OVERVIEW

● Broad money supply (M3) slowed to 5.5% YoY in May (Apr: 6.2%) due to a sharp moderation in net foreign assets. Its contribution to M3 growth shrank to 0.7 percentage points (ppts) from 2.2 ppts in April, partly reflecting the month’s large capital outflow from the bond and equity market. However, on a MoM basis, M3 growth edged up by 0.2% (Apr: 0.1%) on higher claims on government and BNM loans extended to the private sector.

● Meanwhile, narrow money (M1) growth moderated to a 15-month low at 6.7% YoY in May (Apr: 7.5%) as demand deposits shrunk for the fifth consecutive month. Domestic spending appears to remain weak during the month on tepid consumer spending and weak economic conditions relative to the preceding year. However, on a MoM basis, M1 growth picked up to its first positive gain for the year at 0.3% (Apr: -0.3%) as sentiments somewhat improved though investors and are still digesting the surprise outcome of the 14th General Election (GE14).

● Loan growth remained on an uptrend in May, at an 8-month high of 4.9% YoY in May (Apr: 4.8%) following higher loans extended for the purchase of securities, fixed assets excluding land and building as well as working capital. By sectors, growth was higher for the agriculture, mining and quarrying; electricity, gas and water supply; real estate as well as finance, insurance and business activities sectors. However, on a MoM basis, loan growth edged lower to 0.3% (Apr: 0.4%), partly due to the higher weighted average lending rate among commercial banks at 4.97% (Apr: 4.90%).

● Deposit growth moderated to 4.8% YoY (Apr: 5.5%), the lowest in three months following a drop in the banking system’s total deposits. On a MoM basis, like in the preceding month, the deposit growth contracted by 0.1%.

● Nonetheless, banks’ liquidity and funding post GE14 remained conducive to support financial intermediation according to BNM. Banking system Liquidity Coverage Ratio (LCR) stood at 142.1%, albeit lower compared to 144.5% in April due to higher net cash outflow of 2.6% MoM in May (Apr: -0.5%). Meanwhile, the banking system’s stock of high liquid assets moderated to 0.8% MoM (May: 2.1%). Reflecting a relatively healthy banking sector, the loan-to-fund and the loan-to-fund-and equity ratios stood at 83.0% and 72.5% respectively, with all banks recording levels above the transitional minimum regulatory requirement of 90%.

● The US Fed’s rate hike in June and its indication for an additional two rate hikes in the coming month has led to emerging market Asia’s biggest capital market exodus since 2008. Headlines on Trump’s trade war threat over China are hurting China-dependent Asian exporters economy and capital flows. While neighbouring countries have begun to tighten their interest rates, we expect Malaysia to remain status quo on its monetary policy direction. On the basis of ensuring 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 - 2 Jul 2018