Money supply growth slowed in April as the use of money and credit was affected by the implementation of the Goods and Services Tax (GST) from April 1. All three main measures of money supply saw a slower pace of expansion during the month, consistent with market expectations. Broad money or M3, along with M2 and M1 moderated to 6.5%, 7.0% and 8.1% respectively on a YoY basis from 7.9%, 8.5% and 10.2% respectively in March on decreased spending activity after GST came into effect. System-wide loan growth edged lower to 8.8% YoY in April from 9.2% in March but was flat compared to the previous month. Meanwhile, accelerating growth in deposits appears to have stabilised the loan-to-deposit ratio. We expect tight lending conditions, moderating economic growth and consumer pessimism to weigh on loan growth this year. To reflect this expectation, our forecast is for loan growth to average between 7.0% and 8.0% in 2015, below the 8.7% seen in 2014.

Growth in money supply slowed in April after two consecutive months of improvement in February-March. M3 or the broadest money supply expanded 6.5% YoY (Mar: 7.9%). The slower pace of expansion is consistent with expectations for the use of money and credit to decline on a MoM basis (-0.6%) during the first month of the GST on reduced consumer spending.

The narrowest money supply measure, which best tracks consumer spending patterns, M1, saw a 2.3% MoM slump in April but still expanded 8.1% YoY. Fluctuations in M1 have been more volatile than broader measures of money as changes in consumer behaviour mainly affected lower value non-perishable goods and consumer devices as many big-ticket items such as motor vehicles and residential property were not expected to increase in price significantly from GST implementation. The slightly broader measure of money, M2, also showed a slower YoY growth performance of 7.0% compared to 8.5% in March.

Total net foreign assets declined slightly on a MoM basis, by 0.9%, after two months of positive MoM numbers on a reversal in capital outflows. On an annual basis, Malaysia remains firmly in a net foreign assets outflow position with a YoY decline of 2.9%. The banking system remains robust and domestic liquidity sufficient to handle the current level of capital outflows. The other components of M3; net claims on government and the private sector expanded 5.7% YoY (Mar: 29.5%) and 8.4% YoY (Mar: 9.1%) respectively.

Loans growth slowed in April to 8.8% YoY, returning to the path of a long-term downward trend after two consecutive months of improvement. The measure was flat compared to the previous month of March and is close to a near five-year low recorded in January (8.6%). Macro-prudential measures introduced in 2013 and the resulting tighter lending conditions have kept a lid on growth in housing and consumer loans and will continue to do so in the coming months.

According to Bank Negara, net financing to the private sector in April grew by 7.8% YoY (Mar: 8.3%) from a moderation in growth of both outstanding banking system loans and net issuances of private debt securities (PDS). Outstanding business loans registered a lower annual growth rate, with repayments matching disbursements.

Outlook

Money and credit conditions in the first month of GST are consistent with expectations and points to a smooth transition to the new tax system. For the remainder of the year, liquidity concerns will keep loans growth in check in the near-term as we observe that the loan-to-deposit ratio, which has been rising steadily since 2013, is around the 86% to 88% range. Expectations of slower GDP growth will also put a dampener on borrowing. Loans growth will continue to creep lower unless there is a change of monetary policy or the lifting of macro-prudential cooling measures, both of which are unlikely to happen this year at this juncture. Along with moderating economic growth and consumer pessimism our forecast is for the banking system loans growth to average between 7.0% and 8.0% in 2015 (2014: 8.7%)

Source: Kenanga Research - 2 Jun 2015