Outlook

A better 4Q17 growth prospects. The monetary aggregates have shown convincing growth momentum which could give support to a better prospect for domestic demand in 4Q17. Indeed, we believe that government policy measures laid out in the Budget 2018 that seek to address the rising cost of living, including personal income tax rate reduction, cash hand outs to the lower income group (BR1M) and special incentives for civil servants, would likely raise disposable income for the rakyat. These stimulus measures, coupled with the usual spike in total fiscal spending leading up to the election, in which we believe could happen as early as 1Q18, would help support domestic demand and sustain a solid economic growth trajectory well into 1H18.

Risk of housing oversupply on loan quality. Meanwhile, BNM has recently issued a stark warning that there is a mismatch between housing supply and demand leading to a surge in unsold residential properties, which stood at a decadehigh of 130,690 units in 1Q17. This could pose a medium term risks to the loans quality and soundness of lender portfolio in the case of a sharp decline in property prices. However, we deem it unlikely that a crash in the housing sector would happen. Our assessment is grounded on the basis that the government has enacted measures to rein in the oversupply issues, the latest being the decision of a freeze on high end properties. Thus we do not see a material risks in the banking system arising from the oversupply issues at the moment.

Monetary tightening expected in 1Q18. BNM has shifted to a hawkish tone in its recent statement hinting at reviewing the current degree of monetary accommodation, which has led market expectations towards a tightening in 2018. Indeed, the stronger than expected economic growth of 6.2% in 3Q17 presents a convincing case for BNM to do so possibly by early next year premised on the growth momentum to remain strong. With the expectation that the economic growth trajectory to remain above its potential or more than 5.0% in 4Q17 (KIB 4Q17F: 5.5%), we believe an ideal timing for a rate hike to be in 1Q18. A rate hike may also help to cushion the impact of a possible outflow of capital as well as to defend the ringgit in lieu of the expected US Fed Funds hike in December. For now, we pencil in a single 25bps increase in OPR for 2018, though a second rate hike should not be ruled out.

Source: Kenanga Research - 4 Dec 2017