OVERVIEW

• M3 expansion accelerates. Broad money supply (M3) grew at a sharper pace of 4.9% in February (Jan: 4.6%). This is mainly attributable to stronger growth in BNM loan extended to the private sector at 4.3% (Jan: 4.0%).
• M1 growth eases. Growth of narrow money (M1) moderated to 8.5% (Jan: 8.8%). On a monthly basis, M1 saw a second month decline at 0.3% or RM1.4b. This could be largely attributable to the sharp price correction in the stock market.
• Loan growth continues. Loan growth accelerated for the third month to 4.5% YoY (Jan: 4.2%); while deposit inched lower to 4.2% YoY (Jan: 4.3%) as demand deposit slowed to 8.0% (Jan: 11.7%).
• Moderating growth trajectory. The trajectory in money supply still reflects an elevated growth trend expected in the 1H18. However, we expect GDP growth to moderate thereafter in 2H18 in view of high base effect and the growing uncertainty in the global economy. We maintain our GDP forecast of 5.5% in 2018, the lower end of BNM’s growth range of 5.5-6.0%.
• OPR to stay pat in 2018. The risks of financial imbalances remained contained with prudent lending practices and lower household debt. Coupled with slower growth expectation in the latter half of 2018, we expect BNM to maintain its policy rate at 3.25% in 2018.

M3 growth rebounds. Broad money supply (M3) grew at a faster pace of 4.9% YoY in February from a twomonth low of 4.6% in the preceding month. On a MoM basis, however, M3 growth moderated slightly to 0.6% in February (Jan: 0.8%).

Loans to private sector accelerates. February’s M3 growth was mainly supported by BNM loan extended to the private sector which grew at a sharper pace of 4.3% YoY (Jan: 4.0%), providing a higher 3.9 ppts contribution to the M3 growth (Jan: 3.6 ppts). Net foreign assets in the banking system registered higher growth of 12.0% in February (Jan: 10.3%), contributing further to the positive M3 expansion. Nevertheless, net claims on government declined 4.6% in February, shaving off 0.4 ppts from the overall M3 growth.

M1 growth eases. Narrow money (M1) growth moderated slightly to 8.5% YoY in February from 8.8% in the preceding month. On a MoM basis, it declined 0.3% or RM1.4b due to a 1.3% drop in demand deposit (-RM4.2b). This is could be largely attributable to the sharp price correction in the stock market triggered by the large selloff in the US stock market. Nonetheless, the current M1 level remains elevated, underpinned by solid domestic spending amid improving economic conditions.

Loan growth quickens. Loan growth accelerated for the third month to 4.5% YoY in February (Jan: 4.2%). By purpose, the categories that experienced stronger loan growth include “purchase of securities”, “credit card”, “personal use” and “construction”. Meanwhile, the sectors that saw higher growth include household; construction; real estate and primary agriculture. Notably, household loans grew at a 17-month high of 5.6% in February (Jan: 5.3%), providing additional 0.2 ppt to the overall loan growth for the month compared to the preceding month’s contribution. On a monthly basis, however, loan growth was slower at 0.3% (Jan: 0.5%). The loan approval rate remained stable at 43.3% in February.

Stable deposit growth. Deposit slowed slightly to 4.2% YoY from 4.3% in January. This is attributable to a weaker growth of demand deposit at 8.0% in February (Jan: 11.7%). Similarly, deposit growth softened to 0.2% MoM in February (Jan: 0.6%). Loan growth thus outpaced deposit growth by RM1.6b for the month.

Liquidity remains healthy. The Liquidity Coverage Ratio (LCR) edged up to 133.8% from 131.9% in January, pointing to ample liquidity in the banking system. This is largely due to a 2.0% monthly decline in the banking system’s net cash outflow, while its high quality liquid assets dropped at a smaller 0.6% MoM.

OUTLOOK

Moderating growth trend. The positive monetary aggregates expansion supports our view that the economic trajectory would remain solid throughout 1H18, underpinned by steady domestic spending amid improving labor market and increased fiscal spending ahead of 14th General Election (GE14). However, we expect growth to moderate thereafter in 2H18 on the back of high base effect as well as the rising uncertainties in domestic and the global economy. One of our major concerns is the looming trade war triggered by the Trump administration aimed at China. This would also have an adverse impact in the global economy if tension escalate and retaliation ensued by China and other countries. We therefore maintain our GDP forecast of 5.5% in 2018, the lower end of BNM’s growth range of 5.5-6.0%.

OPR to stay put. While Bank Negara Malaysia (BNM) highlighted in its recent report the oversupply issue in office and shopping complex segments, it acknowledged that risks of financial imbalances remained contained. Indeed, prudent lending practices have kept household borrowings and household debt in check. We thus see fewer reasons for BNM to tighten monetary policy at this juncture. Coupled with slower growth expectation in the latter half of 2018, there is a higher probability that the overnight policy rate would remain at 3.25% in 2018.

Source: Kenanga Research - 2 Apr 2018