BUILDING BUFFERS AND CONFIDENCE

By M.SARASWATHI

KUALA LUMPUR, April 3 -- It is not all doom and gloom for Malaysia’s economy amid the fallout from COVID-19, as, along with the healthcare, the buffer build by the banking and financial sector all these years has enabled the country to face the challenges with lots of confidence.

While the short term impact of the disease on the economy is likely to be significant,  banks are entering this uncertain period from a position of strength, with significant capital and liquidity buffer.

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According to Bank Negara Malaysia’s Annual Report 2019, the capital buffers of banks as of February 2020 stood at RM121 billion, while the insurers at RM23.6 billion at the end of 2019.

These buffers are in excess of regulatory minima and more than double during the Global Financial Crisis in 2008, which has enabled banks, financial institutions and insurer to dish out measures such as six months moratorium as well as assistance for households and businesses.

Similarly, the government has also been on a consolidation path since 2009, when the fiscal deficit hit 6.7 per cent, which has enabled it to introduce two economic stimulus package worth RM250 billion within a span of two months to avert adverse economic impact from COVID-19.

The country’s fiscal deficit is now set to be at 4 per cent from the previous target of 3.2 per cent.

Too rosy when some countries are screaming armageddon?

What is being experienced in Malaysia now is a supply and demand shock emanating from a health crisis coupled with unprecedented measures taken globally to contain COVID-19.

And the capital buffers, which have been built up over the years, along with liquidity management by BNM, have placed Malaysian banks in a stronger footing to support the economy during these challenging times.

The sustained profitability of banks, underpinned by sound underwriting and risk management practices will also help banks gradually restore their buffers once the flexibilities are lifted.

Thankfully for Malaysia, the economy is also well-diversified.

The country’s varied sources of growth and external trade structure had helped it to mitigate the economic impact of domestic and external developments.

Continued surpluses in the current account, adequate levels of international reserves and a flexible exchange rate has also accorded the country with some buffer against external shocks.

But, these may not be the case for a lot of other countries facing the pandemic.

According to the International Monetary Fund (IMF) and World Bank, not only some of the countries have to deal with the economic fallout due to COVID-19, but they also had to grapple with financial and banking crisis.

Hence, the need to push the help button - more than 80 poor and middle-income countries reportedly have sought financial help from the IMF as they struggle to cope with the fallout.

What is next for Malaysia?

The government has embarked on painful measures such as the Movement Control Order (MCO), which has seen the country’s economy operating at only about 45 per cent capacity.

But the move is crucial in addressing the health crisis and contain the spread of the virus within the shortest span of time.

People need to gain confidence that the outbreak is under control, which would then drive private consumption, demand for financing that would lead to economic growth.

Past episodes of health crisis have shown that there will be a short term impact and eventual rebound, especially once a vaccine is found.

So, it is a matter of timing.

“Once, people’s confidence is restored, the economic activity will rebound. And you will have all the pent up demand and that will also drive recovery eventually,” BNM Governor, Datuk Nor Shamsiah Yunus.

As this situation progresses, BNM will remain vigilant of developments in the financial system and the wider economy. Should the need arise, the Central Bank can utilise its policy levers appropriately to cushion the impact of an economic downturn, she said.

“We will all need to persevere and come together for the sake of our collective future. We have done this before, and I do not doubt that we can do it again.”

And what more you need when the silver lining comes from the Governor herself.

-- BERNAMA

SM SM MHI