OVERVIEW

Broad money supply growth moderated in May, to 5.5% from 6.0%, whilst loans expanded at a slower pace of 9.7% from 10.0%. Consumption and lending remain sedate on inflationary pressures and macroprudential measures. However, a rebound is expected in the later half of the year as festivities and price normalization picks up demand, giving little justification for BNM to alter the interest rates, which have remained supportive of the economy.

- Money supply in circulation lessened in May, with M3 moderating to 5.5% YoY from 6.0% in April. The same could be said for M2 and M1, which grew at a slower pace of 5.6% (April: 6.3%) and 9.6% (April: 11.3%) respectively. Year-to-date saw overall money supply increasing by 2.6% compared to 4.6% seen in the same period in 2013.

- The main reason behind broad money moderation is due to a steeper 4.1% decline in net foreign assets (April: -2.4%), on account of favourability towards recovering developed economies, especially the USA. However, we don’t reckon that this will be a prevailing trend for long as the Malaysian capital market has been seeing net foreign buyers of late and we expect a similar trend in other Malaysian assets. There was also a moderation in net claims to the government, which grew at a slower pace of 41.0% compared to 57.2% in the previous month. Claims on the private sector expanded at the same pace of 9.9% as spending still remains somewhat subdued due to higher costs.

- Foreigners have continued to be net buyers in the financial market and have remained so for 10 consecutive weeks, as the Fed continues to reduce its bond and asset purchases (currently at US$35b) and is estimated to maintain the pace of US$10b each time. We expect there may be further inflow of capital to emerging markets, Malaysia included, in light of the interest rate cut and the introduction of a negative deposit rate by the European Central Bank, in hopes to encourage lending to battle against the threat of deflation. There is a possibility of futher stimulus measures in the near future and funds will need to seek other venues to gain higher yields. Rate differential alone would make countries like Malaysia favourable.

- Meanwhile, loans growth in May continues its moderating trend, expanding by 9.7% from 10.0% in the previous month. However, a monthly comparison saw a 0.7% MoM rise in gorwth, from 0.4% before. Pace will probably remain somewhat sedate as macroprudential measure continues to reign in household debt and speculation in the property market. The higher than average inflation from fiscal consolidation also keeps consumption, ergo lending, placid.

- In detail, there was a 16.8% increase in loan for the purchase of securities, a slower pace from 17.6% previously. Notably, loans for the purpose of purchase of consumer durables remains robust, increasing by 258.4% in May (April: 250.8%). Loans for the purpose of purchasing residential property remained at the same pace of 13.6% whilst loans to purchase passenger cars increased to 5.7% from 4.7%. On the business end, loans for the purpose of working capital moderated to 7.2% (March: 7.7%) whilst for the use of construction moderated to 12.5% from 13.8%.

- On a sector basis, loans for financing, insurance and business services moderated to 8.2% from 9.5% whilst the manufacturing sector credit growth moderated to 1.5% growth (April: 2.9%). Loans towards wholesale, retail, restaurants and hotels saw an improvement of 8.0%, from 5.4% in April and loans in the mining sector grew at a slower pace of 15.2% from 35.5%. The loans towards electricity, gas and water supply has tapered off, increasing by 17.3% in comparison to 45.1% previously as businesses have begun to get more accustomed to the higher electricity tariff that came into effect in January. Loans to the household sector edged up slightly to 11.8% from 11.6% previously.

Outlook

- Credit growth is expected to remain somewhat subdued this year, for better or worse, it at least shows foreign watchers and rating agencies the government and central bank’s commitment to tackle household debt and to reduce deficit. However, inflationary pressures have begun to lessen as prices in the market have started to normalize and demand should start to turn more robust, especially in light of festivities during the Eid season and year-end holidays. With little justification of an overheating economy, we still believe that BNM will not raise the interest rates just yet.

Source: Kenanga