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Besides DIBS removal, further LTV tightening expected towards year end

Besides DIBS removal, further LTV tightening expected towards year end

Posted on August 21, 2013 – Property News.

Bank Negara measures seen slowing down loans growth next year; interest rates might increase 0.25% or even 0.5% next year.


PETALING JAYA: More macro prudential measures, especially those aimed at “cooling” the property market, are expected to be introduced in the fourth quarter or next year amid escalating household debt.
These measures include further tightening the loan-to-value (LTV) ratio for property purchases and the removal of the developer interest-bearing scheme (DIBS) by Bank Negara.

Such measures, according to some analysts and industry observers, could potentially slow down the banking system loan growth next year. However, this would depend on how fast the Economic Transformation Programme (ETP)-related loans are disbursed.

On July 5, the central bank announced a slew of measures aimed at reinforcing responsible lending practices and combating surging household debt. These include shortening the personal financing tenure to a maximum period of 10 years and capping the maximum tenure for residential and non-residential property financing at 35 years.

Malaysia’s household debt to gross domestic product (GDP), which as at March this year stood close to 83%, is among the highest in the region. The country’s household debt has expanded at a rate of 11.5% per annum over the past five years, outpacing the nominal GDP growth of 7.5% per annum.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said that based on the growing concern of the issue of household debt, which remains stubbornly elevated, there could be additional measures to prevent it from rising further. “Measures like LTV ratios could be further reviewed – either by lowering it for third property purchases or even introducing it for second property purchases if necessary,” he told StarBiz.

In 2010, Bank Negara announced a 70% LTV cap on a borrower’s third and subsequent property-financing facility.

Alliance Research banking analyst Cheah King Yoong said he did not discount the possibility of the central bank introducing another round of macro-prudential measures by the fourth quarter or 2014 to ensure a more sustainable loan growth due to high household debt.

He said there could be a possibility that Bank Negara might remove the DIBS. Such a move, according to analysts, was to curb speculative buying of properties. Industry observers said Bank Negara was closely studying the scheme to see whether it was practical to curb it in light of the current economic situation.

StarBiz had, in June, reported that Bank Negara was studying the risks arising from the DIBS, with a view to potentially impose curbs on it.

Under the scheme, buyers need not fork out much initial payment to purchase properties, as the developer supposedly absorbed the initial interest. The buyer only starts paying the instalments after the property is ready.

Cheah said the overnight policy rate might potentially be raised by 25 basis points (bps) or even 50bps in 2014, possibly slowing down the loan growth momentum.

Meanwhile, Maybank Investment Bank Research analyst Desmond Ch’ng said of the various household debt components, risk still lay with mortgages and that further property cooling measures couldn’t be ruled out.

The three main components of household debt are mortgages, which made up some 45% of total household debt as at end-March 2013, transport vehicles (18%) and personal financing (17%). Currently, property loans constitute some 40% of the Malaysian banking system’s lending.

Ch’ng projects a lower banking industry loan growth of 10.2% in 2014 compared with 10.7% this year.

Cheah, on the other hand, is maintaining his industry loan growth forecast for 2013 at 10.5%, although he acknowledges that there is further upside potential should the loan growth momentum pick up in the second half of this year, particularly with the accelerated disbursement of ETP-related loans.

Hwang-DBS Vickers Research banking analyst Lim Su Lin said the new macro prudential measures could affect the growth of mortgages and personal loans.

However, with the ETP projects coming on stream, she does not foresee it impacting the industry’s overall loan growth.

Lim forecasts loan growth this year to be almost similar to next year at 10%

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Fitch pushes Malaysia’s credit rating outlook to negative

Fitch pushes Malaysia’s credit rating outlook to negative

July 31, 2013
Latest Update: July 31, 2013 01:01 pm

Global ratings agency Fitch Ratings has revised Malaysia’s sovereign credit rating outlook from stable to negative as the possibility of addressing public finance weaknesses has deteriorated after Election 2013.

The news comes as the Malaysian ringgit slid to three-year lows against the US dollar and 15-year lows against the Singapore dollar, making imports more expensive while exports would be cheaper although exports have slipped.

But it affirmed the country’s long-term foreign and local currency issuer default ratings at A- and A, respectively.

 “Malaysia’s public finances are its key rating weakness. Federal government debt rose to 53.3% of gross domestic product (GDP) at end-2012, up from 51.6 percent at end-2011 and 39.8 percent at end-2008.

“The general government budget deficit (Fitch basis) widened to 4.7 percent of GDP in 2012 from 3.8 percent in 2011, led by a 19 percent rise in spending on public wages in a pre-election year,” it said.

But Fitch believed that it would be difficult for Putrajaya to achieve its interim 3 percent federal government deficit target for 2015 without additional consolidation measures.

“Fitch sees risks even to the achievement of the agency’s 3.5 percent deficit projection, as this already factors in one percentage point of GDP of spending cuts.

“This leaves Malaysia’s public finances more exposed to any future negative shock,” it said.

It pointed out that Putrajaya’s contingent liabilities were on the rise and its debt guaranteed rose to 15.2 percent of GDP by end-2012 from 9.0 percent at end-2008, as state-owned enterprises (SoEs) participated in a government-led investment programme.

“Also, Malaysia’s fiscal revenue base is low at 24.7 percent of GDP, against an ‘A’ range median of 32.8 percent. Fitch has long emphasised two key budgetary vulnerabilities: reliance on petroleum-derived revenues and the high and rising weight of subsidies in expenditure. Fitch estimated that petroleum-derived revenues contributed 33.7 percent of federal revenues in 2012,” the ratings agency said.

“We believe the lack of progress on structural budgetary reform could be due to the general elections, resulting in the government delaying its reform. The situation was compounded by the Umno general election that has been set on October 5.

“Indeed, the government has since put on hold its subsidies rationalisation, after it last cut its fuel subsidies in December 2010. This was made worse by fiscal transfer in 2012 and 2013 to help ease people’s financial burden,” Fitch said.

It pointed although the subsidies were projected to fall, it remained sizeable and accounts for 18 percent of the revenue in 2013 (+21.3 percent in 2012), which was still uncomfortably high.

“Way back in the early 2000s, the subsidies only accounted for 2.9-7.8 percent of revenue in 2000-2004, compared with an average of 18.0 percent a year in 2008-12.

“We expect the government to resume its fiscal reform once the Umno election is over. This may help to convince Fitch that the government is committed to bring down its budget deficit through fiscal reform including rationalisation of subsidies and implementation of the goods & services tax (GST) to broaden the government’s tax base,” it said.

But it also affirmed the Short-Term Foreign Currency IDR at F2 and the Country Ceiling at A. Despite the weaknesses, the rating house also acknowledged the strengths in the composition of Malaysia’s debt and its funding base.

“Federal Government debt is overwhelmingly denominated in local currency (97 percent at end-2012) and has a smooth maturity profile.

“Sovereign funding conditions benefit from deep domestic capital markets and from the role of the broader public sector in funnelling savings to the Government,” it stated.

Fitch also said Malaysia’s credit fundamentals were weak by a range standards, as the average income level of US$10,400 (RM33,597) in 2012 was closer to the BBB range median of US$11,300 than the A median of US$18,600.

“Its overall level of development and standards of governance are also considered weak for its A- rating. Fitch’s Banking System Indicator of bbb suggests the standalone strength of Malaysian banks does not weigh on the credit profile.

However, Malaysia’s high level of private sector leverage is a risk from a credit perspective,” it said, pointing out it reached 118 percent of GDP at end-2012, above the ‘A’ median 94 percent.

Malaysia’s household debt also rose from a low of 60.4 percent in 2008 to 81.1 percent of GDP in 2012 and further to 82.9 percent in March 2013 but RHB Research said it was set to rise further given that household loans in the banking system continued to outpace the growth of GDP currently. – July 31, 2013