Monetary Conditions

• Monetary indicators weakened in June. Growth in broad money supply (M3) and narrow money supply (M1) moderated to +1.9% yoy and +0.9% yoy respectively (May: +2.2% yoy; +1.2% yoy). Loan disbursements declined by -9.6% yoy (May: +6.9% yoy). BNM foreign reserves fell marginally by US$0.1bn (May: +US$0.3bn) to US$97.2bn.

• The deterioration in monetary conditions points towards a weakening momentum in the second quarter. We expect growth in 2Q 2016 to be weaker at 4.0% (1Q 2016: 4.2%). We maintain our 2016 GDP growth forecast at 4.2%.

Loan & Deposit

• Household loan-deposit growth gap remained stable, as deposit growth moderated to +4.4% yoy (May: +4.7% yoy) amid marginal deceleration in household credit growth for the 15th consecutive month (+6.0% yoy; May: +6.2% yoy).

• Overall deposit growth deteriorated to -0.5% yoy (May: -0.4% yoy), following a renewed contraction in business deposits (-0.8% yoy; May: +0.6% yoy) and foreign deposits (-1.2% yoy; May: +0.1% yoy). Despite this development, we opine that liquidity condition has not reached a stressful level to trigger further need for SRR cut.

• Loan indicators for the passenger car and housing sector showed renewed weakness. Loans applied for passenger cars recorded a marginal decline of -0.8% yoy (May: +0.5 yoy). Loans applied for residential properties also reverted to a contraction of -7.1% yoy (May: +7.1% yoy). Meanwhile, loans approved for residential properties diminished at a faster pace of -20.1% yoy (May: -11.2% yoy). However, loans approved for passenger cars fell at a slower pace (-8.1% yoy; May: -14.0% yoy).

• While growth in business loans moderated for the tenth month to 4.2% yoy (May: +4.5% yoy), the level of loans disbursed increased during the month. Net PDS issuance continued to rise for the third consecutive month to RM4.7bn (May: RM3.5bn) in tandem with higher awards of construction projects.

• We expect BNM to cut the OPR by another 25bps should growth momentum remain weak in the 2H 2016. While we believe income measures and infra projects will support growth in 2H 2016, there is a risk that the slowdown in external sector may weigh on overall GDP growth. Hence, we see a high probability of a rate cut in November 2016.

Liquidity

• Excess liquidity in the banking system remained steady at RM147.3bn as at end-Jun (May: RM146.8bn) after recording a bottom of RM121.9bn in Aug-15. Overall deposit-loan gap declined slightly to RM209.9bn (May: RM212.9bn).

• Foreigners continued to reduce their position in Malaysian equities, albeit by a smaller amount of RM1.8bn in June (May: -RM4.3bn) following global concerns.

• However, foreign holdings of Malaysian government debt securities rose by RM6.8bn in June to RM207.2bn (May: +1.6bn). Consequently, foreign holdings of MGS increased to a record high of 49.8% (May: 48.7%).

Source: Hong Leong Investment Bank Research - 1 Aug 2016