Economics & Strategy

Bank Negara's balance sheet and pre-holiday rally


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(for the week of 19-23 January 1998)

Bank Negara's balance sheet and pre-holiday rally

A string of positive assessment of the local economy, particularly from the International Monetary Fund (IMF) officials, provided an adrenaline to the languishing stockmarket last week. That Malaysia's economic austerity measures won the fund's approval and would not need its assistance beyond policy and technical advices, should put to rest lingering doubts about the financial stability here in the short term. With a strong fiscal (surplus) position, Malaysia need not raise taxes that would make economic adjustments more painful than other bailed-out countries.

IMF's money is not needed, but tight monetary policy is:
A tight monetary policy is still strongly advocated by the IMF, particularly to rein in credit expansion of recent years. That leaves little room for interest rates to ease any sooner than the second quarter of 1998. That has been amply manifested by the benchmark 3-month Klibor's uptrend, now at unprecedented 9.6%. The cost of borrowings is now quoted as high as 18% - rather deterrent to even productive businesses.

Bank Negara has been injecting liquidity in the system:
Over the last six months of 1997, Bank Negara's balance sheet has indicated a significant trend in flow of liquidity in the financial system: a total of RM18.5b has found its way into the banking system since mid-July for two apparent reasons. Firstly, to plug the gap created by the shift of money from local to foreign banks, as well as instill confidence in the ability of the banking system to make good any suddden large withdrawals.

That amount of money can be deployed from various sources. The balance sheet indicates that the central bank drew down its international reserves (RM2.8b), redeemed matured BN Bills and also raised statutory reserves (RM2.6b), increased money in circulation (RM2.5b) and received additional deposits from the government (RM2.8b). Such a flux of liquidity could be jittery for two reasons: (1) any significant change in credit flow could spike interest rates rather effortlessly and (2) the ringgit could weaken (or have weakened) unnecessarily as more ringgit chases after fewer US dollar.

Regional developments are sending mixed signals:
US investment house last week reduce their weightings on Hong Kong and Singapore, as these two countries have belatedly suffered from the Asian economic crisis. These two markets have some similarities, but none as glaring and worrisome as a bubbly property market. Coupled with Morgan Stanley's strategic views of Asian stocks debacle (almost bottomed out, but still not time for aggressive buying), the regional markets are presented as a mixture of confusing diagnoses. The KL market appear sets pre-celebrations window-dressing, but a long holiday could prove a short-lived hive of activity. We would remain sidelined under such circumstances.

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