OVERVIEW

• April broad money (M3) grew 6.2% YoY in April, the highest since May 2015 or in 36-month, buoyed by a surge in net claims to the private sector, which contributed a higher 6.6 percentage points (Mar: 5.7 ppts) to the overall M3 growth. The faster YoY growth was also due to last year’s lower base. On a MoM basis, M3 grew by a marginal 0.1% in April (Mar: +1.9%), In line with our expectation that money supply would decline in absolute terms in view of moderating economic growth and increasing capital outflow.
• Likewise, narrow money (M1) growth moderated to a 14-month low at 7.5% YoY in April (Mar: 7.9%), following a drop in demand deposits. The decline in M1 growth for the fourth month in a row further validates our view for a potential moderation in domestic spending amid weakening economic conditions and the lacklustre capital market. On a MoM basis, M1 fell 0.3% albeit smaller compared to -0.7% in March.
• Similar to base effect justifying M3 growth, loan growth was at a 7-month high of 4.8% YoY in April (Mar: 4.4%) following higher loans for working capital, purchase of property and personal use. By sectors, growth was broadbased except for the real estate and finance, insurance and business activities sectors. However, on a MoM basis, loan growth was unchanged at 0.4%.
• Deposit growth surged to 34-month high at 5.5% YoY (Mar: 5.2 %), the highest since June 2015. Similar to money supply and loan growth, a lower base a year ago was a major factor, which explains its MoM decline of 0.1% (Mar: 2.0%). A large drop of foreign currency deposits were the main contributor triggered by concerns over uncertainties on the 14th General Election (GE14) in May and external factors (US trade war with China and rising US treasury yields).
• Nonetheless, banks’ liquidity continued to remain healthy as the liquidity coverage ratio rose to 144.5% (Mar: 140.8%). This was due to lesser cash outflow recorded in the banking system. However, the banking system’s stock of high liquid assets moderated to 2.1% MoM (Mar: 3.4%).
• Following the surprise outcome of the recent GE14 and the recent changes brought by the new administration led by Pakatan Harapan government, we expect loan growth, particularly from the corporate sector to be hampered by the government’s decision to nix key infrastructure projects. Additionally, we expect the shock of the election outcome to weigh on net foreign assets, as evidenced by the recent outflows observed in the capital market. Nonetheless, we expect the removal of the Goods and Services Tax to augur well for domestic consumption and probably help to mitigate any downside to economic growth. To ensure capital market stability and ample liquidity as well as to support growth, we expect BNM to adopt an accommodative stance and retain the overnight policy rate at 3.25% for the year.

Source: Kenanga Research - 1 Jun 2018