OVERVIEW

• M3 growth eases. Growth in the broad money supply (M3) eased slightly to 4.4% (Mar: 4.5%) as it slipped 0.2% on a MoM basis (Mar: +0.4%).
• Base effects continue to lift M1. Narrow money (M1) growth remained elevated with 11.0% growth (Mar: 9.2%), largely from the low base effect observed for the Mar-Apr 2016 period. In MoM terms, M1 saw a modest 0.1% growth (Mar: -0.2%).
• Loan growth in line with healthy economic fundamentals. Loans grew by a stable 6.1% (Mar: 6.0%). This is consistent with the improved economic prospects highlighted by the 1Q17 GDP figures and other signs of firming domestic and external demand. Deposits, meanwhile, rose 3.5% (Mar: 3.3%), keeping the loan-deposit ratio unchanged at 88.8.
• Improved aggregate demand but manageable inflation. We reiterate our stand that inflation is manageable despite the uptick in domestic demand, especially given stable core inflation of 2.5%. As a corollary to this, we also believe that there is little catalyst for the MPC to raise the OPR; it is likely to remain at 3.00% in the short term to medium term barring any uptick in demand-pull factors.

M3 plateaus in March. Broad money supply (M3) grew by a slightly slower 4.4% YoY (Mar: 4.5%). On a MoM basis, M3 growth fell 0.2% (Mar: +0.4%) though M3 remains elevated overall. As with the previous months, M3 growth were largely driven by loans to private sector which contributed 5.5 percentage points (ppt) to M3 growth (Mar: 5.4 ppt). Net claims on the government remained high at 3.1 ppt contribution (Mar: 3.0 ppt contribution). Again, the sharp deterioration from the “Other influences” subcomponent (likely arising from the offset in the growth of the Islamic Investment Account) weighted against M3 growth.

M1 sees double digit growth. The narrow money measure (M1) grew at a 36-month high to 11.0% (Mar: 9.2%). As anticipated in our previous report, this was largely a result of low base effect during the Mar-Apr16 period. Indeed, on a MoM basis, M1 grew by just 0.1% (Mar: -0.2%).

Stable loan growth. Loans were largely unchanged from March, resulting in a stable 6.1% YoY growth (Mar: 6.0%) while the MoM loan growth was up marginally (Mar: +0.6%). Household loan growth, the largest contributor to headline loan growth, expanded 5.1%, just a touch lower than March’s 5.2%. However, this was offset by higher growth in finance, insurance and business activities sector at 9.8% (Mar: 6.7%). By loan purpose, residential property and working capital loans remain the primary driver of loan growth, growing 8.7% and 7.3% respectively (Mar: 8.9% and 7.3% respectively).

Deposit growth slightly higher. Deposit growth grew at a faster 3.5% YoY (Mar: 3.3%), moving into a 19-month high. However, in MoM terms, deposits saw a marginal decline of 0.3% (Mar: +0.8%), implying that the 19-month record high deposit growth may be partially attributable to low base rate effects.

Stable resource balances. With both the deposits and loans seeing relatively little change, the loan deposit ratio (LDR) remained at 88.8 (Mar: 88.8). BNM’s alternative ratios were likewise largely unchanged with the loan-to-fund ratio (LTF) also stable at 82.4 (Mar: 82.4).

Lending rates eased marginally. Lending rates continued to be stable with the weighted average lending of commercial banks increased slightly to 4.59% (Mar: 4.60%) while the weighted average base rates of commercial banks likewise fell marginally to 3.61% (Mar: 3.62%). Combined with stable loan and money supply growth, monetary conditions continue to remain stable, consistent with the improvements in Malaysia’s economic fundamentals.

OUTLOOK

Real economy expands. May’s Monthly Statistical Bulletin came just more than a week after Malaysia reported a solid 5.6% growth in 1Q17 (4Q16: 4.5%), beating consensus estimates of 4.8% (4.3-5.5%) with domestic demand expanding 7.7% (4Q16: 3.2%). With aggregate demand picking up, we are keenly monitoring the inflation barometers for any signs of demand push inflation. However, for now, we believe that liquidity is not excessive with consumer price inflation likely to remain manageable. Indeed, April’s CPI numbers suggests that inflation rate has dialled down a notch, moderating to 4.4% (March: 5.1%) and is likely to plateau. Indeed, core inflation remains unchanged at 2.5%, suggesting stable broader price trends. As such, we project 2Q17 and the full year inflation both at 4.4%. We are also reiterating our view that the OPR will be maintained at 3.00% at least for its July and September MPC meeting, though we do not see any immediate case of raising OPR during the November meeting either, barring an unexpected uptick in demand-pull factors.

Continued loan growth sign of improving real growth. With loan growth continue to see healthy – but not excessive – growth moving into April, we believe that this bodes well for the real economy. Robust domestic investments are expected to support loan growth moving forward, in line with better economic fundamentals in Malaysia, both domestically and externally. Additionally, we view the recent resident inflows into the equity market (and, to a lesser extent, a modest return into the domestic bond market) as a vote of confidence on business sentiments and improved external perception on the Malaysian economy.

Source: Kenanga Research - 1 Jun 2017