Household Debt: A Different Perspective

From today’s The Star (excerpt):

Malaysia's household debt on the rise...But mortgage NPLs at an all-time low

PETALING JAYA: Malaysia's household debt rose at a rapid rate of 11.1% per annum from 2004 to 2009, and from RM516.6bil at end-2009, it climbed by 8.4% to RM560.1bil as at end-August 2010, said CIMB Research.

The household debt to gross domestic product (GDP) ratio increased from 66.7% in 2004 to 76% in 2009 but is estimated to ease to 74.6% at end-2010.

The rapid growth of household borrowings is causing some worries that the excessive leveraging by households may make the economy and financial sector more vulnerable to instability and crisis...

June 2010 Monetary Conditions Update

Despite three consecutive 25bp hikes in the Official Policy Rate, growth in M2 is keeping pretty steady (log annual and monthly changes, seasonally adjusted):

Jan 2010 Monetary Policy Update

The big news on the economic front this week is of course this Thursday’s Monetary Policy Committee meeting, where I think there’s a 50-50 chance of a 25bp rise in the Official Policy Rate. There’s also some speculation over a rise in the statutory reserve requirement, but I don’t think a hike in the SRR will have much impact – I expect BNM in that event to simply pump the equivalent amount of liquidity back into the interbank market. This isn’t China – we don’t have the excessive loan growth the PBOC has to contend with. An SRR hike will be more of an administrative move, rather than a shift towards real tightening.

Nor are we dealing with excessive money supply growth – in fact just the opposite (log annual and monthly changes; seasonally adjusted M1 & M2):

There is a tendency for  money supply growth to moderate after the year-end binge, but outright contractions are relatively rare - bear in mind though that these are seasonally adjusted figures. In any event, the money supply situation hasn’t affected loan growth (log monthly changes, seasonally adjusted):

Credit quality looks good, with non-performing loan ratios at the lowest I’ve ever seen them – 1.8% at the 3 month classification and 1.3% at 6 months.

On the interest rate front, yields on BNM bills and T-bills fell marginally in January but have gone up about 20bp since. MGS yields on the other hand have continued to steepen at the short end, although we don’t have the big jump that we had in December:

The latest indicative yields (end-Feb) indicative a further steepening in the 3-year benchmark maturities, but some softening at the long end. Unlike in the past, the government’s primarily borrowing at 3yr and 5yr maturities to fund the deficit – the actual bulk of outstanding debt is at 5yr and 10yr maturities. Either we’re looking at stricter fiscal consolidation over the short term, or they’re simply taking advantage of the lower rates at the short end.

Interbank rates haven’t and won’t move much of course, until BNM actually changes the OPR…for which we await Thursday’s announcement with bated breath.

Technical Notes:

Data from Bank Negara’s Jan 2010 Monthly Statistical Bulletin

October 2009 Monetary Policy Update

As expected, M1 growth fell down in October compared to September - the Raya effect in full force (log monthly changes):



Year-on-year however, we get the base effect, with growth ticking up to more normal levels (log annual changes):



With 3Q GDP numbers now up, I got the chance to update my velocity estimates (details here), which are still falling despite economic activity picking up:



However, the implied velocity growth (from changes in money supply, output and inflation) is still higher than actual (-10.8% versus -19.6% for 3Q 2009), which suggests the monetary policy stance is appropriately looser than strictly required for a growth-neutral stance.

Loan growth is within the norms of the last few years, so excess money supply growth is being channeled through into the economy (log annual changes):



...even if banks are still keeping a lot of money aside (reserve deposits of FIs with BNM, RM millions):



On the interest rate front, average lending rates have settled at about 2.9% over interbank overnight, which seems a bit excesive to me given the continued downtrend in NPLs:



That kind of spread would be justified if defaults were rising, but since they're not, we're still looking at some "fear" in the banking system, and possibly caution among consumers and businesses - in other words, money demand is still high in the system.

There's also been a lot of movement in the MGS market:



Yields have gone up for all maturities, despite net redemptions in October (RM millions):



...and November trading has added a further 10bp-40bp to yields. That's bad news - prices falling despite a reduction in total supply implies an even sharper reduction in demand. This would be understandable if we're looking at year-end window dressing, but it's a little premature for that to happen now. I can't think of any recent news that would justify this movement (Dubai was too recent, as was Prof Ariff's call for a third stimulus), except that possibly investor perception of the government's underlying risk premium has changed. While this won't much crimp the government's ability to borrow, it is a signal that the market's capacity is not unlimited.

May 2009 Monetary Policy Update

BNM at the latest MPC meeting kept the Official Policy Rate (OPR) at 2%, but average lending rates have thankfully kept coming down:



The latest May data shows average lending rates just a hair over 5%, which is the lowest on record (at least since 1980), although on a real basis, it's still fairly high at about 2.6%. The spread on lending (based on interbank overnight rates) is also nearer "normal" levels, but still too high for my comfort given the current circumstances:



Money supply growth has responded to lower deposit rates, continuing to decelerate (log annual changes):



But so have loans (log annual changes):



That's the first time loans have seen net repayments since Dec 2007. In the money market, the MGS yield curve has continued to steepen, particularly at the long end:




That's factoring in a lack of demand for longer tenures due to uncertainty, as well as a lack of supply. I'm a little unsure what to make of the evolution of the MGS yield curve. On the one hand, it approximates the spreads seen between 1999-2005, and as such might conceivably be seen as "normal" in one sense. On the other, the compression in spreads between 2005-2008 suggest that the lifting of capital controls and the float of the MYR allowed for greater interest and participation from foreign investors; which immediately suggests that the widening we're seeing now is a function of the pullout by foreign investors over the last year, and that we should see the yield curve flatten again once conditions stabilise. I prefer the latter explanation, but the other could equally be true.

Why Are Lending Rates Falling Less Than Cuts In Interest Rates?

The Star today has a report on why lending rates have lagged cuts in interbank rates over the past few months. Which is fine - there are indeed good technical reasons for such lags and I've experience enough in the banking industry to readily believe why this is happening.

What isn't explained is why lending rate cuts are also less than the fall in interbank rates. I've covered this topic before, but it bears repeating. Borrowing costs are not fully reflecting the drop in bank funding costs - in effect, banks have increased their margin on lending to the point where the real interest rate (as opposed to the nominal rate) is actually higher now than at the beginning of the downturn:




That makes little sense to me, both from a policy perspective as well as a business perspective. We see here a conflict of incentives that could bite the banks if economic conditions continue to deteriorate. On the one hand, there is the desire to buffer income against the possiblity of loan defaults, which to be fair are likely to rise this year.

On the other hand, higher real interest rates reduces the propensity to borrow and invest, thus reducing the pace and trajectory of potential economic recovery, as well as to increase the systemic probability of the very loan defaults that banks fear. By acting to buffer potential losses, banks may actually be encouraging it to happen instead.