• M3 growth picks up. After a slight growth moderation in April, the broad money supply (M3) accelerated to 4.7% YoY (Apr: 4.4%) in May, growing 0.8% on a MoM basis (Apr: -0.2%).
• M1 sustained uptrend despite receding low base effects. Narrow money (M1) growth remained relatively elevated with a 9.8% YoY growth, just a step down from April’s 11.0%. Its MoM growth hit a 4-month high of 1.1% MoM (Apr: 0.1%).
• Loan growth moderates. Total loans grew by a slightly slower 5.5% compared to April’s 6.1% in spite of gaining 0.2% in MoM terms after a flat growth in April, suggesting the start of a higher base effect. Meanwhile, deposit growth was stable at 3.4% (Apr: 3.5%). Loan-deposit ratio was unreported by BNM.
• Monetary conditions slightly tighter but supportive of healthy growth. While lending rates were just a touch higher in May, liquidity remains ample and overall monetary conditions are accommodative for sustaining the uptick in domestic demand. With receding cost-push factor and modest demand-pull pressures, we reiterate our view that BNM would maintain its accommodative monetary policy and retain its OPR at 3.00% this year.

Pickup in M3 growth. Growth in broad money supply (M3), rose at a faster pace of 4.7% YoY in May (Apr: 4.4%) after slipping from 4.5% in March. On a MoM basis, M3 growth easily reversed the mild contraction in April with a solid 0.8% growth (Apr: -0.2%). While M3 growth continues to be driven by loans to the private sector, contributing 5.0 ppt to growth (Apr: 5.5 ppt), the acceleration in M3 growth were attributed to the faster growth in net foreign assets held by BNM which contributed to 3.1 ppt of M3 growth. While the sharp deterioration from the “Other influences” subcomponent (likely arising from the offset in growth of the Islamic Investment Account) continued to weigh against M3 growth, this subcomponent shaved off a lower 5.9 ppt off M3 growth (Apr: -6.1 ppt).

M1 growth remains elevated. The narrow money measure (M1) continued to see brisk 9.8% YoY growth, stepping down slightly from a 36-month record high of 11.0% in April. The marginally slower growth reflects the dissipation of the low base effect observed after the 1Q16 period. Indeed, on a MoM basis, May’s M1 growth of 1.1% was significantly above the 0.1% MoM growth observed in April.

Loan growth eases. Loan growth slowed to 5.5% in May (Apr: 6.1%) though on a MoM basis, loans expanded by a modest 0.2% after being effectively flat during April. Household loan growth was stable at 5.1% YoY (Apr: 5.1%), though slower loan growth in real estate, transport storage and communication and finance, insurance and business activities segment collectively shaved off 0.6 ppt from overall loan growth. By loan purposes, the lower growth was largely attributable to the sharp easing in working capital loans which grew by just 5.6% YoY (Apr: 7.3%).

Stable deposit growth. Deposit growth was just slightly lower at 3.4% YoY (Apr: 3.5%), taking a step back from the 19-month high expansion of April. In MoM terms however, deposit grew by a respectable 0.6%, easily reversing April’s 0.3% contraction. This reinforces our prior hypothesis that April’s uptick in deposit growth was largely driven by low base effects of Mar-Apr 2016 period.

Resource balance stable. Higher MoM loan growth in May despite a lower YoY figures suggests that the higher Mar-Apr17 numbers were likely exaggerated from the similar low base effects during the Mar-Apr period of last year. However, growth in deposits outpaced that of loans on a MoM basis, resulting in a positive deposit-to-loans gap of RM7.0b in May (Apr: -RM5.3b). This would effectively push the LD ratio lower from April’s level of 88.8%. However, for reasons unexplained, BNM did not publish the LD ratio for May.

Lending rates slightly higher. Lending rates remained relatively low though the weighted average lending of commercial banks rose slightly to 4.61% (Apr: 4.59%). However, the weighted average base rates of commercial banks were unchanged from April at 3.61%. Despite the slightly lower loan growth and the minor bump up in lending rates, at present levels, monetary conditions remain well within the parameters of a stable monetary conditions and consistent with Malaysia’s growth recovery.

OUTLOOK

Reflective of growth. Our assessment of the prevailing monetary conditions remains unchanged from our prior report on monetary aggregates. Relatively stable growth in the monetary aggregates amid the dissipating low base effect post MarApr period last year confirms our narrative that liquidity is not excessive in spite of large inflows into the capital market. Indeed, we observed that May’s inflation numbers have receded with lower fuel prices; fuel prices were largely responsible for the inflation spike in the 1Q17. Core inflation numbers were slightly higher at 2.6% in May (Apr: 2.5%) though this is unlikely to translate into significant disruptions into the broader price trend. As such, we project the 2Q17 inflation to be lower at 4.1% from 4.3% in 1Q17. This, in turn, feeds into our projection that the OPR will likely be maintained at 3.00% for the rest of the year with the MPC likely to await multi-period demand-pull factors prior to raising the OPR.

Monetary conditions likely to remain supportive of growth. The slight moderation in loan growth and the minor uptick in lending rates are unlikely to change our view on the ability of the monetary system in accommodating growth. We believe these changes represent a one-off noise. Continued domestic investments and inflow of foreign capital is likely to help support Malaysia’s growth, moving forward. According to BNM, non-resident inflows into the government bond market and equity market amounted to RM9.0b and RM2.0b respectively in May. Despite some noises, non-resident inflows into the equity and bond markets will provide an additional boost, both as a vote of confidence on business sentiments and improved external perception on the Malaysian economy.

Source: Kenanga Research - 3 Jul 2017