MIDF BELIEVES THE CUT IN OPR WILL PROVIDE SIGNIFICANT RELIEF TO BUSINESSES AND BORROWERS
Kuala Lumpur, 21 January 2009 – The MIDF Group welcomes the move by the central bank to cut the overnight policy rate by a significant 75 basis points to 2.50%. The reduction in the cost of borrowing will reduce the interest burden of existing banking customers and will improve the viability of raising credit by potential borrowers, especially businesses and investors.
“Monetary policy is a potent weapon in combating economic slowdown. Used in conjunction with the expansionary and aggressive fiscal policy, these measures are likely to spur domestic economic activity and provide the cushion to ensure that Malaysia does experience a hard landing this year”, according to Zulkifli Hamzah, Head of MIDF Research.
The MIDF Group believes that the banking sector can absorb the effects of a reduction in interest rates, especially on its interest margin, as the industry has entered 2009 in a position of strength. Industry loan growth is still healthy at more than 9% year-on-year as at end November 2008, while the incidence of non-performing loan is low and under control. The banks are well capitalised and should be able to absorb any deterioration in the quality of their assets, even under extreme stress. The decision by the central bank to cut the statutory reserve ratio from 3.5% to 2.0% is also expected to assist the banks in managing their bottomlines.
Although already low at 2.5%, there is still room for the OPR to be reduced further, according to MIDF Research. Inflationary pressure is effectively absent; with the likelihood that Malaysia may even experience a temporary bout of consumer price deflation in the middle of this year. A weaker ringgit as a result of the lower OPR is unlikely to impart inflationary pressure as imported prices are already depressed at the point of origin.
“Indeed, the central bank can afford to let the ringgit chart its own course throughout 2009. The ringgit may experience some weaknesses against the US dollar, but the trend is expected to be transient. The greenback is fundamentally weak, and it should be heading south in the long term as part of the adjustment mechanism for the US economy to regain its growth momentum”, says Zulkifli.
Within the overall context of the Malaysian economy, the reduction in the OPR is expected to stimulate domestic demand, which has been the main driver of the economy this decade. The domestic base of the Malaysian economy has grown strongly over the last few years such that it is getting less dependent on its external counterparts. As Malaysian exports still have high imported contents, the any slowdown on the external front will automatically lead to a more restrained import. The consequent is that any leakage from the economy should be kept under control.
“The multi-pronged approach undertaken by the government through its fiscal and monetary measures in order to combat the slowdown is a right recipe for Malaysia moving forward”, says Zulkifli.
About MIDF
MIDF is now a diversified group with substantial investments in the financial services industry. Following its merger with Amanah Capital Partners Berhad in 2003, the acquisition of Utama Merchant Bank Berhad (UMBB) in 2004, and the emergence of MIDF Amanah Investment Bank Berhad, MIDF Group has evolved into a stronger and bigger entity, offering a competitive and diversified range of financial services to include Investment Banking, Asset Management and Development Finance.
MIDF is a subsidiary of Permodalan Nasional Berhad (PNB)
