OVERVIEW

• M3 growth higher from lower net foreign outflows. Broad money supply (M3) expanded by a faster 4.8% from 4.3% in June, its fastest growth in 22 months. This was largely attributed to a slower outflow of foreign assets in the banking sector on a YoY basis.
• M1 score double digit growth. Narrow money (M1) grew by a faster 10.9% (Jun: 9.3%) after two months of moderation in May-Jun. Faster M1 growth came as demand deposits expanded by a faster clip.
• Loan growth stable; deposit growth higher. Loan growth was just slightly lower at 5.6% (Jun: 5.7%). Deposits growth, meanwhile, hit a 22-month high, growing by 4.3% in July (Jun: 3.0%). largely from higher deposits among commercial banks.
• Monetary conditions stable. Lending rates were little changed in either direction. With the funding structure of banks well-above the regulatory and prudential limits, we believe that the monetary conditions are sound and accommodative of growth.
• OPR likely to remain stable. With inflation quickly becoming a less prominent issue notwithstanding the slightly higher core inflation, we believe that it may be premature to raise OPR for the rest of 2017. Furthermore, with signs of domestic demand growth slowing somewhat, we believe that the MPC will likely adopt a more measured approach and will likely maintain the OPR at 3.00% for 2017.

Higher M3 growth. Broad money supply, as defined by M3, grew by a faster 4.8% in July (Jun: 4.3%), its fastest in 22 months, since October 2015. On a MoM basis, M3 growth shrank marginally by a more gradual 0.3% (Jun: -0.4%).

Lower net foreign outflows. Higher M3 growth came as net foreign assets in the banking system declined at a slower pace relative to July 2016. Net foreign assets in the banking system fell by 20.7% YoY (Jun: 25.7%). This shaved off a lower 1.6 percentage points (ppts) from M3 growth (Jun: -2.0 ppts). Indeed, net foreign assets in the country and the banking system expanded 1.1% and 4.0% respectively on a MoM basis (Jun: -3.0% and -7.3%). This is largely consistent with the cautiously optimistic tone from foreign investors following the reversal of non-resident investments from Malaysia. This comes as the July US Fed meeting, along with comments from Fed policymakers point to a more dovish US interest rate trajectory. Overall, the other factors of M3 growth remain largely stable; claims on private sector – the largest driver of M3 growth – grew by 6.1% (Jun: 6.2%).

Sharper M1 growth on demand deposit growth. Narrow money (M1) growth rose by a faster 10.9% (Jun: 9.3%) after a brief period of YoY moderation during May-Jun 2017. Higher M1 growth is largely attributable to a relatively sharper 11.0% growth in demand deposits (Jun: 8.9%), contributing to 8.5 ppts to M1 growth (Jun: 6.9 ppts). This is reflective of a more robust domestic economic activity and better capital market performance.

Stable loan growth. July’s loan growth was just slightly lower at 5.6% (Jun: 5.7%), reflecting a likewise slower MoM growth by 0.1% (Jun: 0.6%). Overall, however, loan growth was generally stable across the varying loan purpose classifications with the marginal slowdown in headline loan growth attributable to a similarly borderline slowdown in working capital loans growth to 6.9% from 7.1% in June. Sector-wise, loan growth continued to be driven by sustained household sector loans which grew by a stable 5.1% (Jun: 5.1%).

Deposit growth sharply higher. Deposits grew by 4.3% in July (Jun: 3.0%), its highest growth in 22 months since October 2015. This was mainly due to a sharply higher pace of accumulation of deposits among commercial banks – deposits in commercial banks rose by a faster 1.9% (Jun: 0.7%), contributing to 1.4 ppts to overall deposit growth (Jun: 0.5 ppts). Adding to the higher deposits growth was deposits in the Islamic banks which expanded 11.3% (Jun: 9.6%), contributing 2.7 ppts to total deposit growth (Jun: 2.3 ppts). In MoM terms, however, deposit growth was relatively flat (Jun: -0.1%).

Loan deposit gap shrinks. Flat MoM deposit growth amid a more moderate loan growth meant that the increase in loans only exceeded the increase in deposit by a mere RM210m, a far cry from June’s RM11.8b. This led to the deposit-loan growth gap to its lowest level since the series inception in from 2006. This was consistent with our previous report which suggests a closing of this loan-deposit growth gap in the near term.

Prudent bank funding structure. As with the previous month, the loan-deposit (LD) ratio was unreported. However, the Liquidity Coverage Ratio (LCR) remained at a healthy 137.1%, albeit slightly lower than June’s 140.8% (due to higher net cash outflow despite the increase in the banking system’s stock of high quality liquid assets), reflecting that the banking sector’s funding structure is well-within prudent levels.

Monetary conditions remain stable. Lending rates remained stable in July with the weighted average base rates of commercial banks easing slightly to 4.61% (Jun: 4.63%) while the weighted average base rates was slightly up to 3.62% (Jun: 3.61%). Saving deposit rates among commercial banks were likewise unchanged at 0.96%. These stable rates, along with prudent banking sector are funding structure and healthy monetary eco-system suggests that monetary conditions remain healthy and likely to remain accommodative of Malaysia’s growth trajectory.

OUTLOOK

Accommodative monetary conditions. As with our previous reports and in the absence of any immediate signs of trouble in the monetary system, we reiterate our stand that prevailing monetary conditions is overall accommodative of growth. Monetary conditions are expected to remain healthy in August.

August non-resident investments to remain cautious. Malaysia’s net foreign assets grew by 1.9% in July (Jun: 0.2%) as non-resident investors turn cautiously optimistic on the Malaysian financial markets amid a more dovish outlook of the US interest rate trajectory. However, with geopolitical tensions between the US and North Korea heating up and the debacle of US abilities to execute its key fiscal reforms, we expect net foreign flows into Malaysia to remain subdued overall with a mild deterioration in net foreign flows expected for August. For now, we expect the geopolitical tension in North Korea to be a major wild card in determining net foreign flows into the region and, by extension, Malaysia at least for 3Q17.

OPR trajectory to remain unchanged. With inflation easing to 3.2% in July (Jun: 3.6%), we believe that even the inflation management justification for an OPR hike is a less tenable. While broader price trends, as reflected by core CPI, did edge up slightly to 2.6% (Jun: 2.5%), we believe that it is far too soon to conclude the idea of demand based factors seeping into the inflation equation. Instead, we point to the 2Q17 GDP numbers that suggests that despite a 5.8% expansion in the economy, domestic demand eased to 5.7% (1Q17: 7.7%). This leads us to conclude that it is more likely for the Monetary Policy Committee to adopt a cautious hand at the monetary policy levers, pointing to an unchanged OPR at 3.00% for 2017.

Source: Kenanga Research - 5 Sept 2017