as the trade balance surged thanks to strong demand for commodities and a better-than-expected performance of electronics through the third quarter (Figure 3 and Table 3).2 The collapse of exports in 2008Q4 was accompanied by an equally strong import compression, leaving the current account surplus (in relation to GDP) broadly unchanged by year-end. With rising tourism receipts, the services account has registered a small surplus in 2007-08. However, the income balance has remained negative, reflecting greater profit repatriation by multinational companies.

  • In the financial account, outward investment by Malaysian corporates continued to grow—and FDI outflows outstripped inflows. Driven by global deleveraging and the rise in financial home bias, portfolio flows, which had been positive in 2006 and 2007, turned negative in mid-2008, reaching a record outflow of US$27 billion for the year. Other investment (not including that associated with the official sector) also turned negative as bank outflows surged in the second half of 2008.

uA01fig07

Debt Security Holdings: Foreign Holdings

(In billions of ringgit)

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: CEIC and IMF staff calculations.
Figure 3.
Figure 3.

Malaysia: External Developments

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: IMF, World Economic Outlook, and APD databases.
Table 3.

Malaysia: Balance of Payments, 2004–10

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Sources: Data provided by the Malaysian authorities; and Fund staff estimates.

By remaining maturity.

  • With capital flowing out rapidly, reserves shrunk by US$35 billion in the second half of 2008. Reserves have continued to slip, albeit at a slower rate, through March 2009. They stood at about US$87 billion (40 percent of GDP or four times short-term debt) in June.

Outlook and Risks

7. External developments will probably shape Malaysia’s recovery path.

  • Near-term: GDP is projected to contract by 4-5 percent in 2009 (Table 4). The export-led recession is expected to last through end-2009, with quarterly growth returning in early 2010. Private domestic demand will likely shrink this year, but the public sector should provide some offset. The current account surplus is expected to decline in 2009 relative to GDP as exports continue to weaken while import compression slows. Inflation is projected to fall to about 1 percent (yearly average). Risks to growth relate to the duration of the global recession (which could drag down exports), the evolution of commodity prices (which influence disposable incomes in rural areas), and adverse macro-financial interactions (which could crimp the recovery of private demand or blunt policy effectiveness).3 Downside risks are mitigated by Malaysia’s strong reserve position, well-capitalized and liquid banks, and under-geared corporates. Inflation is unlikely to be a policy concern in the period ahead. Entrenched deflation seems a remote possibility at present although, because of base effects, Malaysia may experience a few months of negative headline inflation in mid-year.

Table 4.

Malaysia: Medium-Term Macroeconomic Framework, 2007–14 1/

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Sources: Data provided by the Malaysian authorities; and Fund staff estimates and projections.

Period ending December 31.

Staff projections; excludes nongovernment guaranteed domestic debt of the NFPEs. The debt to GDP ratios starting in 2007 are calculated by adding the yearly deficit financing flows to the previous year stock of debt divided by the corresponding yearly GDP. The projections assume no off-budget operations. Surplus NFPEs are assumed to roll over external debt.

By remaining maturity.

  • Medium term: GDP growth is expected to pick up modestly in 2010, in line with global developments, but it would remain below trend for a few years. Furthermore, shifts in the pattern of global demand and in the global financial landscape could depress the return on capital and growth prospects over a long horizon. While staff’s projections reflect a downward revision of potential growth, the extent of the mark-down is for now speculative.4 This complicates estimates of the underlying current account. In the baseline, the current account surplus estimated at the current real exchange rate (REER) is projected to shrink to about 10 percent of GDP by 2014, as investment activity remains hostage to uncertainty and national savings decline.

Malaysia: Summary of Medium-Term Macroeconomic Framework, 2005–14

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Source: IMF staff estimates.

8. The authorities broadly concurred with these assessments. According to official projections, GDP would contract by 4-5 percent in 2009 and recover somewhat in 2010 with the global economy. Looking further ahead, there was agreement that the crisis underscored the need for Malaysia to step up deregulation in product and labor markets with a view to improving the resilience of the economy. The authorities noted that a revamped development model for Malaysia has taken shape. This New Economic Model (NEM) is designed to meet medium-term challenges that have so far received insufficient attention. In broad contour, the NEM focuses policymaking on market liberalization, support of private investment, new sources of growth, long-term fiscal sustainability, and human capital accumulation.5

III. The Macroeconomic Response to the Global Crisis

A. Fiscal Policy

Background

9. Budget consolidation was reversed in 2008. The central government deficit, which had declined from 5 percent of GDP in 2003 to 3¼ percent of GDP in 2007, rose back to nearly 5 percent of GDP last year (Table 5). On the whole, fiscal policy was pro-cyclical in good times. Oil revenues increased on the back of (lagged) energy prices through 2008. However, spending increased even faster as fuel and food subsidies soared and other current spending kept up with revenues.6 Against the backdrop of a trend erosion of non-oil revenue, the headline deficit widened—and the non-oil deficit surged to 11 percent of GDP. A subsidy reform in mid-2008 provided little budgetary relief as savings were later spent when the cycle turned.7 Malaysia’s fiscal position is projected to deteriorate further in 2009 as revenue begins to decline and countercyclical support comes on-stream, pushing the headline deficit to nearly 8 percent of GDP.

Uses of Oil Revenue

(Cumulative change in percentage points of GDP)

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Source: IMF staff.
Table 5.

Malaysia: Federal Government Fiscal Operations, 2004–09

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Sources: Data provided by the Malaysian authorities; and Fund staff estimates.

Includes taxes on property.

Includes other tax revenue.

Overall balance plus interest payments.

Excludes oil and gas related revenues (corporate taxes, dividends and royalty payments).

10. Two stimulus packages have been rolled out.

  • In early November 2008, the authorities announced a fiscal package of about 1 percent of GDP in new spending to support growth. The original 2009 budget (in August 2008) envisaged a reduction in the deficit of the central government to 3¾ percent of GDP through sizeable cuts in current expenditure. The revised deficit target (of about 5 percent of GDP) reflected lower projected revenues and broadly unchanged outlays. However, spending priorities have shifted in favor of “high-impact” projects financed by savings on fuel subsidies (i.e., public works, education programs, and some pro-business initiatives). Additional measures include a temporary reduction in employees’ contributions to the pension fund.8

  • The second fiscal stabilization package, announced in March 2009, amounts to about 9 percent of GDP. The package includes loan guarantees (about 40 percent of the total) and will be implemented over two years. The fiscal impulse is estimated at about 2 percent of GDP in 2009. The second package aims at limiting the depth of the recession and includes an array of expenditure and revenue measures. The former account for the bulk of the package (excluding loan guarantees). They relate primarily to infrastructure expenditure, worker training programs, and the recruitment of public sector employees. Tax measures include exemptions for interest on housing loans and some income tax deductions for laid-off workers.

Staff’s Views

11. The fiscal easing has been appropriately large and diversified, but room for further maneuver is limited. The non-oil primary balance is set to widen to a record 15 percent of GDP in 2009, and the debt-to-GDP ratio (including guaranteed debt of public enterprises) has already surpassed 50 percent. Furthermore, the budget deficit is projected to remain large over the medium term under current policies. While ample domestic savings allows the government to meet its borrowing requirements without external financing, market concerns about the size of the deficit and the lack of a consolidation strategy have led to the first local currency downgrade since the 1997 crisis. To broaden the room for maneuver, the authorities should start casting their fiscal decisions (particularly on a new stimulus, if needed) in a framework that articulates consolidation plans once a self-sustaining recovery is under way. Reassurances about the medium-term evolution of the public finances would safeguard the credibility of fiscal plans and the confidence effects of actions already taken.

uA01fig08

Central Government Overall and Non-Oil Primary Balance

(in percent of GDP)

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: CEIC and IMF staff calculations.

Authorities’ Views and Policy Intentions

12. The authorities noted that the global downturn had warranted vigorous fiscal action, notwithstanding weaknesses in the fiscal position. Special procedures had been put in place to accelerate execution of the budget and bolster accountability.9 Nonetheless, in their view, the full impact of the package is unlikely to be felt until the second half of this year or early the next. There was agreement that restoring the fiscal position to a sustainable path is a paramount post-crisis priority. In fact, the authorities noted that this had been a policy goal for some time, and some progress had been made until early 2008 when the burden of soaring subsidies had forced the policymakers’ hand. The New Economic Model has brought fiscal adjustment at the top of the medium-term policy agenda once again. The emphasis in the stimulus packages on public spending to increase productivity and support structural changes gives hope that faster growth down the line might help restore fiscal sustainability sooner rather than later.

B. Monetary Policy

Background

13. Monetary policy has been also loosened decisively.

  • Since November 2008, the BNM has slashed its policy rate by 150 basis points to 2 percent. Reserve requirements have also been cut to reduce the cost of financial intermediation. Timely liquidity support in the interbank market has kept the overnight interbank rate close to the policy rate, suggesting orderly market conditions throughout. As elsewhere in the region, U.S. dollar funding pressures appeared late last year, as indicated by widening cross-currency basis spreads and sporadic evidence of more difficult access to trade credit. However, on the whole dollar liquidity has remained adequate.

  • More broadly, the monetary transmission mechanism has not been undermined by the global market turbulence. The base lending rate has declined, and broad money has continued to grow (Table 6). Credit has expanded (y/y) although the rate of expansion has decelerated (on a m/m basis) as banks tightened lending standards and loan demand moderated in tandem with economic activity.

Table 6.

Malaysia: Monetary Survey, 2006–08

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Source: International Monetary Fund, International Financial Statistics; and Bank Negara Malaysia.

Staff’s Views

14. The monetary easing has been appropriately proactive and there is now considerable monetary support in the pipeline. Staff calculations show that interest rates are lower than suggested by a Taylor rule. With risks to growth trumping inflation concerns, the monetary settings are broadly on the mark. Barring a significant deterioration of the outlook for growth or inflation, monetary policy should stay the course until a recovery is well established. However, the BNM still has ammunition that could be used if tail risks materialize.

Authorities’ Views and Policy Intentions

15. BNM officials noted that decisive action was justified in light of the worsening outlook for growth and receding inflation risks. The preference had been for a front-loaded response to head off tail risks. Among other considerations, the policy response had to strike a balance between reducing the costs of funds for households (to stimulate aggregate demand) and supporting the interest income of savers.10 There was agreement that policy could stay on hold for now. The BNM thought that further interest rates reductions would be considered only if the economic situation deteriorates significantly. In the meantime, ensuring a smooth flow of credit to the economy (inter alia through the BNM’s management of facilities to broaden SMEs’ access to funds (¶17) and other guarantee schemes) will take center stage in monetary policymaking.

C. Financial Sector Policies

Background

16. Malaysia’s financial sector has faced the crisis from a position of strength and so far has coped well.

  • Financial markets are relatively deep by regional standards. Total assets of the financial sector (bank and nonbank) were about 350 percent of GDP in 2008.11 Within ASEAN, stock market capitalization is the second largest and the bond market is the largest. Although bank financing remains the predominant source of funding, the corporate sector has increasingly tapped the debt market. Significant steps have been taken to increase the openness of the financial sector, and most foreign exchange controls introduced during the Asian crisis have been lifted.12

Key Financial Soundness Indicators for Commercial Banks

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Sources: Bank Negara Malaysia; and CEIC Data Co., Ltd.
  • Banks (which account for the bulk of financial sector assets) are well capitalized, have low NPLs and sufficient liquidity (Table 7). Reliance on external funding is minimal, and there are no material rollover risks.

  • Generally strong balance sheets of Malaysian corporates and households have also contributed to the strength of the financial sector. Corporates have low leverage and adequate liquidity, despite sluggish profitability.13 Households’ debt is high relative to regional peers, but is equal to about 50 percent of households’ liquid assets and debt service appears to be manageable.

uA01fig09

Household Credit: Selected Components and Year-on-Year Growth

(In percent)

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: CEIC and IMF staff calculations.
Table 7.

Malaysia: Banks’ Financial Soundness Indicators, 2004–09

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Sources: Bank Negara Malaysia; and CEIC Data Co., Ltd.

The minimum RWCR is currently 8 percent for all institutions.

Lending for construction, real estate, nonresidential property, and housing purchases; excludes loans sold to Cagamas Berhad.

Loans are classified as nonperforming if payments are overdue for three months or more. Total loans include housing loans sold to Cagamas Berhad. (Net) NPL exclude interest-in-suspense and specific

In percent of total loans including housing loans sold to Cagamas Berhad, minus interest-in-suspense and specific provisions; minimum requirement is 1.5 percent.

Aggregate of provisions for general, specific, and interest-in-suspense. In percent of NPLs.

Deposits include repos and negotiable instruments of deposit. Loans exclude loans sold to Cagamas Berhad.

From January 2006, data for commercial banks include finance companies.

  • Islamic finance has become an important element of Malaysia’s financial sector (Box 1). Islamic banking is gaining market share, both through entry of foreign players and new product offerings. The issuance of Islamic securities (sukuk) now exceeds that of conventional corporate bonds. In the view of many observers, Islamic finance has added stability to the system, inter alia by anchoring banking practices to underlying real economic transactions and limiting leverage.

uA01fig10

Issuance of Islamic Bonds

(In billions of ringgit)

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: Bank Negara Malaysia and IMF staff calculations.
  • Malaysia’s capital markets have been rattled by the international market turbulence, but the impact has by and large been contained. Asset prices have plummeted and spreads (sovereign, bank CDS, and cross-currency basis swap) have spiked during the periods of most acute global strains. Nevertheless, Malaysia’s stock price correction and increase in volatility have been among the least pronounced in the region.

Islamic Finance in Malaysia

Since the early 1980s, the development of Islamic financial industry and institutions has been one of the central objectives for the Malaysian policymakers. The regulatory and tax systems have been developed to support the market-driven environment in which Islamic finance coexists with conventional finance. As a result, Malaysia now has robust Islamic and conventional financial systems that operate parallel to each other.

Islamic Banks in Malaysia: Key Indicators

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Source: Bank Negara Malaysia.

Islamic finance has grown rapidly. Assets of Islamic banks have doubled since 2000, and accounted for about 17 percent of total banking sector assets as of May 2009. Shariah-compliant stocks account for about 88 percent of stocks listed and 64 percent of total market capitalization of the Malaysian stock market. Takaful (Islamic insurance) operators have a 7 percent share of total insurance and takaful assets, and about 13 percent of funds managed by unit trust management companies are Islamic.

Malaysia has made steady progress toward becoming an international Islamic financial hub. Malaysia hosts the world’s largest sukuk (Islamic bonds) market (estimated at RM 155 billion or 59 percent of total outstanding bonds in Malaysia). As of end-2008, Malaysian sukuk accounted for about 61 percent of the total global sukuk outstanding (both domestic and international issues). In 2008, Malaysia also led in terms of global sukuk issuance with a share of 53 percent, followed by the United Arab Emirates, Saudi Arabia and Bahrain. The current global crisis has more than halved the global issuance of sukuk in 2008 (54 percent decline y/y), but medium-term prospects remain positive. The share of ringgit-denominated issuance declined to one-third of total global issuance in 2008 from about 78 percent during the same period last year, while other currencies such as the Emirati dirham and the Saudi riyal experienced increases. In other sectors of Islamic finance, international Islamic stock indices have been developed and new licenses issued to foreign Islamic banks, Islamic fund management companies and takaful operators.

uA01fig11

Currency Breakdown of Global Sukuk Market, 2008

Citation: IMF Staff Country Reports 2009, 253; 10.5089/9781451828337.002.A001

Source: Moody’s; Bloomberg L.P.; IFIS; Zawya.

17. Financial sector reforms and proactive policies have helped the financial system withstand the global crisis.

  • Prudential oversight and the regulatory framework have kept up with—and facilitated—changes in the financial landscape. A deposit insurance scheme was introduced in 2005 and a credit-scoring database aids lenders’ decisions. Further reforms to strengthen regulations and market infrastructure have been implemented in recent years. These included steps to bolster risk management and monitoring systems. Notably, Basel II was adopted in 2008, with little impact on capital requirements and the majority of banks opting for the standardized approach.

  • In October last year, as a preventive measure amid heightened distress in mature markets and similar moves in the region, the BNM extended a blanket guarantee on all domestic and foreign currency deposits through 2010. At the same time, to safeguard short-term funding, it announced the willingness to back interbank lending, if needed. The BNM has also injected liquidity at times by drawing down official foreign exchange reserves. Furthermore, the authorities have introduced new financing facilities for the SMEs to ensure that viable companies adversely affected by the slowdown continue to have access to financing.14

Staff’s Views

18. Looking ahead, the global crisis is likely to continue to have an impact on Malaysia’s financial sector. Strains are expected to intensify as the recession drags on. Financial institutions are exposed to credit risks (mostly related to mortgages and loans to exporters) and a slowdown in activity will put pressure on the corporate and household sectors’ ability to service their debt. As deleveraging continues in advanced markets, funding through domestic securities and loans could become costlier and access to external funds could become more difficult.

19. The fluid situation puts a premium on crisis preparedness and proactive supervision. With little fiscal space to repair balance sheets in a worst-case scenario, regulators should focus on further preventive steps to ensure that banks’ capital positions are robust. Rigorous stress tests encompassing multi-year scenarios, tail events, and correlated shocks should remain a high priority for the BNM in the period ahead.15 More broadly, staff noted the importance of: (i) reviewing the adequacy of emergency liquidity assistance, including the triggers for resolving institutions before support is needed; (ii) ensuring that risk management practices are robust to new channels of financial contagion; (iii) strengthening oversight of systemically important institutions with cross-border activities, including through enhanced regional cooperation; and (iv) adopting emerging best practices