Business seminar Malaysia’s central bank is urging the banks to slash their capital expenditure by $500 million a year in order to offset the impact of the central bank’s intervention in the stock market.
Key points:Malaysia is on track to record its third straight year of record net outflows, with the central banking board announcing that it will hold a cash crunch to fund the stock marketsThe central bank says the cash crunch will help boost the economy, but some are sceptical that it is a sustainable strategyMalaysian banks have been facing pressure for months to cut their capital expenditures, but they say they must do so in order for the economy to grow and recover.
The central banks central bank has been announcing plans to hold a series of cash crunch meetings in order “to boost the stock and financial markets” as it aims to help the country’s economy.
Last week the central banks head of policy, M.P. Tan Sri H.M. Abdul Latifuddin, said that the government will have to take drastic measures to boost the stocks and financial market in order that the economy grows and recovers.
The bank said it will “reduce its total capital expenditure and increase its reserve requirements”.
The bank’s capital expenditure target for the fiscal year starting July 1 is $5.1 billion.
The country’s central bankers own about 95% of the stocks listed on the S&P 500 index and more than 70% of its financial stocks.
It also has a substantial portfolio of bonds, which it holds in reserve.
In recent weeks, several banks have cut capital spending, including J.
P Morgan (JPM) and the Reserve Bank of Singapore (RBS).
However, many analysts are scepty of the bank’s claims that the central government will increase the pace of its cash crunch.
“The central government has been cutting the spending and now it is going to take it to the next level.
It is just a matter of when, not if,” said Peter Diamandis, chief economist at BNP Paribas.
Malaysians have been feeling the pain of the cash squeeze since mid-April when the country reported its third consecutive record of net outflow of foreign exchange and gold.
The Reserve Bank has since announced a $10 billion cash crunch, which will see banks freeze withdrawals and cut capital expenditures by $50 billion a year.
The stock market has also been hit by the financial crisis, with a record amount of capital outflows in May and June, with only a few banks reporting positive net flows.
But some analysts are confident that the cash shortage will not hurt the economy.
“In our opinion the money will just help the market,” said BDO Asset Management managing director J.W. Goh.
“This is the only way to bring down the money supply and also increase the demand for financial products, which is important for the banking sector.”
The central bankers plan to hold an additional cash crunch meeting on November 8.