(Mar 17): Malaysia unexpectedly eased its reserve ratio as part of moves to release 30 billion ringgit ($9.9 billion) of liquidity into the banking system as the economy struggles through a lockdown to contain the coronavirus pandemic.
Bank Negara Malaysia cut the statutory reserve requirement ratio by 100 basis points to 2%, effective Friday. It will allow principal dealers to use government bonds and Islamic notes of up to 1 billion ringgit as part of reserve requirement compliance for the next year.
The announcement comes weeks after the central bank lowered the overnight policy rate by a quarter-point to 2.50%, to counter risks from the virus to an already slowing economy.
“We have said before that the central bank is the only game in town, and that cannot ring more true now,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. In the wake of the statutory reserve move, a rate cut before the bank’s next scheduled meeting May 5 can’t be ruled out, he said.
The ringgit fell 0.8% to 4.4080 per dollar Thursday, tracking declines in regional currencies as demand for the dollar surged.
Bank Negara Malaysia’s move comes on a day of action for Asia Pacific central banks as coronavirus threatens to bring the global economy to a standstill. The Reserve Bank of Australia lowered its benchmark rate by 25 basis points at an emergency meeting, while central banks in Indonesia and the Philippines cut their benchmark rates by 25 and 50 basis points, respectively.
Malaysia already is struggling with the virus, which led the government to impose nationwide restrictions on movement. The country reported 110 new cases on Thursday, bringing the total to 900, the highest number in Southeast Asia.
The central bank has said first-quarter growth will be affected, especially in the tourism and manufacturing industries, prompting the government to introduce a 20 billion-ringgit fiscal stimulus package to cushion the blow.
“Judging by how the market has reacted to other major central banks’ action, it would be surprising to see market sentiment turning positive just because reserve ratios have been slashed,” said Mingze Wu, a foreign-exchange trader at INTL FCStone in Singapore. “You need stronger fiscal stimulus.”
The government expects the pandemic to cause as much as 17.3 billion ringgit of losses to gross domestic product, which suggests growth of 3.6%-4% this year, Prime Minister Muhyiddin Yassin said Friday. That compares with 4.8% growth estimated in the state budget, after last year’s expansion of 4.3% was the weakest in a decade.
The government has widened the fiscal deficit target to 3.4% of gross domestic product, from 3.2% earlier, to accommodate the stimulus package.