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Nikkei Markets

Malaysia central bank has more room to flex monetary muscle

Analysts say BNM could inject more cash, cut policy rate to combat COVID-19

Malaysia's central bank, Bank Negara Malaysia, has room to impose further monetary measures to protect the trade-reliant country from shocks related to the new coronavirus pandemic.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia's central bank has the firepower to inject more cash into the banking system to boost lending and support growth, with another policy rate cut not being ruled out as authorities in the trade-reliant country seek to cushion the economy against shocks related to the outbreak of the new coronavirus, economists said.

Bank Negara Malaysia's recent move to cut the so-called statutory reserve requirement ratio -- the proportion of deposits that banks have to set aside as cash -- will also help reduce funding costs and modestly raise interest income for banks, according to analysts.

"The latest move by BNM did not catch us by surprise given the large reversal of capital flows from the bond market," said Hong Leong Investment Bank Economist Felicia Ling. "The reversal in capital outflows may have led to a reduction in liquidity in the financial system."

Between January, when COVID-19 began to spread widely, until February, foreigners have dumped more than 8 billion ringgit-worth ($1.8 billion) of Malaysian bonds, according to Maybank Investment Bank.

The yield of benchmark 10-year Malaysian government bonds has risen to 3.619%, from 2.781%, in less than two weeks as investors dumped risky assets worldwide amid fears over the coronavirus outbreak. The U.S. dollar has gained more than 7% against the ringgit so far this year.

On Thursday, BNM reduced the SRR by 100 basis points to a nine-year low of 2%. In addition, the central bank also allowed principal dealers -- select group of banks required to bid for all government and central bank debts -- to recognize up to 1 billion ringgit each to comply with the new SRR rule.

Together, the measures are expected to release about 30 billion ringgit-worth of liquidity into the banking system. BNM had reduced the SRR most recently in November and reiterated on Thursday that the SRR was an instrument to manage liquidity and was not a signal of the country's monetary policy stance.

"Banks do not earn any interest from the statutory reserve maintained with the central bank," CIMB Investment Bank Analyst Winson Ng wrote in a note to clients. "The partial release of this would benefit banks as these funds can be invested/lent out to generate additional income for banks."

Ng estimates that the move could boost banks' net profit by 1.1% but warned of potential margin erosion from prospective cuts in the overnight policy rate and higher loan loss provisioning.

BNM had cut the policy interest rate to the lowest level in a decade earlier this month to spur activity and cushion Southeast Asia's third-largest economy from the impact of the pandemic. In addition, the government has also announced a slew of measures to stimulate the economy.

Deaths from COVID-19 have topped 10,000 worldwide, with more than 245,000 people infected by the highly-contagious virus. Malaysia has recorded 900 cases and two people have so far succumbed to the disease.

In response to the outbreak, Malaysia has imposed a partial lockdown, closing all government and private businesses with the exception of essential services. The government is now considering deploying military forces to enforce some of the measures.

"Combined with monetary easing moves by major and regional central banks, BNM has ample room to lean further towards an expansionary monetary policy," said Kenanga Investment Bank. In addition, the BNM still had scope to cut the SRR to as low as 1% as it did in March 2009, Kenanga added.

--Jason Ng

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