Taklimat

Laporan Tahunan 2016 dan

Laporan Kestabilan Kewangan
dan Sistem Pembayaran 2016

Gabenor Bank Negara Malaysia

23 Mac 2017

1
Taklimat
Laporan Tahunan 2016 dan
Laporan Kestabilan Kewangan
dan Sistem Pembayaran 2016

Gabenor Bank Negara Malaysia

23 Mac 2017

2
 Domestic Demand: 2014

In 2016, the Malaysian economy continued to expand

despite multiple external shocks and domestic adjustments
Within the region, Malaysia was among the amid a period of adjustment
faster-growing economies to various challenges

Real GDP growth of selected countries

Annual change (%)
8 Volatile global commodity prices
2015 2016
7
Weak global demand
6
5.0
5 Depreciation of the ringgit
4.2
4
Lingering impact of GST implementation
3

2 Domestic price adjustments

1

0
PH ID MY TH KR SG

Note: PH= Philippines, ID= Indonesia, MY= Malaysia, TH= Thailand, KR= South Korea, SG= Singapore
Source: National authorities, Department of Statistics, Malaysia

3
Private domestic demand remained the key growth driver

Real GDP Growth

Contribution to
growth (ppt.) Sustained private consumption:
8 6.0%
- Supported by continued wage and employment growth,
1.2
6 5.0% with additional impetus from Government measures
0.6
4.2%
1.8 0.6
4 0.1 Private investment continued to expand:
1.1 0.7
- Supported by implementation of new and ongoing
2 3.6 3.1 3.2 projects in the manufacturing and services sectors

0 -0.1 0.0
-0.5
-0.4 -0.2
Smaller negative contribution from net exports:
-2
2014 2015 2016p - Import growth moderated at a faster pace than exports
Change in Stocks Net Exports
Public Investment Public Consumption
Private Investment Private Consumption
GDP Growth (%, yoy)

p preliminary
Source: Department of Statistics, Malaysia

4
2017 will be characterised by several developments

Improvement in
global growth

Volatile Global Landscape Higher

financial markets in 2017 commodity prices

Socio- and geopolitical Policy adjustments

developments in advanced economies

5
Malaysia is positioned to benefit from positive
developments and to withstand negative shocks

Diversified economic and trade structure

Structural transition towards high-value added sectors with varied export products and markets

Well-developed and resilient financial system

Strong capital and liquidity buffers with continued access to financing

Adequate reserves and manageable external debt

Ample international reserves and increased foreign asset holdings act as buffer against external shocks

Policy space and flexibility

Flexible exchange rate and monetary policy space

6
Recent indicators point to an improvement in global growth

Higher global manufacturing and industrial production Exports in Asia has been recovering
data signal better global growth prospects

Global Manufacturing Indicators Export Value Growth in Selected Asian Economies

%, yoy Index %, yoy %, yoy
Global Industrial Production Index* (IPI) KR MY
20 25
3.5 Global Purchasing Managers' Index (RHS) 53 SG TH
15 ID (RHS) 20
3.0 15
52 10
2.5 10
51 5 5
2.0
0 0
1.5 50
-5 -5
1.0 -10
49 -10
0.5 -15
-15 -20
0.0 48
3Q-13 1Q-14 3Q-14 1Q-15 3Q-15 1Q-16 3Q-16 Jan- -20 -25
Feb 3Q-13 1Q-14 3Q-14 1Q-15 3Q-15 1Q-16 3Q-16 Jan-
17 Feb
*Data available as at 2016
17**
** January 2017 data for Malaysia and Thailand
Source: Bloomberg, Haver, BNM
)

7
Global growth and trade projected to expand in 2017

Broad-based expansion in growth across regions World trade to world GDP ratio to improve after
reaching the lowest ratio since 2001

GDP Growth By Region World Trade Growth and Trade to GDP Ratio
%, yoy %, yoy Ratio
12 Global 14 World Trade Growth 3
Adv. economies
Asia 12 World Trade to World
10 GDP Ratio (RHS)
Other EMEs
10
8 2
8
6
6
4 1
4

2 2

0 0 0
2010 2011 2012 2013 2014 2015 2016e 2017f 2010 2011 2012 2013 2014 2015 2016 2017f

e estimates f forecast
Source: International Monetary Fund (IMF)

8
 L

The Malaysian economy to expand by 4.3 4.8% in 2017

Growth to remain anchored by private domestic demand,
with support from external sector

Real GDP Growth Private Consumption Private Investment Net Exports

Annual change (%) Annual change (%) Annual change (%) Annual change (%)

4.8 5.3
6.1 6.0 4.4 4.1 -1.8
4.2 4.3

2013 2015 2017f 2013 2015 2017f 2013 2015 2017f 2013 2015 2017f

f forecast
Source: Department of Statistics, Malaysia, Bank Negara Malaysia

9
 Updated

Domestic demand to remain a key driver, with support

from improvement in net exports
Real GDP by Real GDP by
Share2 Share2
Expenditure 2016p 2017f Economic Activity 2016p 2017f
2016 (%) 2016 (%)
(Annual change, %) (Annual change, %)

Domestic demand1 91.8 4.4 4.4 Services 54.2 5.6 4.9

Private expenditure 70.2 5.7 5.6

Manufacturing 23.0 4.4 4.3
Consumption 53.3 6.1 6.0
Investment 16.9 4.4 4.1
Public expenditure 21.6 0.4 0.5 Mining & Quarrying 8.8 2.7 2.7
Consumption 13.1 1.0 -0.2
Investment 8.5 -0.5 1.5 Agriculture 8.1 -5.1 4.0
Net exports 8.1 -1.8 5.3
Exports 70.0 0.1 2.2
Construction 4.5 7.4 8.0
Imports 61.9 0.4 1.8

Real GDP 100.0 4.2 4.3 4.8 Real GDP 100.0 4.2 4.3 4.8

p preliminary f forecast
1 Excluding stocks, 2 Numbers may not add up due to rounding and exclusion of import duties
Source: Department of Statistics, Malaysia and Bank Negara Malaysia

10
Private consumption to remain supported by continued
employment and income growth
supported by continued and wage growth
Sustained household spending
employment growth
Real private consumption Employment Wage growth in the manufacturing and
major services sectors
Annual change (%) Million Persons Annual change (%)

9 14.3 7
+112k jobs
14.2 14.2 6
8 5.3
4.9
14.1 14.1 5
4.2
7 Private
14.0 4
sector wages
6.1 6.0
6 13.9 13.9 3

13.8 2
5
13.7 1

4 13.6 0
2013 2014 2015 2016p 2017f 2014 2015 2016e 2014 2015 2016e
p preliminary, e estimate, f forecast

Source: Department of Statistics, Malaysia

11
Households have the capacity and resilience to
support expenditure
Continued expansion in income, On aggregate, households have ample liquid
the primary driver of private consumption financial assets to cover debt

Determinants of Private Consumption HH Liquid Financial Assets and Debt

(%share) (RM trillion)

Others HH Debt HH Liquid Financial Assets

3

17 Financial wealth
1.5
1.5
16 Housing wealth
1.1
1.0
Disposable income
(MEF salary increment in
2017f: 5.4%; 2016: 5.5%)
65

1Q05 - 4Q13 2015 2016

Source: Bank Negara Working Papers (WP7/2015), Department of Statistics, Malaysia, Bank Negara Malaysia, Malaysian Employers Federation

12
Private investment to register modest growth

Private investment activity to Malaysia continues to attract FDI, Business sentiments

grow at 4.1% but in lower amounts remain soft
Real Private Foreign Direct Investment Business Condition Index
Investment Growth Share to Nominal Points
Annual
change (%) Private Investment (%)
25 30 110
Avg.
Annual FDI: Optimism threshold
RM36.6 bn FDI: (100 points)
20 RM43.4 bn FDI: 100
RM41.2 bn
20
15
90

10 23%
22%
10
19% 80
81.2
5 6.4
4.4 4.1

0 0 70
2011 2013 2015 2017f 2011-2015 2015 2016p 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
15 15 15 15 16 16 16 16
p preliminary, f forecast
Source: Department of Statistics, Malaysia, Bank Negara Malaysia, MIER

13
Private investment will be supported by the ongoing
projects in the services and manufacturing sectors
Services and manufacturing sectors account Key quality projects to increase efficiency,
for 75% of private investment activity productive capacity and employment

Private Investment by Sector

(2010-2015)
Share (%)
Services
100
Transport and storage:
Services
Oil and gas storage terminals,
80 seaports and aircrafts
49

Telecommunication:
60
4G/LTE network expansion

40 26 Manufacturing
Manufacturing
3 Construction
20 6 Agriculture Electrical and electronics (E&E)
16 Mining
Resource-based industries
0

Source: Department of Statistics, Malaysia, Bank Negara Malaysia

14
External trade performance to improve

Higher export and import growth, lifted by positive Diversified export structure across products and
global factors amid sustained domestic demand markets to help mitigate shocks
Exports by Product, 2016
% share %share of total exports
Annual change (%) 2016p 2017f
(2016) Commodities
Gross exports 100.0 1.1 5.5
17.1
Manufactured 82.2 3.2 3.7 Non-E&E
45.5
E&E 36.6 3.5 4.2
Non-E&E 45.5 3.0 3.3 36.6 Exports by Market, 2016
%share of total exports
Commodities 17.1 -8.6 14.8 E&E
Gross imports 100.0 1.9 6.4 ROW 19.3 ASEAN
29.4
Intermediate goods 57.1 -0.1 5.4
NIE 10.4
Capital goods 14.3 4.9 7.9
Consumption goods 9.6 7.3 9.9 12.5
28.4
Trade balance (RM billion) - 87.3 86.4 China
G3
p preliminary, f forecast
Note: G3 refers to the US, EU and Japan, NIEs refers to Hong Kong, Korea and Chinese Taipei, ROW refers to rest of the world
Source: Department of Statistics, Malaysia and Bank Negara Malaysia

15
 Current account balance to narrow but remain in surplus
Smaller CA surplus reflect global conditions Higher domestic investments Lower private sector surplus,
and domestic structural transformation and moderating savings due partly to higher investment

Current Account Balance Savings-Investment Gap Saving-Investment Gap

RM billion % of GNI % of GDP % of GDP
by Sectors
200 24 60 30
Pvt. investment
20 growth (2011-16):
17.6
10.9%
16

100 12 40 Moderating 15
savings Private sector
8

1-2% 4
0 0 Rising
20 0
investment
-4

-8 Public sector

-100 -12 Savings-Investment Gap

0 -15
2006 2008 2010 2012 2014 2016p 2017f 2006 2008 2010 2012 2014 2016p 2017f 2006 2008 2010 2012 2014 2016p 2017f
Goods Services
Primary income Secondary income
% of GNI (RHS)

Source: Department of Statistics, Malaysia, Bank Negara Malaysia

16
 Updated

The ringgit exchange rate has stabilised in 2017, in line

with most major and regional currencies
The ringgit followed two distinct phases in 2016, with The ringgit has, however, recovered slightly in 2017,
most of the depreciation occurring after the US election in line with most major and regional currencies
Exchange Rate of the Malaysian Ringgit (RM) and Selected Performance of Selected Currencies against the
Regional Currencies against the US Dollar (USD) US dollar (USD)
Index (Dec 2015 =100)
115 KRW -2.5
Depreciation 7.9
Appreciation
period AUD -1.0
period 2017 6.6
2.0
110 +9.9% -13.0% TWD 5.9
JPY 3.2
-2.2 3.5
Ringgit SGD 3.4
105
0.4
THB 3.1
-3.7
EUR 2.1
100
MYR -4.3
Index of Selected Regional 1.3
Currencies against the USD1 IDR 2.8
0.9
95 -17.1
GBP 2016
0.7
CNY -6.6
0.6 2017 YTD
90 PHP -5.3
-1.3
Jul-16
May-16
Mar-16

Apr-16
Feb-16

Oct-16

Feb-17
Dec-15

Aug-16

Sep-16

Nov-16

Dec-16
Jan-16

Jun-16

Jan-17

-25 -15 -5 5 15
% change

1 Regionalcurrencies: Chinese renminbi, Indonesian rupiah, Korean won, Philippine peso, Singapore dollar, New Taiwan dollar and Thai baht.
Each currency carries equal weight.
YTD year-to-date
Source: Bank Negara Malaysia

17
 The FMC measures have lent stability to the ringgit and
domestic foreign exchange market
Daily turnover remained stable Ringgit volatility declined Offshore-onshore gap narrowed
Average Daily Turnover of Average Volatility of MYR/USD Average Daily MYR/USD
USD bn MYR Currency Pair Points Offshore-Onshore Gap
Points
6 5.2 600
250 219 504
5 4.6
200 500
4
150 400
3 275
100 300
2 53
50 200
1
0 100
0 Nov-16 Feb-17
Nov-16 Feb-17 Nov-16 Feb-17

Bid-ask spread narrowed FX conversion increased post-measures 5Y CDS spread narrowed

Net Foreign Exchange Conversion Basis
Points Average MYR/USD
points Average Daily 5-year CDS spread
70 65 Bid-Ask Spread USD bn from Exports (Cumulative)
180
60 2.0
2.0 150.6
50 1.5
40 140
40 117.4
1.0
30
20 0.5 100
10 -0.5
0.0
0 60
Nov-16 Feb-17 -0.5 Nov-16 Feb-17
Jan - Nov-16 Dec-16 - Feb-17
Note: Volatility refers to the difference between MYR/USD interbank intraday highest and lowest rate. Offshore rate refers to the NDF 3-month rate
while onshore rate refers to the spot rate.
Source: Bloomberg, Bank Negara Malaysia

18
Non-resident holdings of Malaysian government bonds
remained broadly stable as at end-2016
Non-resident holdings of Malaysian Government Majority of non-residents holdings are by
bonds stabilised towards the end of the year long-term investors
Non-Resident (NR) Holding of Distribution of Non-resident Holdings in
Malaysian Government Bonds Government Bonds as at end-Dec16
RM billion % share RM billion
of total 42%
300 Outstanding Government Bond (LHS) 40 80
Non-Resident Holdings of Govt. Bonds (RHS)
35 30%
250 60
30
2016:
200 2015:
2014: 30.6% 40 17%
28.2%
29.6% 25

150 20 20 8%

15 2% 1% <0.5%
100
0
10

Management

Companies
Banks
Central Bank/

Custodians

Others
Pension

Nominees/
Government

Insurance
Funds
50

Asset
5

0 0
Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
Note:
- Malaysian Government Bonds includes Malaysian Government Securities (MGS), Malaysian Government Investment Issues (MGII), and Sukuk Perumahan
Kerajaan (SPK).
- Others include individuals, non-financial corporations and unidentified sectors.
- Data may vary pending further classification by reporting entities.
Source: Bank Negara Malaysia

19
Malaysias external debt remains manageable given
its currency, maturity and balance sheet profiles
Foreign currency-denominated 59% of total external debt is in Short-term external debt partly
debt remains low relative to Asian medium- to long-term tenures covered by short-term external assets
Financial Crisis
Breakdown by Currency Breakdown by Maturity Short-term External Position of
(% of GDP) (% of total share) Banks and Corporations (end-2016)
Ringgit-denominated debt RM billion
Foreign currency-denominated debt Limited
400 377
Total: rollover risks
73.9%
300
300
25.4%

Medium- to
Long-term 200
58.6%

60.0%* Short-term 100

48.5% 41.4%

0
Short-term Short-term
1998 2016 External Assets* External Debt
*Based on previous definition of external debt *Debt instruments only
Source: Department of Statistics, Malaysia and Bank Negara Malaysia

20
Going forward, Malaysia is well-positioned to intermediate
volatile capital flows
Short-term capital flows were driven by
prevailing conditions in the global financial markets
Net Portfolio Flows Going forward, large and volatile shifts in global
RM billion
liquidity will continue to shape capital flow
30 Resident Non-Resident
movements
20

Malaysia will be able to withstand these external

10
shocks, drawing on its diversified economic
0 structure, financial buffers and prevailing robust

-10
policy framework

-20 Well-developed and resilient financial system

-30 accord Malaysia the capacity to intermediate

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
large and volatile flows
2015 2015 2015 2015 2016 2016 2016 2016

Source: Department of Statistics, Malaysia

21
Ample international reserves and increased foreign asset
holdings act as buffer against external shocks
Reserves position remains at about four-times Increased holdings of foreign assets by
the level during the Asian Financial Crisis banks and corporations

Net International Reserves Malaysias External Assets1

USD billion Times
200 14 % share
Net International Reserves 100
Retained import cover (RHS) 15 Mar. 2017
12
Reserves/ST ext debt* (RHS) USD94.9 bn 26%
80
150
10 59%
8.3
60
AFC 1997: 8
100 USD21.7 bn
40 74%
6
USD265.4
41% billion
4 20 USD118.7
50
billion
1.1 2 0
2005 2016
0 0
2005
International reserves
2016
1991 1996 2001 2006 2011 2016 Bank & non-bank corporates external assets
*Lower ratio since 2009 following redefinition of external debt 1 Based on the International Investment Position
Source: Department of Statistics, Malaysia and Bank Negara Malaysia

22
Higher average headline inflation driven by cost factors

Headline and Core Inflation

Annual Growth (%)
5 For 2017, headline inflation to average
3 4% reflecting primarily the pass-through
4% impact of the increase in global oil prices on
4
Headline inflation domestic retail fuel prices

3%
3 Headline inflation would be relatively high in
1H 2017 before moderating thereafter
2
Core inflation The cost-driven inflation is not expected to
have significant spillovers given the
1 moderate domestic demand conditions

Core inflation to increase only modestly

0
Aug-14
Nov-14

Nov-15

Nov-16
May-14

May-15

May-16
Aug-15

Aug-16
Feb-14

Feb-15

Feb-16

Source: Department of Statistics, Malaysia and Bank Negara Malaysia

23
 Updated

Headline inflation outlook is subject to uncertainty in

global oil prices

Brent Global Oil Price

USD per barrel Trajectory of domestic headline inflation
80
will be dependent on the future trend in
70 global oil prices which remain highly
uncertain
60

50 The uncertainties in global oil prices arises

mainly from:
40
Possible extension of OPEC's agreement on
30
the cut in crude oil production
20
Recovery in the global growth
10 Geo-political tensions
0
Jul-15

Jul-16

Jul-17
May-15

Nov-15

May-16

Nov-16

May-17

Nov-17
Sep-15

Sep-16

Sep-17
Jan-15
Mar-15

Jan-16
Mar-16

Jan-17
Mar-17

Source: Bloomberg and Bank Negara Malaysia

24
Monetary policy will focus on supporting the sustainable
growth of the economy while maintaining price stability
OPR of 3.00% is currently consistent with steady growth and stable inflation
The MPC will continue to assess balance of risks on outlook of domestic growth and inflation

Baseline: Sustained domestic demand supported by more

GDP growth positive contribution from external sector
4.3 4.8% Risk factors: Threats of protectionism, geopolitical
developments, cautious sentiments, financial disruptions

Baseline: Cost-driven inflation primarily due to pass-through

impact of higher global oil prices on domestic fuel prices
Inflation
3 - 4% Core inflation to increase modestly
Risk factors: Developments in global oil prices and higher
spillovers from cost-push inflation

25
 Updated

Financing to the private sector remained healthy with

relatively stable borrowing costs
Broad-based loan disbursed across all economic Private sector continue to benefit from stable
sectors for both businesses and households financing costs

RM bn Gross Financing* % Interest Rates on New Loans to the

1400 7 Private Sector
1,209 1,225
1,194 Long-run average**
1200 1,124 1,084
6
1000 Jan-17
926
842 5
800

600 4
400
3
200
184 220 232 239 273 268
151 2
0
Overall Households Overall SMEs Large
2010

2011

2012

2013

2014

2015

2016

private businesses Corporate

sector (5y AAA
Funds Raised via Capital Markets PDS)
Loan Disbursements by the Banking System and DFIs
Loans Disbursed to SMEs
*Comprises gross loans from the banking system and DFIs, and gross funds raised from the capital markets
**Average (Jan 2002 Dec 2016)
Source: Bank Negara Malaysia

26
Malaysias macroeconomic fundamentals remain
supportive of growth
Diversified sources of growth Diversified export market Stable labour market conditions
Malaysia GDP by Economic Sectors (2016) and product Employment Wage Growth
% share of GDP Product Market (million) (%)
54
% share of exports % share of exports 14.2
17 20 ROW 4.9
Commodities 4.2
10 NIE
23 46 13 PR China
Non-E&E 14.1
29 ASEAN
9 8 5
E&E 37 28 G3
Services Mfg. Mining Agri. Const. 2015 2016p
2016p 2016p 2015 2016p

Conducive investment Current account balance Deeper markets and

destination for foreign investors reflects strong investment strong financial buffers
% of
FDI Inflows by Source Country (2016) Current Account Balance nominal Size of Bond Market
% share of total FDI inflows % of GNI GDP and Banking Capital Ratio %
36 150 20
16.5
16 100 11.8
9 9 10
8 10.4 50 95.3
5 5 55.5
4 3
2.1 0 0
1998 2016p
HK SG JP CN US NL UK KR CH 2010 2012 2014 2016p Size of Bond Market
Capital Ratio* (RHS)
* Capital ratio in 98 refers to the risk-weighted capital ratio; Ratio in 2016 refers to total capital ratio, reported based on Basel III Capital Adequacy Framework adopted since January 2013;
Note: HK= Hong Kong, SG= Singapore, JP=Japan, CN=China, US=United States, NL=Netherlands, UK= United Kingdom, KR=South Korea, CH= Switzerland
Source: Department of Statistics, Malaysia and Bank Negara Malaysia p preliminary

27
The economy remains resilient with the ability to manage
potential downside risks to growth
1 The Malaysian economy to expand by 4.3 4.8% in 2017, driven by domestic demand

2 While headline inflation to range between 3.0 4.0%, underlying inflation is expected to
increase only slightly

3 Risks to growth emanating from global and domestic fronts

Upside: Positive spillovers from expansionary policies by major economies
Downside: Slower global growth emanating from global policy uncertainties, volatility in capital flows
and exchange rates, and weaker consumer and business sentiments

4 Malaysias strong fundamentals to provide resilience in confronting these risks

- Diversified economic, trade and FDI structures
- Stable labour market conditions
- Current account surplus and ample international reserves
- Strong financial buffers with well-capitalised banking system and developed capital markets
- Policy flexibility

28
Bank Negara Malaysia: Annual Financial Statements 2016

Financial position remained strong in 2016:

Total assets of BNM amounted to RM450.98 billion with
International Reserves of RM423.9 billion (USD 94.5 billion)
Net profit of RM6.48 billion

Dividend of RM2.5 billion to the Government

29
Bank Negara Malaysia: Annual Financial Statements 2016

Statement of Financial Position Income Statement

(as at 31 December 2016) (Year ended 31 December 2016)
RM billion RM billion
460 500
450 RM billion
450
400
440 350
Total Income 9.02
300
430
250
420 200 Less:
410 150
100 Recurring Expenditure 1.12
400 50
390 0
Assets Liabilities and Capital Development Expenditure 1.37
Other Assets
Capital
Land and Buildings Taxation 0.05
Liabilities
Loans and Advances
Deposits with FIs
Total Expenditure 2.54
MGS
SDR
Net Profit 6.48
IMF Reserve Position
Gold and Foreign exchange

30
Laporan Kestabilan Kewangan
dan Sistem Pembayaran 2016

31
Laporan Kestabilan Kewangan
dan Sistem Pembayaran 2016

32
Financial stability was sustained in 2016
Banking Sector (%) 2015 Jan 2017
Capitalisation
Common equity tier 1 ratio 13.3 13.1
Total capital ratio 16.6 16.9
Domestic financial stability was sustained in
Excess capital buffer (RM bn) 124.3 131.0 1
2016 amid heightened financial market
Profitability
Return on assets 1.3 1.3 volatility
Return on equity 12.3 11.6 Sound financial institutions and orderly
Asset Quality financial market conditions preserved
Net impaired loans ratio 1.2 1.2
Loans in arrears (1-<3 months) 2.2 2.2
Insurance/Takaful Sector (%) 2015 2016 Stable outlook for financial stability in 2017
2
Capitalisation Financial institutions remain resilient to any
Capital adequacy ratio
Insurance 251.6 248.5 severe macroeconomic and financial
Capital adequacy ratio shocks, supported by strong financial buffers
Takaful 191.6 205.3
Capital buffer (RM bn) 45.9 47.9
Profitability
Profit (RM bn) 14.7 16.6
Claims ratio 60.2 56.0

Source: Bank Negara Malaysia

33
Healthy banking system liquidity positions, supported by
diversified funding sources
Sufficient liquidity buffer to withstand Increased contribution of equity and long term
potential shocks debt instruments to support asset growth

RM billion Stock of HQLA % RM billion

800 Net cash outflows 140 300 Long-term borrowing Capital
Liquidity Coverage Ratio (RHS) 269

124.8 250
CAGR (2008-2016):
12.5%
120 200 178
481.3

400 385.7 150

115
106
100 100
73

50 43

0 80 0
Jun Sep Dec Mar Jun Sep Dec 2008 2012 2016
2015 2016

Source: Bank Negara Malaysia

34
Household debt accumulation more in line with asset and
income growth
Growth in debt converged towards Lower share of debt to vulnerable borrowers
financial assets and income growth

RM billion Annual change (%) % of total household debt DSR (%)

4,000 Financial assets: 5.4% 14 50 40

12
40
3,000 Debt: 5.4% 30
10
Income: 5.5% 30
8
2,000 20
6 20
4
1,000 10
10
2

0 0 0 0
2012 2013 2014 2015 2016 Bottom
Bottom 20-40 40-60 60-80 Top
Top 20
20
20
20
Debt Financial Assets Debt (% of total debt)
Debt (RHS) Financial Assets (RHS)
Median DSR (RHS)
Income (RHS)

Source: Bank Negara Malaysia and Malaysia Employers Federation

35
Continued access to house financing, especially for first
time home buyers
Growth in financing mainly driven by 72% of housing loan borrowers are first time
sustained demand for affordable housing home buyers of houses priced <RM500K

RM billion Annual change (%) % Annual change, %

600 16 100 5

477.3
80 4
12
400
60 3
9.2 8 Houses
40 2 priced
200 < RM 250K,
5.3p mainly first-
4
time home
20 1 buyers

0 0 0 0
2013 2014 2015 2016 2013 2014 2015 2016
Outstanding financing < RM500K RM500K - RM1M
Annual change (RHS)
> RM1M 2 HLs (RHS)
MHPI - annual change (RHS)
3 HLs (RHS)
p preliminary
Source: Bank Negara Malaysia

36
Housing affordability remains low, amid slow pace of
new supply in affordable segment
Houses are unaffordable in major Higher-priced property forms Most unsold* houses are in the
urban centres most of new launches higher-priced segments
RM 000 % share
100
700 10
600 19
600 560 33 37 Affordable segments,
22
470 75 20.9%
500
33
400 335 50
42 36
300
68
200 25 47
100 26 27
0 0
KL City

Petaling

Johor Bahru

Georgetown

2008 2010 2012 2015

-2009 -2011 -2014 -2016 Higher-priced segments, 79.1%

Above RM500,000
RM250,000-RM500,000
Estimated affordable house price Below RM250,000
Median House Prices (actual)

*Includes unsold properties that were completed and under construction

Source: NAPIC, DOSM and BNM estimates. For details, refer to 2016 AR Box Article Demystifying the Affordable Housing Issue in Malaysia

37
Measures to encourage prudent financial discipline
remain important, as signs of risk are emerging
Increase in impairment and delinquency in recent Existing measures still needed but
period, particularly for housing more can be done
Annual change, %
10
6.5

5
6.3 1 Raise productivity and income
1.8
0 Reduce unproductive debt through debt
2 rationalisation and consolidation
-5
Accelerate supply of affordable housing
-10 3 and rental schemes

-15 Ensure efficient allocation of affordable

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4
2015 2016 housing units to eligible target buyers

Delinquent household loans

Impaired household loans
Impaired housing loans

Note: Delinquent loans refer to loan-in-arrears of between one and three months
Source: Bank Negara Malaysia

38
Corporate sector borrowings continue to support
domestic economic activities
Financing activities broadly in line with Higher corporate debt driven by new
domestic economic activities bond issuances
% of GDP
Quarterly change, %
8 150
131.7%
105.5% 107.9%
6
99.6% 97.9%
4 100

0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 50
-2
2014 2015 2016
-4
0
-6 1998 2013 2014 2015 2016

GDP Business Sector: Domestic financing

Domestic Loans to GDP
Domestic corporate bonds to GDP
External debt to GDP

Source: Bank Negara Malaysia

39
Debt servicing capacity of businesses remained sound
Low leverage, with debt servicing Debt-at-risk within Impaired and delinquent loans
capacity and liquidity sustained manageable levels broadly low and stable
above prudent thresholds
%
% Times %
50 15 30 4
43.6
40
3
10 20
30
9.4
3.6 2
20
5 10
4.3
1
10 4.6 3.3 13.2
1.2 7.0
4.2 4.4
0 0 0 0
2012 2013 2014 2015 2016* EMEA Malaysia Latin Emerging 2012 2013 2014 2015 2016
America Asia
(ex- Business: Impaired loans
Debt-to-equity ratio Malaysia)
SME: Impaired loans
Interest coverage ratio (RHS) Business: Delinquent loans
ICR 1 1 < ICR 2 2 < ICR 3
Cash-to-short-term debt (RHS) SME: Delinquent loans

*For 2016, data as at first nine months

^Debt-at-risk is measured as the share of debt borne by firms with an interest coverage ratio (ICR) of less than two times
ICR= Earnings before interest expense, taxes, depreciation and amortisation / interest expense
Source: Bank Negara Malaysia, International Monetary Fund

40
Overseas operations of domestic banks remain
financially sound amid continued regional expansion
Net external liabilities largely driven by LIFBs, while Continued earnings resilience and sustained asset
DBGs continue to maintain net external assets quality of DBGs overseas operations

RM billion RM billion %
300 Assets 100 30
%
150 4.1 50 10

0 0 20 Max
175
-150 -50
50 Median
5
-300 100
-100 10 Min

-450 Liabilities 114 150

-150
2012 2013 2014 2015 2016
0 0
Others Debt securities 3Q 2015 3Q 2016 3Q 2015 3Q 2016 3Q 2015 3Q 2016
Securities under custody Loans Capital ratio Return on equity Gross impaired
Capital funds Deposits & nostro loans ratio (RHS)
Interbank Banking system net exposures
Net exposures of LIFBs (RHS) Net exposures of DBGs (RHS)

LIFBs: Locally incorporated foreign banks; DBGs: Domestic banking groups

Source: Bank Negara Malaysia

41
Continued regional expansion expected under ASEAN
Banking Integration Framework

Presence in 15 countries
1
worldwide

Bilateral arrangements with

2
Indonesia and other ASEAN
countries pave the way for
further regional integration

3Q 2016
2012

Assets (RM bn) 306.7 559.3

Source: Bank Negara Malaysia

42
 Additional
R
Insurance and takaful sector continued to record
positive growth
New life/family takaful premiums In the general sector, growth in fire Insurance and takaful assets
driven by growth in endowment premiums offset slower growth in expanded, with a shift to higher
and group term policies motor & MAT premiums yielding corporate bonds and equity

RM billion RM billion % RM billion

%
18 12 30 12 300
16
10
14
12 8 20 8 200
10
6
8
6 4 10 4 100
4
2
2
0 0 0 0 0
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2007 2010 2013 2016
Others Others Total assets
Medical and health Motor Corporate Bonds
Temporary Marine, aviation and transit MGS
Endowment Fire Equities
Whole life Gross premiums growth (RHS) Cash and deposits
New premiums growth (RHS) Others

Source: Bank Negara Malaysia

43
 Additional
R
Greater focus on strengthening domestic underwriting
capacity and reducing the protection gap
%
General Insurance/Takaful Retention Ratio

100 Overall
1 Domestic underwriting capacity for more
80
complex & non-traditional risks remains
60 underdeveloped, mainly in the MAT sector
Marine, aviation and transit
40

20

0
2007 2010 2013 2016

Life Insurance/Family Takaful Penetration Rate

%
2 Insurance penetration plateaued, with
60%
60 significant protection gap

50
50% Number of policies per capita Only 35% of the population have at least 1 life
insurance/family takaful policy, with average
40
40% sum assured of RM61k per capita
Initiatives being pursued to expand the
30
30% Number of policies per capita
(without multiple policies) provision of simple & affordable products,
20
20%
leveraging on technology & alternative
2011 2012 2013 2014 2015 channels to enhance access
Source: Bank Negara Malaysia

44
 Additional
R
Sustained demand for Islamic financial services, with
encouraging growth in investment intermediation
Composition of Investment Accounts out of Increasing share of investment accounts as a new
Total Islamic Deposits & Investment Account (IDIA)
source of funding for Islamic banks, facilitated by:

Investment Account Framework and Implementation

Guide
87.8% regulatory expectations on product structuring,
91.4% 49.3% operational management & business conduct
protection of investors
RM36.3 bn
12.2% recognition of distinct risk characteristics compared
8.6% to Islamic deposits
50.7%

RM37.4 bn Investment Account Platform (IAP)

Operationalised in April 2016 by a consortium of
6 Islamic banking institutions
Raised RM20 million in new funding to date
Combines wakalah or mudarabah with debt based
contracts (e.g. tawarruq)

Source: Bank Negara Malaysia

45
 Additional
R
Islamic finance poised to assume a larger role in
value-based intermediation
Diversifying measures of effective intermediation in
realising socio-economic impact of Islamic finance 1 Development of Corporate Value Intent
framework and value-based scorecard
Current Measures

Financial Institutional Delivery Profitability

Deepening Strength Channels Promote high quality disclosures on intent,
Cost
Contribution Range of Efficiency strategy and performance of business
to GDP Products &
Services
Broader dimensions of performance
Growth
measurement to accelerate value creation
for the economy, shareholders and wider
community
Institutional Inclusivity
Sustainability Efficiency
Future Measures

Quality and Diversity

2 Waqf and sadaqah applications in financial
Impact and Institutional Business Innovation products to deliver positive socio-economic
Value Dynamism Models Technology
Creation and Agility
impact
Entrepreneurial Adoption
Mindset Cash waqf arrangements
Community
Debit card with waqf features
Empowerment
Banking charity accounts

46
 R
Regulatory measures taken to further strengthen
financial system resilience and integrity
Corporate Consumer
Capital and
governance and protection and AML/CFT
liquidity
risk management financial literacy

Greater emphasis on Smooth transition to Proposed enactment of Strengthened compliance

sound risk culture and higher Liquidity Consumer Credit Law with international
risk-aligned Coverage Ratio Financial Education AML/CFT standards
compensation Implementation of Network established to Enhanced cooperation to
Strengthened ICAAP for takaful drive the national combat terrorism
requirements for operators financial education financing threats
independent boards strategy
Enhanced operational Operationalisation of the
and credit risk Ombudsman for
management standards Financial Services
Improvements to stress
testing practices

Supported by supervisory and enforcement actions

47
Stable outlook for financial stability in 2017

Stable labour market conditions, continued economic growth and

sound lending and risk management practices expected to support
asset quality

Ample domestic liquidity to remain supportive of financial

intermediation

Banks and insurance companies are well positioned to manage

transition to strengthened regulatory standards and more
competitive environment

Effects from measures to deepen and broaden domestic foreign

exchange market will contribute to orderly market conditions

Source: Bank Negara Malaysia

48
Implementation of the Financial Sector Blueprint is on
track with further priorities identified
41% Completed 44% On Track 6% Yet to 9% Under
Commence Review

Key Initiatives Implemented New/Expanded Priorities

Strengthened and new legislation (i.e. FSA

2013, IFSA 2013 and DFIA 2002) 1 Evolving a vibrant FinTech ecosystem

Implementation of Payment Card Reform

Framework Developing more market-based funding
2 solutions
Financial Ombudsman Scheme
Developing deep and liquid financial
3 markets to manage risk exposures
Agent Banking Framework
Enhancing the role of
4 development financial institutions
ASEAN Banking Integration Framework

Expanding insurance and takaful to

5
Reforms under the motor and LIFE address protection gaps
Framework

49
Development of alternative finance to meet diverse
financing needs of new economy
SMEs Using Alternative Financing
% of SMEs
7
1Q 2016 Policy priorities moving forward
6
3Q 2016
5

4 Strengthen institutional arrangements

3
Improve data on alternative finance and
2 the innovative economy
1

0 Establish a unified collateral registry

Angel investors
Leasing

Pawnbroker/ Ar-Rahnu

Factoring

Venture capital
Cooperatives

Licensed money lenders

Investment Account Platform

Crowdfunding
Promote the development of open
Application Programme Interfaces

Raise SMEs awareness on alternative

financing avenues.

Source: SME Corporation Malaysia

50
 R
Providing a conducive regulatory environment for
fintech innovation

Solutions applied through

Regulatory Sandbox

Product Currency
Aggregator Exchange 1 The Regulatory Sandbox
Framework allows innovative
Comparison of Peer-to-peer
insurance currency fintech solutions to be tested
product exchange safely in a live environment
model

2 Further initiatives planned to

facilitate open banking models,
Remittance Artificial common KYC utilities,
e-money Intelligence distributed ledger applications
transfer to Digital and cloud computing
parties across identification
countries verification &
Chatbot

51
Motor insurance reform on track
From 1 July 2016 From 1 April 2017 From 1 July 2017

Pricing of motor
New products and add-on comprehensive and third
covers introduced by insurers party fire & theft products will
be liberalised to reflect risks
Nation-wide awareness campaign to
Flexibility for insurers to More equitable and competitive
inform and empower consumers
introduce new motor products at pricing based on risk
market-based pricing
Important information will be disseminated Improved incentives for safe
Additional options for via print and social media, online, agents driving and prevention of
consumers e.g. Guaranteed and customer support channels vehicle theft
Asset Protection product
Empowering consumers to compare
products, understand policy options and
be aware of price drivers

Public encouraged to visit

www.bnm.gov.my; www.piam.org.my; or
www.malaysiantakaful.com.my for more
information

52
 R
Increasing momentum in migration to e-payments

Sustained decline in cheques with increasing use of Accelerated expansion of payment card
electronic fund transfers acceptance points

Transaction Volume for Cheques, IBG and Instant Transfer Number of Point-Of-Sale (POS) terminals
Million Number (000) Average growth:
20 350 18.6% p.a.

Thousands
Cheques 300 Average growth:
15 6.5% p.a.
250

IBG 200
10

150

5 Instant
100
Transfer

50
0
M J S D M J S D M J S D M J S D -0
2013 2014 2015 2016
2011 2012 2013 2014 2015 2016

Source: Bank Negara Malaysia

53
 R
Fostering stronger payment card security

Migration to PIN-based transactions

Jul 2015 Jan 2017 1 Jul 2017

Enhancement of payment card infrastructure Transition period Mandatory PIN verification

Migration from signature to PIN verification for 6-month period to All payment card
payment card transactions at POS terminals adapt to the usage transactions at POS
of PIN at POS terminals must be
terminals completed with PIN

Cardholders and merchants are urged to adopt the use of PIN today, before PIN is made
mandatory for all payment card transactions effective 1 July 2017

54
End of Presentation

55
End of Presentation

56