OVERVIEW

Broad money supply in September expanded to 5.2% following a 4.8% gain in the previous month. Loans growth also grew that month, to 9.0% from 8.6%. Aggregate demand has started to tick upwards once more as the impact of high costs has begun to wane. However, considering the higher interest rates, coupled with an increase in petrol prices, the pace of expansion will be somewhat subdued despite the festivities and holidays at the end of the year.

- Money supply in expanded in September as M3 saw a 5.2% YoY increase, following a 4.8% growth in August. M2 managed to gain by 5.4% from 5.0% previously but M1 moderated to 6.7% from 7.7%. Year-to-date saw overall money supply growing by just 3.6% compared to 5.7% seen in the same period in 2013. Though broad money expanded, factors affecting M3 showed that net claims on government moderated to 15.7% (August: 19.7%) and net foreign assets fell by 3.1% (August: +3.9%). Claims on the private sector however remained steady at 9.4%.

- There has been continuous outflow of capital in the month of September and into October, as many traders and investors move capital back into the USA on optimistic growth recovery as well as in anticipation of the end of the quantitative of easing (QE). However, capital has been trickling back to Malaysia’s shores on higher yields, and safer and steadier financial environment. The Eurozone continues to battle against a deflationary threat and high employment. In Japan, the BoJ has had to increase their own QE to counter the worse than expected impact of the tax hike, falling inflation and weak Yen making imports expensive.

- Loans growth in September managed to gain 9.0% YoY following an 8.6% rise in August. A monthly comparison saw a 1.3% MoM increase. However, this improvement may be short lived as the impact of the increase in the Overnight Policy Rate (OPR) kicks in. Slightly further ahead, we may very well also see improving loans growth in light of the year-end holidays and in anticipation before the implementation of the Goods and Services Tax (GST) come April 2015. The pace however, is likely to be somewhat muted due to recent increase in petrol prices increasing costs once more.

- Upon closer scrutiny, we see that loans for the purchase of securities moderated slightly, to 15.5% YoY (August: 16.7%) whilst loans for the purpose of purchasing consumer durables remains strong at 250.5%, albeit slightly slower than Augusts’ 269.9%. Loans for the purpose of purchasing residential property inched higher to 13.7% from 13.6% whilst loans for purchase of passenger cars moderated to 2.6% from 3.0%. Consumers may choose to wait until after the implementation of the GST to purchase cars as prices are expected to fall by then. On the business end, loans for working capital increased by 7.5% (August: 6.7%) and for construction purposes, rose by 16.6% (August: 12.4%).

- Looking at loans on a sector basis, loans for financing, insurance and business services moderated to 6.5% (August: 8.8%) whereas all other business sectors saw loans improving. Loans towards wholesale, retail, restaurants and hotels expanded by 7.3% (August: 7.2%) and loans for manufacturing increased by 4.1% (August: 2.2%). Loans for the mining sector grew by 6.8% (August:

1.3%) and the loans towards electricity, gas and water supply remains high at 32.9% as the effects of the tariff hike has yet to wear off. Loans to the overall household sector saw a reduction to 10.7% from 11.0% in the previous month as consumers remain wary of higher costs of living.

Outlook

- As the year is coming to an end, there are the festivities and holidays to look forward to. This will hopefully boost consumer spending and help mitigate effects of the increase in interest rates and rise in petrol prices, though at the same time, those very same factors will most likely mean that spending will be of a moderate pace. At least on the business end, we can already see keenness to expand capital in hopes for a better yearend and also in anticipation of doing so before the implementation of GST to keep costs lower. Nonetheless, due to macroprudential measures and higher interest rates, loans growth is projected to expand between 9.0% to 10.0% this year, albeit slower than 10.6% in 2013.

Source: Kenanga