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Stimulating Domestic Demands By Turning From Retail To Investments
Malaysia Perspective | 23 February 2012

By Yang Ming Wan

In line with expectations, the Monetary Policy Committee of Bank Negara (BN) did not change interest rates at its first meeting of this year, holding the overnight policy rate at three percent.

This is the fifth time in a row that the Committee left rates unchanged. However, its statement released after the policy meeting showed that the Government has reversed course and is no longer depending on domestic consumption to stimulate economic growth. While domestic demands remain the key driver, the government is now looking at investments as the main stimulant, rather than consumer spending.

The reason why BN is changing direction now is because it is still unsure about the economic conditions abroad, especially over the impact of the simmering European debt crisis. At the same time, it is also worried about domestic spending, which had been in over-drive lately and may now be losing steam.

Household Loan Growth Heading For A Soft Landing

In the past two years, the government has been over-reliant on domestic spending to stimulate the economy to keep growing at a moderate pace.

Household loans have been experiencing double-digit growth since early 2010. By the end of that year, the growth rate of household loans was as high as 14%.

With rising concerns over the rapid growth of family loans causing more debt-ridden households, BN took measures early last year to moderate the growth of household loans. The effect of this moderation took an exceptionally long time to kick in, so much so that we finally saw the growth rate of household loans slowing down to 12.4 percent only by November last year.

From this, we can see BN’s very cautious approach to ease the growth of household loans. This is to avoid impairing economic growth with overly aggressive measures. As a result, since home loans slowed to below 13% in November, it had crept up to 12.9% in December, barely missing the 13% threshold.

In any case, BN has managed to rein in home loan growth to a certain extent, and is gradually guiding it towards a soft landing.

Yet Another Record Number Of Bankruptcies

On one hand, we see that the high level of household loans is headed towards a soft landing; on the other hand, we see the number of individuals filing for bankruptcy soaring. Just as I had predicted in this column last month, the total number of bankruptcies last year did exceed the 19,000 level for the first time to hit 19,167 cases, an increase of 5.8% over the 18,119 cases in 2010.

Even though this was an increase of less than 6%, any increases of this magnitude deserve our attention, because this is the second consecutive year of record high cases of bankruptcies. Bankruptcies increased by nearly 12% in 2010 to a record high. This figure continued to climb higher to mark two consecutive record breaking years. The situation can no longer be ignored.

The increase in bankruptcies will, to a certain extent, dampen domestic consumption. The Government had to come up with other ways to grow in this aspect. In general, when domestic consumption increases, domestic demands will then turn to domestic investment activities that benefit from this growth in consumption.

Government Leading The Charge In Promoting Investments

Apart from a record high rate of bankruptcies last year, Malaysia’s private sector consumption is also showing signs of a slowdown. Car sales, which has always been used as a dipstick for the health of private consumptions, has been weakening, as evidenced by a 13.6% drop last December.

Full year sales figure dipped slightly by nearly 2%, a far cry from the increase of nearly 12% in 2010.

The weakening of domestic consumption is an indisputable fact. The picture painted by the Monetary Policy Committee of Bank Negara’s statement depicted a bleak outlook on the impact of the debt crisis in Europe. In this Year of the Dragon, the Government has to continue working on increasing domestic demands to stimulate the economy.

Now that domestic consumption has cooled off, the only way out is to stimulate domestic investments.

Our Government needs to rely on domestic investments to maintain a decent growth in domestic demands in order to achieve its 5-6% economic growth target. It now has to step up official investments in the public sector so as to stimulate economic development that would hopefully encourage private sector investments. In fact, the Government had been increasing its spending in the public sector since the third quarter of last year.

It is therefore self-evident where it will continue pumping in funds and focusing developments this year.

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