The bubbly debate

Let’s talk about bubbles. You know what I mean — the property bubble, stock market bubble, asset bubbles in general. It doesn’t matter which one. The fact is that the word “bubble” gives us goose bumps, especially if we make our living in the financial world.  

According to the experts, asset bubbles are a long way away from hitting Malaysia. But they have been giving policymakers in other countries headaches. Just look at China. The People’s Bank of China has finally given up on non-interest rate measures. The central bank finally jacked up the lending and deposit rates last week, after other measures failed to tame the blistering gross domestic product (GDP) growth and surging property prices, which have seen double-digit growth rates in recent quarters. The property market has remained stubbornly strong with prices continuing to defy gravity.  

Back in Malaysia, Ministry of Finance representatives upheld their view during the post-budget discussion that a bubble problem is still a long way away. News flow also suggests the same. And judging by the present macro statistics, they may be quite right. But why all the fuss about the possibility of a bubble? I will tell you why.

Three men and a woman from an international financial institution paid me a visit two weeks ago to discuss “economic scenarios” in Malaysia and in the region (frankly, I am seldom on their list). They were taking a trip around Southeast Asia to get a feel of the economic conditions in this region. They were concerned about bubbles, and here’s the kicker — they were hoping to hear stories about bubbles emerging in this region. Aren’t they worried about another financial crisis? They are concerned, of course, they said, but they think they would be able to ride on it before exiting with handsome profits. Now I understand why Paul Krugman labelled people like them “an extremely dangerous flock of financial sheep” in a New York Times article in 2001.

The fact that they are here reminds me of the days back in 1993, when a huge amount of liquidity came sloshing into the region’s banking system. Everything went up —  property prices, the stock market, inflation — you name it. There was so much money floating around that the efforts of central banks — not just in Malaysia — to quell inflationary pressure through tight monetary policies ended up luring more capital in, making liquidity management extremely difficult. We now know the end result — the stock market nosedived, property prices fell, and the economy went on a roller coaster ride.

The funny thing was that nobody recognised the existence of the bubble in any part of the world. Alan Greenspan is right — identifying a bubble is next to impossible. In Malaysia, former Finance Minister Tun Daim Zainuddin had to throw his most vocal advice about the feverish state of the stock market in January 1994. So let me, for the sake of argument, play the devil’s advocate: are we in a similar economic situation as the one that we now know was the building up of a bubble in 1993?

Well, the numbers tend to be rather mixed at this juncture. Property prices have gone up significantly, but only in certain places. The median prices for 1 to 1½-storey terraced homes in Kuala Lumpur have risen by about 14% on a year-on-year basis in the second quarter of this year. The stock market is back up to almost its highest level (the inflation rate at around 2%, however, is really not a major concern).

The stock market is mainly supported by index-linked counters. With price-earnings multiples above its post-Asian financial crisis historical average of 16 times, my guess is that it is driven more by liquidity than anything else.The fact that foreign investors have been flocking to the local bond market, pushing up the ringgit by 9.5% this year, also tells us that too much money is floating around looking for more decent returns than the markets in the US and Europe can give. The percentage of foreign holdings of Malaysian Government Securities hit almost 25% as at August 2009, the highest level before the most recent global crisis erupted. A similar problem emerged in Thailand, causing the government to re-introduce the 15% withholding tax as too much money is flooding its bond market.

There are other signs that make one feel a bit queasy. For instance, getting loans from banking institutions has never been so easy. Banks are practically begging people to take up all kinds of loans — personal, housing, credit card and so on. Loan growth to the household sector remains resilient, expanding at an average of 12% in recent months. My 20-year fixed mortgage loan at 5.77% now looks expensive by industry standards! Even loans to purchase land, which used to be approximately 60% of value, are being given for around 80% by many banks.  

On the issue of personal debt, banks are becoming aggressive in securing their market share. Limits on credit cards are automatically raised without any request from cardholders. Customers are frequently offered additional loans during festive seasons in case they need to spend extra. Debt can also be easily transferred to other credit cards if necessary. Not surprisingly, checks with the Credit Counselling and Debt Management Agency reveal that the agency receives a constant stream of people wanting to meet with their counsellors for advice on credit management and debt restructuring.

Compared with other countries, however, the situation in Malaysia still looks pretty benign at this juncture. For those who went through the 1993 bubble period, today’s conditions are nothing to shout about. Punters are still not having as much fun as they did back in the early 1990s. Only some segments of the property sector are enjoying their trips to the bank. Then again, one has to realise that bubbles are just like eczema — once they start to show up, they spread like wildfire. Let’s hope they won’t pop up unexpectedly.


Nor Zahidi Alias is chief economist of Malaysian Rating Corp Bhd. All views, opinions and information expressed herein by the author are his own, and do not necessarily reflect those of MARC.


This article appeared in The Edge Financial Daily, November 1, 2010.