Household loan demand to moderate amid rising inflation

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 -- BANKING

By: FocusM

CEO of Maybank

WE are constructive of Malaysia’s economic outlook and fundamentals for 2014.  With real GDP growth picking up pace in H2 2013, we expect the momentum to be sustained next year with growth expected to come in at 5% versus the estimated 4.5% in 2013.  The signs are already there with faster economic expansion of 5% year-on-year (y-o-y) in Q3 2013 compared with 4.3% y-o-y during H1 2013 amid resilient domestic demand and improved external demand.  The improvement in external demand will result in continued trade surpluses, in turn sustaining the nation’s current account surplus which looks unlikely to turn into deficit.  This is positive for the country’s fundamentals.

Domestically, among the main issues will be the economic and industry impact of Budget 2014 measures to curb property speculation; faster inflation as a result of subsidy rationalisation, especially in fuel and energy prices; and preparation for the implementation of the goods and services tax (GST) in 2015.

These developments point to an expected moderation in household loan demand in 2014 and potential stress on asset quality amid rising inflation.  This is a challenge that banks will have to manage.  Liquidity is also a challenge and funding costs could rise as a result, contributing to further net interest margin compression.

Externally, the current improvement in global economy (and hence external demand for Malaysia) while a welcomed development, still appears vulnerable rather than entrenched.  Over the past three years, the global economy has struggled to uphold its recovery momentum, especially given the headwinds like the eurozone sovereign debt crisis, the Arab Springs, the US Budget and debt ceiling deadlocks, and China’s growth slow down.

As we head into 2014, the immediate issue will be the US monetary and fiscal policies amid speculation on the timing of the Federal Reserve’s quantitative easing (QE) taper.  Also of concern are the approaching “fiscal deadlines”, that is the expiry of US federal government funding after Jan 15, 2014 and the suspension of debt ceiling until Feb 7, 2014.  These events have significant bearing on the banking industry via variables such as capital flows, currencies and financial markets.  Other than that, attention will also be focussed on the following areas:

a)     sustainability of the emerging turnaround in Europe;

b)     execution of economic reforms and rebalancing in China;

c)     Japan’s policies to reflate its economy; and

d)     Macroeconomic management and policies in emerging market economies to balance between sustaining growth, dealing with volatile capital flows and financial markets, and safeguarding fundamentals and financial stability.

At the same time, globally, the banking industry has to navigate the operating landscape that is marked by evolving rules as well as heightened regulatory powers and supervisory oversights.  This comes especially in the aftermath of the Global Financial Crisis which, among others, involved higher capital and liquidity requirements; controls and limits on certain activities such as derivative, proprietary and commodities trades; and “ring-fencing” retail banking from investment banking.