M'sian monetary policy to remain unchanged this year, MARC expects

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Petaling Jaya (The Star/ANN) - Malaysia's monetary policy will remain unchanged this year with a slight upside bias unless the growth momentum declines a lot, according to Malaysian Rating Corp Bhd (MARC).

It noted in its 2013 economic outlook report that the central bank, Bank Negara, had kept the overnight policy rate unchanged at 3 per cent contrary to pressures to lower it amid the weakening external sector.

Among the primary factors behind the central bank's decision were the upside surprise in gross domestic product (GDP) growth in the first three quarters of 2012, strong consumer sentiment, evidenced by the Malaysian Institute of Economic Research's rising consumer sentiment index, as well as high household indebtedness, it said.

The rate has been normalised from as low as 2 per cent in 2009.

"Based on its rhetoric, we sense that the Bank Negara is not willing to endanger the financial system by inducing more over-leveraging practices through lower interest rates, especially among households," MARC said.

It added: "As household debt-to-GDP has topped 60 per cent in the past one decade, premature reductions in the policy rate will not be in line with the central bank's intention to curb households' appetite for debt."

As the US Federal Reserve is planning to keep the rate unchanged for a considerable period, raising the policy rate will also lure more capital inflows which are dominated by portfolio flows.

"This may lead to a continuous surge in foreign holdings of Malaysian securities, especially Malaysian Government Securities (MGS). As of September, foreign holdings of MGSs have reached an all-time high of 42.1 per cent of total outstanding MGS."

Local economic growth prospects will largely hinge on the global economic momentum, which at this time is still clouded by the prospects of the recovery in the eurozone.

However, it said, the bottoming of Malaysia's exports would likely lead to a mild rebound in external trade performance as exports to Asian economies stabilise.

However, MARC pointed out two major imbalances to be concerned about: the elevated levels of property prices, which to some extent signify speculative activities, and the overstretched household sector.

"Rising property prices have not abated despite the implementation of some measures by the government and the central bank."

While raising the real property gains tax and curbing loans through net income assessment are commendable measures, prices have not softened materially as these measures do not hit the groups which are buying properties on a large scale," it said, highlighting that incomes for most people have not increase in tandem with prices of residential properties.

Another minor factor to note was the declining current account surplus which may cause uneasiness among financial market players. MARC felt that the mediocre performance of Malaysia's export sector and rising imports due to the ongoing mega projects will put more pressure on the current account (CA) balance,

It said that the CA balance as a percentage of GDP had shrunk from 17.1 per cent in 2008 to 11 per cent in 2011 and would likely drop further this year.

"Although the shrinking savings-investment gap in theory would not cause significant changes in the fundamentals of Malaysia's economy as investment is mainly channeled towards productive sectors, investors' perception may not be too kind especially when the economy is already saddled with persistent budget deficits," it explained.

The ratings agency said this would be one of the factors placing the ringgit under pressure despite having strong fundamentals in the long term.

Despite these concerns, Malaysia's domestic demand would likely remain resilient amid rising contributions from private investment and private consumption, it said.

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