OVERVIEW

● March broad money (M3) grew at a slower pace of 4.6% YoY (Feb: 6.0%), marking its lowest growth rate for the past 14 months. This was underpinned by a steeper contraction in net foreign assets (-2.2%; Feb: -1.8%), reflecting enlarged capital outflows, as well as slower growth of net claims on government (44.2%; Feb: 48.6%) and claims on private sector (5.7%, Feb: 5.9%). Collectively, these have more than outweighed faster expansion of net other influences (9.5%, Feb: 7.6%). In terms of percentage point (ppt) contribution, broad money growth was dragged by net other influences (-3.4 ppt) and net foreign assets (- 0.7 ppt), while claims on the private sector remained the key contributor (5.7 ppt), followed by net claims on government (3.0 ppt). Meanwhile, on a MoM basis, M3 growth charted a turnaround of 0.6% (Feb: -0.1%).

● Tracking an opposite direction, narrow money (M1) growth edged higher to 2.5% YoY (Feb: 0.5%), after registering a 29- month low growth in the preceding month. This was attributable to an expansion in demand deposits (2.8%; Feb: 0.2%), offsetting a softer growth of currency in circulation (1.3%; Feb: 1.6%). This could partly be explained by increased transaction demand amid the school holiday in March. On a MoM basis, M1 growth rebounded to 1.3% (Feb: -1.4%).

● Loan growth retained a downtrend in March, registering a 10-month low expansion of 4.9% YoY (Feb: 5.0%), mainly driven by slowdown in loans extended for construction (1.1%; Feb: 2.8), working capital (4.3%; Feb: 5.2%) and personal use (6.5%; Feb: 7.2%). Meanwhile, loans for the purchase of consumer durables and passenger cars continued to deteriorate, indicating elevated precautionary sentiments among consumers against the backdrop of a slower economic growth. On a sectoral basis, construction (8.0%; Feb: 10.7%), as well as mining and quarrying (-22.6%; Feb: - 21.3%) led the slowdown observed during the month. On a MoM basis, loan growth accelerated to 0.4% (Feb: -0.2%), in spite of slight increase in weighted average lending rate of commercial banks to 5.03% (Feb: 5.02%). On a similar trend, deposit growth decreased to a 6-month low of 5.3% (Feb: 6.3%), predominantly triggered by tapering growth of fixed deposits (7.7%; Feb: 8.4%), saving deposits (4.1%; Feb: 4.7%) and foreign currency deposits (9.6%; Feb: 2.0%).

● In view of an expected slowdown in the economy this year, both externally and domestically, loan growth is projected to ease further to 4.2% in 2019 (2018: 5.6%). As such, coupled with subdued inflationary pressure and dovish stance of major central banks (i.e. Fed and ECB) and a growing number of regional central banks, we believe that the Bank Negara Malaysia now has a bigger leeway to cut its overnight policy rate by 25 basis points, possibly at its next Monetary Policy Committee meeting on 7 May.

Source: Kenanga Research - 2 May 2019