OVERVIEW

Monetary conditions deteriorated in July as outflow of portfolio capital accelerated, leading to a 1.3% MoM contraction in broad money supply. On a YoY basis, M3 growth remained in positive territory but grew just 3.9%, its lowest since January 2002. Deposits in the overall banking system was also affected by volatile financial markets and fell by 2.4% MoM as money was withdrawn from fixed deposit and investment accounts. Loan growth was stable, even performing slightly better than expected at 9.6% YoY. This led to a wider gap between loan and deposit growth rates, which meant the loan-to-deposit ratio further increased to 89.3%, the highest in more than 15 years and ever closer to the point of liquidity stress. We continue to expect monetary conditions to reflect moderating economic growth and tight lending conditions. Relatively low banking system liquidity will keep loan growth in check over the next few months to our forecast range of 7.0% - 8.0% for 2015.

• M3 or broad money supply on a MoM basis shrank 1.3% in July as portfolio capital outflows intensified. This showed up in the data as a 10.2% YoY fall in Net Foreign Assets. YoY growth in M3 subsequently moderated to 3.9%, its lowest since January 2002.
• A typically fast growing category of M3, Net Claims on Government, contracted 3.1% YoY while Claims on the
• Private sector remained stable at 8.9% YoY.
• Narrow money supply shrank on a MoM basis in July but continued to grow on a YoY basis. From the same month last year, M1 expanded just 4.3%, much lower than in previous months on weak growth in Demand Deposits.
• Loan growth improved in July to 9.6% YoY from 9.1% in the previous month. This was slightly above 2014 average loan growth of 9.3%.
• According to Bank Negara, net financing to the private sector grew by 8.6% in July due to stronger growth in outstanding banking system loans while the growth of net outstanding issuances of private debt securities (PDS) continued to moderate.
• More loans were made out to businesses than households. Outstanding business loans grew at a faster rate of 9.9% YoY compared to 8.6% for outstanding household loans, which has been on a moderating growth trend following the introduction of macro-prudential measures in 2013 intended to cool real estate speculation.
• Deposit growth was sharply lower at just 4.5% YoY in July compared to 7.7% in the previous month. Deposits in the overall banking system was affected by volatile financial markets as well as the sharp depreciation of
• the ringgit and fell by 2.4% MoM as money was withdrawn from Fixed Deposits, Special Investment Account and General Investment Account category.
• The gap between system-wide loan growth and deposit growth widened in July, taking the loan-to-deposit ratio to 89.3%, the highest in more than 15 years.

Source: Kenanga Research - 1 Sep 2015