Malaysia Cuts Reserve Ratio as Fund Outflows Sap Cash in System

  • Foreign funds withdrew $7 billion in stocks, bonds last year
  • Prime minister to unveil revised budget, GDP figures next week

Malaysia is cutting the amount of cash banks must set aside as reserves for the first time since 2009 to boost funds in the financial system as a global selloff in stocks rattles markets.

Bank Negara Malaysia will reduce the statutory reserve-requirement ratio to 3.5 percent from 4 percent effective Feb. 1, it said in a statement in Kuala Lumpur Thursday. It held the overnight policy rate at 3.25 percent, a decision predicted by all 20 economists surveyed by Bloomberg News.

The central bank is delving into its policy toolkit to ease monetary conditions as a depreciating currency and quickening inflation limit its ability to lower the benchmark rate. A slump in crude is hurting government revenue for oil-exporting Malaysia and Prime Minister Najib Razak is expected to revise growth forecasts and cut operating expenditure to keep 2016’s fiscal deficit in check.

"There is little leeway to act via policy rates as growth risks constrain space for a hike while currency weakness limits space for a cut," said Weiwen Ng, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. The central bank had to take "measures around reserve requirements in the absence of a policy cut to alleviate the tight liquidity in Malaysia’s banking system amid slower deposit growth," he said.

Ringgit Weakness

The ringgit has depreciated about 2 percent against the greenback this year, extending a 19 percent decline in 2015. It gained 0.3 percent to 4.3818 a dollar in Kuala Lumpur Thursday.

Malaysia’s monetary policy is already accommodative and the nation also needs other measures to support growth, Governor Zeti Akhtar Aziz said in Hong Kong on Monday.

"The decision to reduce the SRR is undertaken as part of a comprehensive effort by Bank Negara Malaysia to ensure sufficient liquidity in the domestic financial system, and to support the orderly functioning of the domestic financial markets," the central bank said. "The SRR is an instrument to manage liquidity and is not a signal on the stance of monetary policy."

Capital Outflows

Waning risk appetite as China’s economy slows and the U.S. raises interest rates has spurred capital outflows from the Southeast Asian nation. Foreign investors unloaded $7 billion of equities and bonds in 2015, and were net sellers of shares in the first two weeks of the year. The reserve ratio has remained unchanged since 2011, when it was raised three times in one percentage-point increments to its current level.

Bank Negara said Thursday it had pumped 40 billion ringgit ($9.1 billion) into the banking system via monetary operations including the reverse-repurchase facility since early 2015 as "net external outflows reduced the amount of liquidity in the system."

“There have been some concerns that domestic liquidity conditions have tightened as evidenced from the rise in the Klibor rates last year,” said Julia Goh, an economist at United Overseas Bank Ltd. “As a result of that they probably felt they need to lower the SRR.”

The three-month Kuala Lumpur interbank offered rate has climbed to 3.82 percent from last year’s low of 3.69 percent in May. It has averaged 3.74 percent since the start of July 2014, the month the central bank last moved on rates with a 25 basis-point increase.

Rating Outlook

Malaysia as Asia’s only major net oil exporter risks losing 300 million ringgit for every $1 per barrel drop, according to government estimates. Moody’s Investors Service cut its credit rating outlook on the sovereign to stable from positive this month, while state oil company Petroliam Nasional Bhd. told employees it’s studying plans to “optimize costs” to address the plunge in crude.

Najib reiterated a commitment in January to cut the deficit this year from an estimated 3.2 percent of gross domestic product in 2015, even with oil trading more than 40 percent below the 2016 budget assumption of $48 a barrel. He will announce revised expenditure and growth figures on Jan. 28.

Gross domestic product was forecast by the government to increase 4 percent to 5 percent in 2016, after an estimated expansion of as much as 5.5 percent last year. Inflation is projected at 2 percent to 3 percent this year.

"While recent trends suggest a turnaround in exports, the contribution of the external sector to overall growth is expected to be modest," the central bank said. "The economy is expected to experience more moderate growth in 2016, after expanding by about 5 percent in 2015. Downside risks to growth have increased following greater uncertainty on both the global and domestic fronts."

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