Monetary  Conditions

• Monetary conditions improved in June with annual growth in broad money (M3) and narrow money (M1) edging up to 6.0% and 9.5% respectively (May: +5.7% and +8.7%). Loan disbursements surged by 12.9% yoy (May: +4.9% yoy), the fastest growth since Nov 2014. However, foreign reserves fell by US$0.9bn to US$105.5bn as at end-June after rising for two months to US$106.4bn as at end-May.
• The improvement in June monetary indicators suggests that pullback in economic growth may have bottomed and started to reverse course. Overall, we maintain our 2Q GDP growth estimate of 4.3%. We still expect real GDP growth to normalize in 3Q and back to normal growth path in 4Q, concluding the year with an average 5.0% growth.

Loan & Deposit

• Household loan-deposit growth gap narrowed further in June, suggesting that risk of financial imbalances was further contained. Household loan growth slowed down to 8.7% yoy (May: +9.0% yoy), the lowest expansion since May 2008, while that of household deposits climbed up to a 20-month high of 7.1% yoy (May: +6.6% yoy). We anticipate further narrowing of household loan-deposit growth gap ahead, largely premised on continuing prudent lending practices, competitive deposit rates and expectations of prolonged policy rate pause.
• Outlook for the housing sector remains subdued, justifying by persistent weaknesses across forward loan indicators. Growth in both loan applications and loan approvals for the purchase of residential properties remained in the negative territory for the fi fth month (-7.8% yoy and -7.9% yoy respectively; May: -15.9% yoy and -21.3% yoy). We see lower odds for housing market to make a big turn in the near term as long as existing hurdles are still in place (i.e. prudent lending guidelines and subdued sentiment).
• Owing to a more cautious business confidence and rising financial volatilities, business loan growth slowed to 8.7% yoy (May: +9.1% yoy) while net PDS issuance dipped to RM0.5bn after hitting 5-month high of RM4.1bn in May.
• Since the heightened external woes have yet to significantly undermine domestic growth outlook, we see no reason for BNM to cut its OPR at this juncture. Inflation outlook remains manageable despite GST imposition while risk of financial imbalances remains contained.

Liquidity

• Excess liquidity shrank further to decade low of RM158.6bn as at end-June (May: RM173.9bn) due to continued foreign capital outflows. Besides, overall deposit-loan gap also narrowed for the third month to RM296.3bn (May: RM304.3bn). That said, banking systems remain flushed with liquidity to support credit activities going forward.
• Foreign investors sold Malaysian equities for the second month in Jun (-RM3.1bn; May: -RM2.5bn) as appetite shifted to debt securities (+RM3.5bn to RM211.9bn; May: -RM7.9bn). Still, MGS was the most favourable debt instrument, posting the biggest increase in 13 months by RM8.6bn (May: +RM0.6bn) and offsetting a further reduction in BNM monetary note (-RM3.7bn; May: -RM7.1bn).

Source: Hong Leong Investment Bank Research - 3 Aug 2015