HIGHLIGHTS

Broad money in circulation narrowed in November with M3 posting a 6.7% YoY growth compared to 7.9% in October. M2 growth also moderated, to 7.1% YoY from 8.4% whilst M1 grew at the same pace of 13.9% YoY. On a monthly comparison, M3 decreased by 0.8% MoM and M2 by 0.9% MoM, though M1 expanded by 0.7% MoM. The overall moderation in M3 expansion is the result of lower net claims on the Government (+44.7% YoY from 51.0%) and net portfolio outflows throughout the month, which can be seen in the net foreign assets growth (+0.2% YoY from 1.0%). Claims on the private sector also grew at a slightly slower pace of 9.1% YoY, from 9.3% in the preceding month. Year-to-date, M3 growth expanded at a 6.0% pace compared to 8.3% seen in the same period in 2012.

The situation on portfolio outflow will be a norm for a while yet for emerging economies, especially now that the Fed has finally decided to begin QE tapering. However, it could be a while yet before complete cessation on bond purchases. For now, the reduction will be gradual, starting with reducing monthly purchases to US$75b from US$85b come January and possibly further reduction spread out throughout the year. Even then, this is dependent on how the new head of Fed, Janet Yellen, feels about the performance of the US economy. QE could last even longer if recovery in the fundamentals of the US economy remains rocky. However, it is difficult to deny that there is in fact improvement in the US economy, making its assets and currency a favourable choice once again. The same could be said with parts of Europe. However, as seen in the last few months of continuous outflows, the Malaysian financial system functions unperturbed and we believe it has the capability to handle any backlash from QE tightening up ahead.

On the other hand, loans growth in November remained at the same pace of 9.9% YoY, a considerable chunk due to the purchase of residential property (+13.3% from +12.9%), a final hurrah before new macro prudential measures to reign in the property sector comes into play in 2014. Purchase of consumer durables continues to see considerable growth (+140.1% from 122.3%) whilst there was an increase in credit card loans growth (+5.8% from 4.8%), indicative of steady consumer demand heading into the year-end festivities. Loans for the purchase of passenger vehicles however, moderated slightly (+7.5% from 7.8%). The overall household sectors loans growth remains steady at 11.9%.

On a sector basis, loans to the construction sector increased by 9.5% (October: 8.7%) and should continue to see a steady growth on infrastructure projects under the ETP and Budget 2014. The loans for financing, insurance and business services also improved in November, increasing by 9.2% (October: 3.6%). Loans growth to the manufacturing sector remained at 1.7%, and is expected to advance further with general improvement in exports and domestic use. Loans to wholesale, retail, restaurants and hotels still remains strong at 11.5%, though slightly slower than 13.6% seen in October but should continue to remain steady in light of the festive and tourist season and improve further in 2014 on backing of Visit Malaysia year.

Outlook

So far, the 4Q13 is retaining its strength, justifying our estimation that it would be the best quarter of the year as we have estimated the economy to expand by 5.6%. Loans growth, particularly the consumer sector, would benefit on the tradition year-end spending. Going into 2014, however, loan growth may go on a descending trend particularly due to the various macro-prudential measures introduced by BNM to curtail speculation in the property sector and to control the rising household debt. Credit growth may also be hampered slightly by people’s reluctance to spend, the side effect of a raft of general rate hikes on electricity tariff, highway toll, and urban property assessment as well as possibly another round of fuel price increase this year. Hence, this is also why we believe that BNM may keep the OPR at its current level of 3.00% in 2014, so as not to further hinder growth that will be mitigated by belt-tightening. Conversely though, we do not leave out the possibility of BNM may consider raising the OPR some time in the 2H14 to rein in on a possible rush in consumer spending in anticipation of the GST that will be implemented in 2015 though we feel it less likely.

Source: Kenanga