Overview

• M3 growth rise for the second month. Broad money supply (M3) expanded for the second month to 5.2% YoY in November (Oct: 5.1%), the second highest growth for the year (Aug: 5.3%).
• Net foreign assets surged. November’s M3 growth was driven by net foreign assets, which grew more than double its pace to 7.1% YoY (Oct: 3.5%), reflective of large net portfolio inflows into the capital market.
• M1 growth moderates to its lowest in five months to 9.9% YoY (Oct: 11.7%), signalling an impending tapering trend following the strong third quarter 2017 (3Q17) demand driven growth of 6.2%.
• Loan growth slowed, extending its third month of moderation to 3.9% YoY (Oct: 4.6%) suggesting that the credit cycle and economic growth trend may have peaked and start to taper in 4Q17. Yet growth momentum as well as election driven fiscal spending may still boost economic activity well into 1H18.
• A good start for 2018. The monetary aggregates reflect banks’ solid liquidity position supportive of the economic growth momentum going into 2018 one of many factors that could alter the monetary policy trend as a rate hike is seen as early as 1Q18.

M3 growth rise for the second month. Broad money supply (M3) expanded for the second month to 5.2% year-on-year (YoY) in November (Oct: 5.1%), the second highest growth for the year, (Aug: 5.3%). On a month-on-month (MoM) basis, M3 grew by 0.3%, moderating from 0.6% growth in October.

Net foreign assets surged. November’s M3 growth was driven by net foreign assets, which grew more than double its pace to 7.1% YoY (Oct: 3.5%). This could be largely due to the large inflows of portfolio capital. Nonetheless, this could have also mitigated a slowdown in money supply growth seen in net claims on government and claims on the private sector. Net claims on government moderated to 24.8%, from 56.3% the previous month. Meanwhile, claims on the private sector also moderated to 5.2% from 5.6% the previous month. Net foreign assets contribution to November’s M3 growth rose to 2.2 percentage points (ppt) from 1.1 ppt in October. Meanwhile, claims on private sector and government contribution to November’s M3 growth fell to 5.2 ppts and 1.6 ppts respectively from 5.6 ppts and 3.1 ppts respectively in the preceding month.

M1 growth moderates. Narrow money, as defined by M1, declined by 9.9% YoY, reversing the growth momentum of the last five months. This was largely due to the drop in NIDs i.e. the holding of Ringgit denominated negotiable instruments ofdeposits issued by other commercial banks, finance companies and merchant banks. The slower growth signals an impending tapering trend following the strong 3Q17 demand driven growth of 6.2%.

Loan growth moderates for third month. November’s loan growth extended its third month of moderation to 3.9% YoY (Oct: 4.6%), suggesting that the credit cycle along with economic growth trend may have peaked and could start to taper in 4Q17. Loan growth slowed across most sectors, except for the “Education, Health & Others”, “Household” and “Other” sectors. The “Mining & Quarrying”, “Transport, Storage & Communication” as well as the “Wholesale, Retail, Trade, Hotels and Restaurant” were the biggest YoY loan growth decliners. The “Mining & Quarrying” sector showed the biggest drop of 23.4% YoY (Oct: - 9.6%) while “Transport, Storage & Communication” sharply slowed to 1.4% YoY (Oct: 8.2%) and “Wholesale, Retail, Trade, Hotels and Restaurant” sector moderated to 1.4% YoY (Oct: 4.5%). By purpose, moderation was seen across “purchase of securities”, “purchase of fixed assets excluding land & building”, “construction” and “working capital”. On a MoM basis, November’s loan growth accelerated to 0.3% (Oct: 0.1%). Loan approval rate similarly increased by 44.3%, from 42.5% the previous two months.

Deposit growth accelerates further. Deposit growth in November accelerated for the second month to 4.9% YoY, from 4.7% growth the previous month. Deposit growth in November was driven by Islamic banks’ deposit, which grew by 15.2% (Oct: 13.1%). However, deposits by investment banks moderated sharply to 5.2% YoY (Oct: 13.3%). Commercial banks’ deposit growth also slowed to 1.6% (Oct: 1.8%). On a MoM basis, deposits grew at a softer pace of 0.3% (Oct: 0.6%).

Lending rates remains stable, deposit rates fall. While lending rates in the commercial banking system remained stable at a weighted average of 4.61% (Oct: 4.64%), average saving deposit rates declined slightly to 0.95% from 0.97% the previous month. Meanwhile, the Liquidity Coverage Ratio (LCR) rose further to 139.3% from 138.2% the previous month, suggesting that banks’ balance sheet are better provisioned and relatively stronger.

Outlook

A better start for the year. The monetary aggregates reflect the strong liquidity position of the local banking system, well supportive of the expected growth momentum going into early 2018. As the growth prospects remain promising looking into the New Year, we believe improved domestic demand from an increase in disposable income, coupled with an increase in fiscal spending especially ahead of the 14th General Election in 2018 would spur higher economic activity. Additionally, with the expectation that major developed economies in Europe will maintain its loose monetary policies, at least till 1H18, we remain sanguine on the outlook of the global economy. Though this would help uplift GDP growth in 1H18, it may taper off towards 2H18 as momentum may start to decelerate partly due to the higher base effect as well as the impact of further tightening of monetary policy seen in the developed as well as the emerging economies.

BNM expected to raise OPR in 1Q18. Heading towards the end of 2017, Malaysia has sustained its sturdy growth momentum on the back of stronger than anticipated global growth. With consensus expecting global growth to sustain its current trajectory and momentum, supporting a strong external demand coupled with continued uptrend in domestic demand along with recent surge in oil prices, we expect the consumer price index to sustain above 3.0% in 2018. This and together with Bank Negara Malaysia’s (BNM) recent statement in its last Monetary Policy Meeting that “global and macroeconomic conditions now provide flexibility in reassessing its degree of monetary accommodation,” have successfully sent a prudent yet a strong enough signal to the market that it is ready to change its monetary stance. Additionally, the recent US Fed Funds hike and further three additional hikes expected in 2018 provides the added rationale for BNM to alter its monetary policy stance and possibly decide to raise the Overnight Policy Rate by 25 basis points as early as in the 1Q18.

Source: Kenanga Research - 2 Jan 2018