Monetary Conditions

• Monetary indicators accelerated in March. Broad money supply (M3) grew at a faster pace (+4.5% yoy; Feb: +3.6% yoy) while narrow money supply (M1) growth accelerated (+9.2% yoy; Feb: +5.5% yoy). Loan applications moderated by +6.4% yoy (Feb: +21.2% yoy) while loan approvals continued to record strong momentum (+28.9% yoy; +Feb: +17.4% yoy). BNM foreign reserves increased by +US$0.4bn to US$95.4bn (Feb: unchanged at US$95.0bn).

• The improvement in monetary conditions in Jan-Mar 2017 suggests economic growth experienced a further uptick in 1Q 2017. For 1Q 2017, we estimate that GDP growth had improved to +4.6% yoy (4Q16: +4.5% yoy).

Loan & Deposit Liquidity

• Household loan-deposit gap improved slightly as deposit grew at a faster pace of +5.7% yoy (Feb: +5.5% yoy). Meanwhile, household credit turned around to record a slight improvement in March after moderating for 24 consecutive months (+5.2% yoy; Feb: +5.1% yoy).

• Overall deposit charted a faster growth of +3.2% yoy (Feb: +2.2% yoy) supported by turnaround in business deposit (+2.8% yoy; Feb: -0.6% yoy) and continued growth in household deposit (+5.7% yoy; Feb: +5.5% yoy).

• Loan indicators for consumer sector continued to recover in March. Loans applied for residential properties continued to grow strongly by +20.8% yoy (Feb: 34.5% yoy). Likewise, loans approved for residential properties grew by +20.1% yoy (Feb: +27.3% yoy). Meanwhile, loans applied for passenger cars moderated after growing strongly in the previous month (+6.8% yoy; Feb: +24.3% yoy), but loans approved for the similar sub-segment accelerated (+14.9% yoy; Feb: +6.4% yoy).

• Business loans grew at a faster pace of +7.2% yoy driven by expansion in manufacturing; construction; agriculture; transport, storage and communication sectors. Meanwhile, PDS issuance recorded a large increase of RM21.4bn (Feb: RM4.9bn).

Liquidity

• Excess liquidity in the banking system trended downwards slightly to RM136.4bn (Feb: RM139.6bn). However, other liquidity indicators, such as loan-deposit ratio showed an improvement for the second consecutive month (89.1%; Feb: 89.5%). Similarly, loan-to-fund and loan-to-fund and equity ratio also showed a slight recovery.

• Foreign holdings of Malaysian government debt securities recorded a significant decline of -RM24.1bn (Feb: -RM7.4bn). Consequently, foreign holdings of MGS fell further to 38.5% in March, returning to April 2012 level.

• On the other hand, foreigners continued to increase their position in Malaysian equities (+RM4.3bn; Feb: +RM0.9bn)

• We expect BNM to stay pat on the OPR given firmer growth and rising inflation outlook. Our GDP growth forecast of 4.5% is not expected to spur strong demand pressure given potential output growth of 4.5-5.0% as reported by BNM.

Source: Hong Leong Investment Bank Research - 2 May 2017