- March’s broad money in circulation continued in the same pace as February, with M3 posting a 5.9% YoY growth. The same could be seen in M2, which expanded by 6.3% from 6.4% in the previous month. However, M1 saw a growth of 11.4%, faster than February’s 10.7%. For the 1Q14 of the year, overall money supply expanded by 1.3% compared to 2.9% seen in the same period a year ago.

- Despite the 33.3% (February: 23.6%) expansion in net claims to government, the reason behind this sedate pace in overall money supply growth is on account of a moderate 9.8% growth in claims on the private sectors (February: 10.1%), tantamount with winding down on spending from impact of increased inflation. Growth in the net foreign assets also moderated, to 0.9% from 1.8%. However, this could begin to see a turnabout in the near future as net outflows have begun to subside.

- More recently, though there has been a net inflow of financials, with the Fed continuing to reduce its bond and asset purchases (currently at US$45b) and expectation to maintain its pace of a reduction of US$10b each time, it may be a while yet before a rebound in net foreign assets. However, improving foreign trade receipts and FDIs would help to mitigate it. The level of net foreign buyers is still small and is dependent on the state of the US economy and recovery of the global economic platform, which is currently see-saw at best.

- Manufacturing in the US remains on the uptrend (manufacturing PMI sitting comfortable above the 50 point expansion level – last seen at 54.9 in April) and sharp rebound in retail sales (1.1% in March – an 18 months high). However, the sharp slowdown in the GDP (1Q14: 0.1% from 4Q13: 2.6%) does bring up questions of how true the recovery is. Though the consumer spending component saw a 3.0% growth, worries come from the 2.1% fall in business investment, paramount to ensure on-going recovery in the future. In Asia, there are questions over Japan’s ability to withstand the latest tax hike and the consequences of China’s internal restructuring and impact on its economy moving forward.

- Meanwhile, loans growth in March expanded by 10.2%, a slightly slower pace than the 10.7% seen in February. On a month-on-month basis however, loans growth improved by 0.5%, compared to 0.2% previously. Nonetheless, the pace remains sedate as macroprudential measures continue to cool off credit growth to reign in household debt and speculation.

- In detail, there was a 19.5% increase in loans for the purchases of securities (February: 22.7%) and notably, a 546.6% surge in loans for purchase of consumer durables (February: 559.3%). Loans for the purpose of purchasing residential property ticked up slightly to 13.6% from 13.5% previously whilst loans to purchase passenger cars moderated further to 5.0% from 5.5%, on account of stricter requirements for auto loans. On the business end, loans for the purpose of working capital moderated to 7.9% (February: 8.5%) but for use of construction increased by 13.9% from 12.0%.

- On a sector basis, loans for financing, insurance and business services grew by 15.6% (February: 15.1%) whilst the manufacturing sector saw a 1.4% growth, slower than 1.8% seen in the preceding month. Loans towards wholesale, retail, restaurants and hotels saw a 5.6% moderation, (February: 5.9%) and loans in the mining sector moderated to 18.7% from 23.6% previously. The loans towards electricity, gas and water supply remains unsurprisingly high, increasing by 46.7% (February: 45.0%) on account of an increased in the electricity tariff that came into effect in January. Loans to the household sector moderated slightly to 11.7% from 11.8% previously.

Outlook

- As the government remains committed to reduce subsidy along with credit control measures to control household debt and property speculation we expect credit growth to remain subdued in the 2H14. Hence, spending, particularly in the household and consumer sectors, is expected to be somewhat muted in 2014 due to the rising cost of living. Though inflation is on the high side, and above long term average, it is still within manageable levels and we reckon it may start to normalize within the next 6 to 9 months. This may take off some pressure from BNM to raise interest rates this year.

Source: Kenanga