Broad money in circulation moderated in the first month of the year, with M3 posting a 6.8% YoY growth compared to 8.1% seen in December. M2 also moderated slightly, to 7.2% (December: 8.4%) and M1 to 12.6% (December: 13.0%). On a monthly comparison, M3 grew by 0.9% MoM, M2 by 0.8% and M1 by 1.3%.

The overall moderation in the growth of the money supply was largely the result of smaller net claims on government (21.7% YoY from 44.0% previously) and a moderation in net foreign assets (1.9% YoY from 2.5% previously). However, credit extended to the private sector remains robust, as the claims to the private sector expanded by 10.5% from 9.9% previously. This is sentiment of on-going preparations and spending amidst the Lunar New Year.

As we had expected, the new year bid welcome to lesser net foreign assets, primarily due to the net effect of the QE tapering by the US Federal Reserve. Currently, bond purchases have been reduced to US$65b from US$75b at the start of the year. According to the Fed’s new chairman, Janet Yellen, the Central Bank is more likely to keep trimming asset purchases on the belief that growth in US economy is on the uptrend.

However, weaknesses seen in recent data has been faulted by extreme weather conditions (from artic-like weather in the north and Midwest to draughts and flash floods in the south). Employment, one of the major indicators for policy decisions, has been particularly hard-hit with less than 200,000 jobs added in December and January combined, well below expectation. This opens up the possibility that the pace of the tapering could be pulled back, maybe at a lesser degree of US$5b instead of US$10b or a larger gap between each taper.

On another note, loans growth in January expanded by 11.0% YoY from 10.6% previously. In detail, there was a 23.3% increase of loans for the purchases of securities (December: 221%) and notably, a 545.5% growth (December: 550.8%) for loans for the purchase of consumer durables. Loans for the purpose of purchasing residential property moderated slightly, to 13.4% (from 13.5%) whilst loans to purchase passenger cars moderated to 6.0% (December: 6.6%) due to heavy discounting as well as many opting to wait for newer models and new pricing under the NAP. On the business end, the year was off to a good start, with loans for the purpose of working capital expanding by 10.2% (December: 8.9%) and construction by 11.7% (December: 8.9%).

This can be seen clearer on a sector basis, where loans for financing, insurance and business services remains robust at 16.2% (December: 16.3%), the manufacturing sector at 2.8% (December: 1.8%), construction at 14.0% (December: 12.0%) and real estate at 14.9% (December: 13.5%). However, loans towards wholesale, retail, restaurants and hotels moderated to 7.3% (December: 11.1%). The loans towards electricity, gas and water supply increased by a whopping 40.3%, largely the result of an increase in the electricity tariff that came into effect in January. Loans to the household sector moderated slightly to 11.9% from 12.0% previously.

Outlook

The year kicked off to a moderate start when it comes to circulation of credit, with hearsay of a temperate expansion especially on the consumer end in the 1H14, due to a pinch from inflation as a result of fiscal consolidation. However, with the help of BR1M, students and those in the lower income group will have some reprieve from escalating prices and this will help in partly mitigating a moderation of credit growth. However, it will not be enough to prompt higher growth and with implementation of various macro-prudential measures introduced by BNM to curtail speculation in the property sector and to control the rising household debt, the overall outlook on consumption seems to be leaning towards a more unfavourable end. Hence we believe that BNM may keep the OPR at its current level of 3.00% for the whole of 2014, so as not to further hinder growth that will be mitigated by belt-tightening following the proposed implementation of Goods and Services Tax in April next year.

Source: Kenanga