OVERVIEW

• Monetary conditions improved in October, underpinned by continued expansion of credit to the private sector and a sustainable domestic spending growth.
• Broad money or M3 growth accelerated to 3.2% YoY from 2.2% in September. Meanwhile, marrow money supply or M1 growth quickened to 2.7% YoY, suggesting a relatively stronger consumer sentiment and spending.
• System-wide loan growth expanded 4.5% YoY (Sep: 4.2%) but grew at a slower pace of 0.6% MoM (Sep: 0.8%). Similarly, the banking system deposits expanded by 1.9% YoY, an eleventh-month high. Consequently, loan-todeposit ratio remained stable at 88.7%.
• We expect the monetary conditions to deteriorate in the coming months as a reflection of the heightened volatility in the financial market. On the back of Malaysia’s solid economic fundamentals, we expect the economy to remain resilient and weather any adverse impact of short term capital outflows.
• With the rising volatility in domestic financial market and a downside bias of the value of the ringgit, we expect the Overnight Policy Rate (OPR) to stand pat at 3.00% in 2017. However, we reiterate our view that there is room for Bank Negara Malaysia (BNM) to cut interest rates if prevailing uncertainties undermine economic growth.

Broad money supply or M3 growth accelerated to 3.2% YoY in October from 2.2% YoY in September. On a monthly basis, M3 growth slowed to 0.6% from 1.1% in September. Besides a lower base comparison from last year, the improvement in M3 yearly growth was supported by a larger extension of loans to the private sector at 5.5% YoY (September: 5.3%). In addition, Islamic Investment Accounts, which are reflected in “Other Influences”, expanded at a slower pace of 72.0% YoY in October compared with 95.5% in the previous month, another reason behind the rising yearly M3 growth.

Narrow money supply or M1 rose to 2.7% YoY from 0.1% in September, suggesting a relatively stronger consumer sentiment and spending compared to last year. On a monthly basis, however, M1 growth softened slightly to 0.7% from 0.9% in September.

Banking system loan growth quickened to 4.5% YoY from 4.2% in September, reinforcing our view that loan growth trend could have bottomed out in September. However, its prospect of sustained recovery remains dim in the face of weak property market and tepid spending on consumer durable goods in an uncertain economic environment.

Private sector financing growth edged down to 6.4% YoY from 6.5% in September, partly on account of a moderation in the growth of net outstanding corporate bonds in October. Business loans growth accelerated to 2.9% YoY in October (September: 2.0%), with growing amount of credit extended to construction; finance, insurance and business services; wholesale and retail trade; restaurants and hotels sectors. On the other hand, household loan growth slowed to 5.4% YoY from 5.6% in September.

Total bank deposit rose 1.9% YoY from 0.8% in September. On a monthly basis, deposit growth moderated to 0.4% from 1.2% in September.

Resource balance remained stable. The gap between system-wide loan growth and deposit growth widened slightly in October as total net loans of the banking system was higher than that of net total deposit. Nevertheless, the banking system resource balance remained stable with the loan-to-deposit ratio maintained at 88.7% in October.

OUTLOOK

Heightened volatility risk. Following a surge in US government bond yield and growing certainty of a Fed rate hike in December, Malaysia saw a wave of capital outflows with unremitting downward pressure on the ringgit in November. We expect the monetary conditions to deteriorate in the coming months as a reflection of the heightened volatility in the financial market. However, as the recent capital outflows can mostly be explained by short-term yield-chasing behaviour of portfolio funds, we see the monetary conditions to stabilize in the medium term. We also believe the economy are resilient enough to weather any short term adverse impact of large capital outflows on the back of Malaysia’s still solid economic fundamentals. Meanwhile, we maintain our projection for the average banking system loan growth to shrink to 5.0% - 6.0% in 2016 from 7.9% recorded in 2015.

OPR likely to stay put in 2017. With the rising volatility in domestic financial market and a downside bias of the value of the ringgit, we expect the OPR to remain pat at 3.00% in 2017. However, we reiterate our view that there is room for BNM to cut interest rates if prevailing uncertainties could undermine economic growth.

Source: Kenanga Research - 1 Dec 2016