OVERVIEW

• M3 growth stable. December’s 3.0% YoY broad money supply (M3) growth matched was a touch higher than the 2.9% growth in November.
• Narrow money spikes. M1 growth spiked to a 13 month high of 5.7% YoY in December from 4.5% in October.
• Resource balance continues tightening. Loans sustained its 5.3% YoY growth similar to that of November while deposits edged up to 1.5% YoY (November 1.4%). Overall, loan-deposit ratio tightened to a multi-year high of 89.8.
• Monetary conditions to remain tight. Continued, albeit moderating, capital outflows suggests that monetary conditions remains tight. However, with short-term interest rates remaining somewhat stable relative to November 2016 and potential upsides from BNM’s financial market stabilisation measures, we see improved prospects for monetary and credit conditions, underpinned by recovery in demand and stronger economic growth.
• OPR to stay at 3.00% in the short term. In the absence of substantial threats to Malaysia’s growth trajectory, we believe that BNM will likely hold the OPR, at least until 1H17. The threat of further capital outflow and its implications on the ringgit further reinforces our view that the OPR will not be cut prematurely. However, potential headwinds to growth from (domestic and external) policy risks may warrant a revision to our projections.

M3 growth marginally higher. Broad money supply (M3) grew at 3.0% YoY compared to 2.9% in November. On a MoM basis it expanded by 0.8% or RM13.0b compared to 0.2% (RM3.0b) in November. Growth continues to be driven by expansion in loans to the private sector (which grew 6.0% from 5.0% in November) though this was somewhat mitigated by a marginal decline in net foreign assets from December’s net capital outflow. M3 growth were further curbed from the continued growth in the Islamic Investment Accounts (which saw the “other influences” subcomponent falling sharply to -RM640.0b from -RM605.8b during November).

Liquidity aflush. Narrow money (M1) supply, the most liquid measure of money, meanwhile, spiked at a thirteen month high of 5.7% YoY in December (4.5% in November). This suggests some support for consumer and/or business spending into 2017. On a MoM basis, M1 growth likewise continued to accelerate to 3.4% from 2.0% in November and 0.7% in October.

Banking system loan growth sustained. Banking sector loans grew by 5.3%, similar to that of November. This may have, to an extent, contributed to the elevated M1 growth in December. However, growth in private sector financing fell to 5.5% from 6.7% in November though this was attributable to slower YoY growth in corporate bond issuance due to higher base effect of December 2015. Households likewise saw a modest expansion in credit at 5.3% (November 5.4%), further strengthening the case for a possible support for consumer spending into 2017.

Modest deposit growth. Deposits grew by a respectable 1.5% YoY from 1.4% in November. On a MoM basis, the difference in deposit growth was more prominent at 0.8% compared to 0.1% in November.

Loan-deposit ratio (LDR) soars. Faster pace of loan growth relative to that of deposit sent the LDR to a multi-year high of 89.8 from 89.2 during November though overall,banking sector liquidity remains ample. Short term rates have remained somewhat stable with weighted average base rate of commercial banks at 3.61% (November: 3.62%) and weighted average lending rates on outstanding loans of 5.21% (November 5.22%). At the same time, the loan-to-fund ratio – BNM’s alternative banking sector liquidity metric – stood at a more manageable level of 84.3% (albeit still rising from November’s 83.7%). Combined, this suggests that monetary conditions remain stable, despite higher LDR.

OUTLOOK

Monetary condition tight but sustainable. Continued, albeit moderating, capital outflows suggests that monetary conditions remains tight. However, with interest rates remaining somewhat stable relative to November 2016 and potential upsides from BNM’s financial market stabilisation measures, we see improved prospects for monetary and credit conditions, underpinned by recovery in demand and stronger economic growth. Furthermore, despite outflows weighing against the ringgit, we believe that rising global crude oil prices will help lend further support to the ringgit. We therefore reaffirm our revised 1Q17 ringgit forecast to a narrower range of 4.40-4.50 (from our earlier range of 4.40-4.60).

OPR to stay pat. In the absence of substantial threats to Malaysia’s growth trajectory, we believe that BNM will likely hold the OPR at 3.00%, at least until 1H17. The threat of further capital outflow and its implications on the ringgit further reinforces our view that the OPR will not be cut prematurely. However, potential headwinds from (domestic and external) policy risks may warrant a revision to our projections

Source: Kenanga Research - 2 Feb 2017