This article first appeared in The Edge Malaysia Weekly on November 18, 2019 - November 24, 2019

THE reduction in the statutory reserve requirement (SRR) from 3.5% to 3% with effect from Nov 16 is not a sign that the supply of ringgit will tighten.

Bank Negara Malaysia governor Datuk Nor Shamsiah Mohd Yunus affirmed this at a briefing on third-quarter GDP growth last Friday.

When pointed out that Hong Kong was experiencing a surge in demand for cash because traders were pricing in tighter liquidity of the local currency, Shamsiah said this was not the case for Malaysia.

Bank Negara has a wide range of instruments to manage liquidity on a day-to-day basis, she added.

“SRR is used to manage what we call structural liquidity in the system. When it was increased in 2011, there was a build-up in excess liquidity [at the time]. Over the years, the structural liquidity has declined, so there is no need for us to absorb that much liquidity on a permanent basis anymore. Thus the reduction in SRR, which releases this liquidity on a much more permanent basis into the system,” Shamsiah told reporters.

She also rejected the notion that the cut in SRR was a prelude to a reduction in the overnight policy rate (OPR). “We are not on any pre-set course. We will continue to monitor the external developments and how they affect the outlook for growth and inflation.”

According to Nomura’s head of equity research for Malaysia, Tushar Mohata, based on the system-wide liquidity coverage ratio, loan-to-deposit ratio and various loan-to-fund ratios, there does not seem to be a liquidity issue in the country.

“[The SRR cut] might be mainly to help banks hold more funds to be able to lend to households or businesses. The system’s loan-to-deposit ratio has been relatively well contained, at 88.4% as at September, below last year’s peak of 89.5%. The liquidity coverage ratio of 144% [for the banking system] is also well above the minimum requirement of 100%.

“A second possible reason for the cut may be to partially offset some of the portfolio outflow seen from the equity markets this year while we await FTSE Russell’s decision on Malaysia’s status on the World Government Bond Index (WGBI),” he tells The Edge.

Malaysian bonds were retained on the WGBI watch list in FTSE Russell’s review in September. Its next review is expected in March 2020.

CIMB Investment Bank Bhd’s regional head of treasury and market research, Ray Choy, says the SRR cut could reduce the aggregate cost of funds for banks. “The SRR cut is useful to help counter the slowdown in loan growth at banks. It makes sense as it helps bolster Bank Negara’s accommodative stance on monetary policy,” he tells The Edge.

Group treasurer for RHB Banking Group, Mohd Rashid Mohamad, concurs. He says a reduction of 50bps in the SRR will release RM7.4 billion into the banking system. “This will encourage lending activities by financial institutions, given that the cost of funds will be lower, and also improve the earnings of banks in the current challenging global banking environment.

“The SRR cut is also timely due to the compression in banks’ net interest margin and slow loan growth as it will stimulate potential lending activity and the deployment of excess funds into the market,” he tells The Edge.

The last time the SRR was cut was in February 2016 when it was trimmed from 4% to 3.5%.

According to RAM Ratings, the revision in 2016 came on the heels of meagre deposit growth in 2015, trailing lending expansion by a significant five percentage points.

“We note the striking contrast in the backdrop of the latest SRR reduction compared with the one in February 2016 (from 4% to 3.5%). The banking industry’s liquidity is healthy at present as evidenced by a liquidity coverage ratio of 144% as at Sept 30, 2019 (compared with 125% as at Dec 31, 2015). Deposit growth has slightly outpaced lending growth while interbank rates have dropped.

“Additionally, aggregate outflow from the equity and bond markets was more manageable in the first 10 months of the year, at an estimated RM4.6 billion,” it says in a Nov 12 note.

Maybank IB Research notes that the SRR was at its record low of 1% as at March 1, 2009, after being slashed by 300bps between November 2008 and March 2009 in response to the global financial crisis.

“It’s hard to say whether there will be more SRR cuts as the announcement of the latest reduction was done outside the monetary policy committee meeting. But the risk of recession will trigger more SRR cuts alongside more aggressive OPR cuts. Our view on Bank Negara’s monetary policy is that of another 25bps cut in the OPR next year after the 25bps reduction in May this year,” says the research house in a Nov 11 note.

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