OVERVIEW

● December broad money (M3) increased by 8.0% YoY (Nov: 7.4%), the highest since July 2013 underpinned by a surge of net claims on government (46.7%; Nov: 37.6%) and a turnaround in net external reserves (0.9%; Nov: -2.7%) with both contributing a total of 3.8 percentage points (ppt) to the overall M3 growth (Nov: 2.1 ppt). Meanwhile, claims on the private sector grew by 6.4% YoY (Nov: 7.1%), contributing 6.4 ppt (Nov: 7.0 ppt) to M3 YoY growth. On a MoM basis, M3 edged up 0.8% (Nov: 0.6%).

● Narrow money (M1) growth dropped sharply to 1.1% YoY (Nov: 3.1%), partly due to higher base effect in the preceding year and softer growth of demand deposits (0.8%; Nov: 3.6%). On a MoM basis, M1 rose sharply by 2.2% (Nov: 0.6%) indicating sustainable domestic spending, as well as a volatile capital market marked by large capital flows and year-end window dressing..

● Loan growth moderated to 5.6% YoY in December after it peaked in November (6.2%) last year, dragged down by lower purchase of fixed assets excluding land and building (8.6%; Nov: 9.8%), working capital (5.4%; Nov: 6.3%) and other purpose (12.9%; Nov: 19.7%). Meanwhile, a contraction was recorded in purchase of transport vehicles (-0.2%; Nov: 0.0%), and purchase of consumer durables (-13.9%; Nov: -13.6%) as consumer typically reduce buying of old stocks near the new year. Meanwhile, loan for the purchase of securities expanded to 7.1% (Nov: 6.9%). Of note, the continued slowdown of loans to the household and real estate sector for the fourth straight month to 5.6% and 1.5% YoY respectively (Nov: 5.7% and 3.1%), reflects cautious sentiment by both the banking sector and consumers due to expectations of slowing economic growth. On a MoM basis, loan growth continued its uptrend, expanding by 0.6% (Nov: 0.4%), amid an increase in weighted average lending rate of commercial banks to 5.02% (Nov: 4.98%).

● Deposit growth rose to a 42-month high of 7.5% YoY (Nov: 6.5%), driven by a sharp increase in fixed deposits which grew by 9.6% YoY (Nov: 7.7%), contributing 4.7 ppt to the overall deposit growth (Nov: 3.7 ppt). Additionally, repurchase agreements of local and foreign currency surged 79.1% YoY (Nov: 46.3%) and foreign currency deposits grew by 10% YoY (Nov: 6.0%), contributing 0.8 ppt and 0.7 ppt respectively to the overall deposit YoY growth.

● Banks’ liquidity remained healthy as the liquidity coverage ratio rebounded to 143.2 (Nov: 141.4), due to the higher stock of high-quality liquid assets which far outpaced the increase in net cash outflow recorded in the banking system. While loan growth has moderated to 5.2% in 2018 (2017: 5.3%), a tad higher than our whole year estimate of 5.0% (2017: 5.3%), deposit growth expanded by 5.6% (2017: 4.0%). Loan growth is forecasted to ease further to 4.2% in 2019, on the back of slower global and domestic growth trend. In ensuring capital market stability, ample liquidity and to remain supportive of growth, we believe BNM will hold the OPR steady at 3.25% this year with room to cut if the economic environment deteriorates.

Source: Kenanga Research - 4 Feb 2019