Monetary Conditions

Money supply growth was broadly stable in April, with M3 growth inching slightly higher to 6.0% yoy (Mar: +5.9% yoy). Meanwhile, M1 (mainly for transaction needs) continued to remain in double-digit expansion mode of 11.3% yoy (Figure #1). In April, loan disbursement growth remained high (+15.1% yoy; Mar: +15.6% yoy) while BNM reserves rose by US$1.0bn (Mar: -US$0.4bn), ending five consecutive months of decline.

The stable money supply expansion suggests that domestic economic activity continued to expand in April after a higherthan- expected 1Q14 GDP growth of 6.2% yoy. We maintain our 2014 full year GDP forecast at 5.5%.

Loan & Deposit

Household loan growth remained largely stable at 11.6% yoy while household deposit inched slightly higher to 6.7% yoy (Mar: +6.4%). The divergence between household loan and deposit growth remained large (Figure #3) and, if remained wide, could mean broad interest rates are no longer at equilibrium. BNM may need to step in to correct the impact of negative real interest rates to prevent structural change in consumer’s risk-taking behavior.

While loan growth for purchase of residential properties remained strong (+13.6% yoy; Mar: +13.6% yoy), loan application for such purpose continued to decline by 8.5% yoy (Mar: -10.0% yoy). We expect property measures (i.e. harsher RPGT, DIBS ban, etc.) will continue to exert some cooling effect on loan growth for the property sector.

Business loan growth stabilized at 8.6% yoy while the PDS market continued to record a sizeable net issuance of RM2.6bn in April (Mar: +RM3.9bn). We believe the soft patch in capital formation growth since the General Election has ended as evidenced in higher total financing for the business sector (eighth consecutive months of net fund raised in the PDS market).

With the stronger-than-expected 1Q GDP growth, we believe the case of an early rate hike is now justified. Moreover, domestic demand growth did not slow down as envisaged while the construction sector received more boosters primarily from the residential sector.

Reinforced by the hawkish MPS, we expect BNM to hike the OPR by 25bps in its July MPC meeting. We expect BNM to stay pat thereafter to assess the evolution of growth, inflation and financial data related to the property sector.

Liquidity

Excess liquidity in the banking system remained ample in April. Deposit-loan gap edged lower to RM297.4bn (Mar: RM297.7bn) (Figure #4). Meanwhile, surplus liquidity (New Liquidity Framework) also rose further to RM127.8bn as at end-Mar14 from RM123.6bn the prior month (Figure #6).

Foreign holding of debt securities rose by RM1.1bn to RM235.9bn (Mar: RM234.8bn) as higher foreign holding of BNM Islamic notes (+RM4.7bn to RM30.0bn) and Government Islamic issues (+RM0.8bn to RM4.5bn) were offset slightly by lower MGS (-RM5.3bn to RM135.5bn).

As percentage of total outstanding MGS, foreign holding of MGS declined slightly to 44.1% as at 1Q14 (end-2013: 44.9%; end-2012: 44.4%; end-2011: 36.9%).

Source: Hong Leong Investment Bank Research - 2 Jun 2014