Thursday, March 12, 2015

How stressful is Malaysia's stress test?

The IMF has published Bank Negara's parameters for stress testing a while back.  

A short primer, is that the stress tests are run for two scenarios.  One, a sharp drop to about -2 percent and then a V-shaped recovery.  Another is a slower drop to just below 0 percent GDP, but followed by a slower paced recovery.

I'm glad to say that Bank Negara follows Basel's baseline -2 percent GDP adverse scenario, which will likely be what will happen when Malaysia puts institutes the GST.  But the tests are not stressful enough.  I'd like to see a scenario where S1 drops to -2 percent and then slowly recovers because that is what will likely happen when Malaysia institutes the GST.  

If the world economies suffer, the stress tests will be a shambles.  Actually Malaysia should include the effects of GST in the oncoming year as a baseline scenario (shift the y axis up by 5 percent).  Then we will truly have a valid stress test.  This stress test I repeat is a JOKE.  The only way the stress tests are valid is if the world economy doesn't slow down!

Furthermore, in adverse scenarios, the smaller banks would likely need to re-capitalization!  stay away from the smaller banks, they will need cash calls in the oncoming year.  That is almost a 90 percent chance of occurring under the adverse scenarios.  And we are going to get the adverse scenario no matter what due to our GST.




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