Money supply growth improved slightly in August but continued to reflect deteriorating monetary conditions from the unrelenting flow of portfolio capital out of Malaysia and other emerging markets. Broad money or M3 grew 4.6% YoY in August, more than the 3.9% YoY in July but otherwise near a 13-year low. Deposit growth was also affected by volatile financial markets and edged up 0.2% MoM and 5.1% YoY, insufficient to keep up with loan growth. Loan growth was stable, even performing slightly better than expected at 10.2% YoY. The loan-to-deposit ratio further increased to 90.4%, 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 new forecast range of 8.0% - 9.0% for 2015.

• Broad money or M3 grew 4.6% YoY in August, more than the 3.9% in July but otherwise near a 13-year low on continuing portfolio capital outflows. This showed up in the data as an 11.6% YoY fall in Net Foreign Assets. On a MoM basis, M3 growth was flat.
• A typically fast growing M3 category of Net Claims on Government contracted 4.1% YoY while growth in Claims on the Private Sector improved slightly to 9.3% YoY.
• Narrow money supply returned to normal growth after a slump in July. M1 expanded just 8.8% YoY in August, more than the 4.6% YoY in July.
• Loan growth exceeded expectations with an improvement in August to 10.2% YoY from 9.6% in the previous month.
• According to Bank Negara, net financing to the private sector grew by 9.2% YoY in August (July: 8.5%), driven by higher growth in both outstanding banking system loans and net outstanding issuances of private debt securities (PDS).
• More loans were made out to businesses than households. Outstanding business loans grew at a much faster rate of 11.5% YoY compared to 8.3% YoY for outstanding household loans, which has been on a moderating growth trend following the introduction of property-cooling measures in 2013.
• Deposit growth edged up 0.2% MoM and 5.1% YoY, insufficient to keep up with loan growth.
• The main cause of weak deposit growth was a high value of withdrawals from fixed deposit and investment accounts influenced by the rapid depreciation of the ringgit. Deposits in the overall banking system have been affected by volatile financial markets.
• The gap between system-wide loan growth and deposit growth widened further in August, taking the loan-to-deposit ratio to 90.4%, the highest in more than 15 years.

OUTLOOK

• Money and credit conditions have been worsening on financial market volatility and slowing economic growth. For the remainder of the year, liquidity concerns will keep loans growth in check as we observe that the loan-to-deposit ratio is close to reaching a point where liquidity stress could become a problem.
• The US Federal Reserve raising interest rates by year-end would further exacerbate domestic liquidity stress as it would spur capital outflow. In recent comments the Bank Negara governor indicated that raising interest rates to stem the expected outflow of funds was very unlikely. Thus we expect the monetary stance to remain unchanged in the near term
• Given slowing economic growth and consumer pessimism, our forecast is for banking system loan growth to average within our newly revised forecast range of 8.0% - 9.0%, up slightly from our previous forecast of 7.0% - 8.0% as year-to-date loan growth has consistently exceeded expectations and there remains potential for loans made out to businesses to grow further.

Source: Kenanga Research - 1 Oct 2015