OVERVIEW

• Monetary conditions remained tight in November, partly attributable to capital outflows in domestic financial markets. Broad money or M3 growth moderated to 2.9% YoY in November from 3.2% in October.
• Meanwhile, narrow money supply or M1 growth accelerated to 4.5% YoY in November from 2.7% in October, pointing to a credible trend of improvement in consumer sentiment and spending.
• System-wide loan growth quickened to 5.3% YoY in November from 4.5% in October. However, the banking system deposits growth slowed to 1.4% YoY from 1.9% in October. Consequently, loan-to-deposit ratio rose to a multi-year high of 89.2% in November.
• We expect the monetary conditions in December to remain tight as Malaysia saw a wave of capital outflows following the latest US Fed rate hike decision. However, we see an improved prospect for the monetary and credit conditions in 2017 on the back of expected recovery in domestic demand and stronger economic growth.
• With the elevated volatility in the capital market and heighten risk of further capital outflows bearing down on the value of the ringgit, we expect the OPR to remain pat at 3.00% in 2017. However, in the event of a sharp economic downturn or an external shock, we reiterate our view that there is room for BNM to cut interest rates.

Broad money supply or M3 growth moderated to 2.9% YoY in November from 3.2% YoY in October. On a monthly basis, M3 growth slowed for the second month to 0.2% from 0.6% in October. The slowdown in M3 growth is partly attributable to a 6.1% YoY decrease in net foreign assets following a wave of capital outflow in November. Besides that, Claims on the Private Sector grew at a slower pace of 5.0% YoY in November from 5.8% in October, curbing the overall broad money supply growth.

Narrow money supply or M1 grew at a ten-month high of 4.5% YoY in November (October: 2.7%), indicating a credible trend of improvement in consumer sentiment and strengthening the case for a consumer spending to sustain a gradual uptrend in 2017 as opposed to it tapering off following a relatively strong growth trend in 2016. On a monthly basis, M1 growth accelerated to 2.0% from 0.7% in October.

Banking system loan growth rose for the second month to 5.3% YoY in November from 4.5% in October. This further supports our earlier view that loan growth could have bottomed out in September. However, we remain cautious of its prospect of sustained recovery as financial institutions continue to adopt macroprudential measures and strict lending procedures.

Private sector net financing growth inched up to 6.7% YoY in November from 6.5% in October. Business loans growth rose to 4.6% YoY in November from 2.9% in October, with expansion of credit extended to manufacturing; real estate; wholesale and retail trade, restaurants and hotels; finance, insurance & business services; and transport, storage & communication sectors. On the other hand, household loan growth stayed at 5.4% YoY in November.

Total bank deposit slowed to 1.4% YoY from 1.9% in October. On a monthly basis, deposit growth moderated for the second month to 0.1% from 0.4% in October.

Resource balance tightens. The gap between system-wide loan growth and deposit growth widened in November as total net loans of the banking system grew at a faster pace than that of net total deposit. This tightened the banking system resource balance in November. Consequently, the loan-to-deposit ratio rose to a multi-year high of 89.2% in November,

OUTLOOK

Slight improvement in 2017. The monetary conditions in the final month of the year is likely to remain tight as Malaysia saw a wave of capital outflows largely due to the US Fed rate hike decision in December. However, while the financial markets take a breather before the next cycle of Fed monetary normalization, we believe investors will remain composed and monetary conditions stabilize in the near term. Besides that, we see monetary conditions and credit growth improve slightly in 2017 on the back of expected further recovery in domestic demand and stronger economic growth. 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. Total loan growth is expected to expand slightly around 6.0%-7.0% in 2017.

OPR likely to stay pat in 2017. With the elevated volatility in the capital market and heighten risk of further capital outflows bearing down on the value of the ringgit, we expect the OPR to remain pat at 3.00% in 2017. However, in the event of a sharp economic downturn or an external shock, we reiterate our view that there is room for BNM to cut interest rates.

Source: Kenanga Research - 3 Jan 2017