• Subdued M3 growth. Broad money supply (M3) growth took a step back, moderating to 4.3% from 4.7% from May, as MoM growth slowed to 0.4% (May: +0.8%). Notwithstanding the moderation, June’s number brought 2Q17 M3 growth to 4.5%, its fastest growth since 4Q15.
• M1 elevated but continues to moderate. Narrow money (M1) grew by 9.3% (May: 9.8%), its second consecutive month of moderation though M1 growth remains high overall, reflective of healthy capital market and business activity. On a MoM basis, M1 growth hit a 6-month high of 1.7% (May: 1.1%).
• Stronger loan growth. Loan growth picked up at a faster 5.7% (May: 5.5%), gaining 0.6% MoM (May: 0.2%). Deposits, meanwhile, grew by a lower, albeit still healthy, 3.0% (May: 3.4%). As with the previous month, the loan deposit ratio remains unreported by BNM.
• Monetary conditions easing somewhat. Lending rates were mostly stable though the weighted average lending of commercial banks fell by 14 basis points (bp). This suggests continued availability of liquidity and accommodative monetary conditions in sustaining domestic demand.
• Fed actions likely neutral on OPR trajectory. While June’s hawkish US Federal Open Market Committee (FOMC) statement resulted in a reversal of non-resident investments in Malaysia, July’s increasingly dovish tone would likely result in a net inflow of capital. Nonetheless, we believe that the Fed stance will hold less sway over the OPR trajectory, which will instead be influenced by domestic growth and inflation. We are maintaining our OPR forecast at 3.00% for the rest of 2017 in the absence of any external shocks.

Moderating but elevated M3 growth. Broad money supply grew by a slower 4.3% in June (May: 4.7%). On a MoM basis, M3 growth shrank marginally by 0.4% (May: 0.8%). June’s M3 growth rounds up 2Q17 with a growth of 4.5% (1Q17: 4.2%), its fastest growth since 4Q15. Until 1Q17, quarterly M3 growth remained below the 3.5% mark since 4Q15. This may suggest a better growth prospect in the 2Q17.

Private credit growth boost M3. Loans to the private sector remain the largest contributor to M3 growth, adding 5.0 percentage points (ppt) to its YoY growth (May: 5.0 ppt). However, if May’s record M3 growth was attributed to faster growth in net foreign assets held by BNM, June’s M3 growth moderation came as net foreign assets growth slowed to 8.9% (May: 13.3%), contributing just 2.1 ppt of growth (May: 3.1 ppt.). The decline in this component coincided with the reversal of non-resident investments in Malaysia following June’s FOMC statement that reaffirmed three rate hikes for 2017, coupled with an unwinding of the Fed balance sheet in 2017.

Stepping back but still elevated. Narrow money (M1) growth expanded by a slightly slower 9.3% (May: 9.8%), representing its second consecutive month of moderation after M1 growth hit a 36-month high in April. However, as noted in our previous report, this is likely due to a dissipation of the low base effect observed during Mar-Apr16. Indeed, on a MoM basis, June’s M1 growth rose to a six month high of 1.7% (May: 1.1%). This could reflect continued improvement in capital market and business environment. June’s figures brings 2Q17 M1 growth to 10.0% (1Q17: 7.0%), its highest level in 12 quarters since 3Q14.

Loan growth pickup. June’s loan growth picked up a touch, rising by 5.7% (May: 5.5%). Its corresponding MoM growth likewise saw a faster 0.6% growth (May: 0.2%). By loan purposes, faster loan growth pickup in June was generally attributed to higher working capital loans which expanded 7.1% YoY after growing by a slower 5.6% in May (Apr: 7.3%). This contributed to 1.7 ppt to total loan growth (May: 1.3 ppt; Apr: 1.7 ppt). Sector-wise, loan growth continued to be driven by sustained loans from the household sector which grew 5.0% (May: 5.1%) along with increased loan growth contribution from the manufacturing, wholesale and retail trade, construction and transport, storage and communication sectors.

Deposits growth more subdued. Deposit growth continued to be slower in June with a growth of 3.0% YoY (May: 3.4%). Deposits growth was negative on a MoM basis, albeit by a marginal 0.1% fall (May: +0.6%). However, in view of a sharp low-base effect observed in July 2016, we believe that July’s deposit growth will likely appear elevated. Overall, deposit growth remains elevated in the context of poor YoY deposit growth during 2015.

Loan-deposit gap at a seven-month high. With brisk loan growth sustained in June amidst flattish deposit growth, change in loans exceeded change in deposit by RM11.8b in June (May: deposits growth exceeded loans growth by RM7.0b), the widest gap in seven month. While this pushed the loan-deposit (LD) ratio lower relative to that of May, the absence of June’s LD ratio was likewise unexplained (similar to that of May).

Generally stable monetary conditions. Lending rates remained relatively stable in June. Weighted average base rates of commercial banks fell by around 14 basis points (bp) to 4.47% (May: 4.61%) though the weighted average base rates stayed put at 3.61%. Among merchant banks, however, the weighted average lending of merchant rates were slightly bumped up by 2 bp to 6.48% (May: 6.46%). However, in the broader context of the aggregate monetary system, prevailing monetary conditions remains consistent with a healthy monetary eco-system and overall accommodative of Malaysia’s growth trajectory.

OUTLOOK

Continued support from monetary conditions. As discussed in our previous report, we remain confident that the prevailing monetary conditions remain overall accommodative of growth. Indeed, the slight moderation in loan growth and the uptick in lending rates during May were largely reversed in June. We likewise believe that the higher loan-deposit gap is not likely to be persistent.

Likely renewed non-resident investments for July. While BNM’s monthly highlight notes that the relatively hawkish June FOMC statement resulted in a reversal of non-resident investments, this was followed by the dovish tone in Yellen’s testimony to the US Congress, FOMC members’ commentary and the subsequent July FOMC statement. The shift in mood suggests that Malaysian financial markets will likely see renewed interest for July, and possibly for the rest of 3Q17 as the odds of a third US rate hike recede in light of persistently soft US inflation. US consumer price index (CPI) expanded by just 1.6% YoY in June (May: 1.9%) while the Fed’s preferred measure of inflation, the core PCE index, grew by an unchanged 1.7%, below the Fed’s 2.0% long term target.

OPR trajectory to be relatively unaffected by Fed. Notwithstanding the sway of FOMC’s July statement on the Malaysian financial markets, it will likely have limited implications on BNM’s own OPR trajectory. With inflation remaining stable, albeit elevated, and growth outlook improving, we believe that the BNM Monetary Policy Committee (MPC) will hold interest rates at the prevailing 3.00% given the limited implications of Fed’s actions on Malaysia’s underlying fundamentals. We reiterate our position that the OPR will likely be maintained at 3.00% for the rest of 2017 in the absence of sharp uptick in inflation or any imminent threat to Malaysia’s growth pickup. At present, Malaysia’s inflation is manageable with headline inflation receding to 3.6% as at June (May: 3.9%) from a record high of 5.1% in March as fuel prices have stabilised somewhat. Core inflation is likewise subdued at 2.5% (May: 2.6%). Growth outlook remains strong with the house expectation for a modest 5.4% GDP growth for 2Q17 (1Q17: 5.6%).

Source: Kenanga Research - 1 Aug 2017