THE MODERATING EFFECT OF NON-PERFORMING LOANS ON THE RELATIONSHIPS BETWEEN MACROECONOMIC DRIVERS AND FTSE KLCI MOVEMENTS

Abstract

This study investigates the moderating effect of Non-Performing Loans (NPLs) on the relationship between Real Interest Rates (RIR), the Industrial Production Index (IPI), and movements of the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FTSE KLCI) from 2008 to 2023. Anchored in the Credit Risk Transmission Theory, it employs a quantitative panel data approach using the Fixed Effects Model to examine how credit risk influences the transmission of macroeconomic shocks to the capital market. The study is timely as Malaysia faces rising NPLs in the post-pandemic period, particularly in SMEs, construction, and retail sectors, raising concerns over banking stability. Volatility in real interest rates, driven by Bank Negara Malaysia’s OPR hikes to combat inflation and support the ringgit, has disrupted investment behavior and increased market uncertainty. Meanwhile, the Industrial Production Index has weakened due to contractions in manufacturing and export-dependent sectors, reflecting global demand challenges. These macroeconomic pressures have contributed to the underperformance of the FTSE KLCI compared to regional peers, highlighting its sensitivity to both global and domestic imbalances. Findings reveal that NPLs significantly amplify the effects of RIR and IPI on FTSE KLCI movements, emphasizing the importance of financial sector health in emerging markets. The results contribute to the expanding literature on macro-financial linkages and offer practical implications for monetary authorities, banks, and investors. In line with the Sustainable Development Goals (SDGs) and Malaysia’s Vision 2030, this study stresses the need for effective NPLs management and stronger macroprudential coordination to ensure capital market resilience and long-term economic stability.