M3 grew at a faster pace in January (3.9% YoY; Dec: 3.5%) …

• MoM: contracted slightly to a 5-month low (-0.01%; Dec: 1.4%).
• Due to better growth in narrow quasi-money (3.5%; Dec: 2.8%) outweighed slower expansion in demand deposits (5.2%; Dec: 5.6%) and M2 (3.8; Dec: 3.5%).

 …with improved growth in net external reserves and public spending

• Net external reserves (0.3%; Dec: -1.5%): expanded after 4 months of contraction, steered by those of the banking system reserves (-2.6%; Dec: -11.5%), although a slight drop was observed in the central bank reserves (1.0%; Dec: 1.1%).
• Net claims on government (7.8%; Dec: 6.0%): expanded for a second consecutive month in January attributable by a large drop in government deposits (-13.0%; Dec: -5.6%).
• Claims on private sector (3.9%; Dec: 4.4%): eases after an uptick in December, mainly due to slower growth in securities.

Loan growth edged down to 3.5% (Dec: 3.9%), the weakest pace in nearly 17 years

• By purpose: slowdown led by contraction in purchase of consumer durables (-16.3%; Dec: -13.4%) and loans for working capital (-0.4%; Dec: 1.0%).
• By sector: negative credit growth in the finance, insurance & business activities (-1.7%; Dec: 0.5%) and weaker expansion in manufacturing (7.0%; Dec: 8.9%) offset improvement in the electricity, gas & water supply sector (20.6%; Dec: 15.0%).
• MoM: drop for the first time in 11 months (-0.1%) in spite of lower weighted average lending rate of commercial banks (4.64%; Dec: 4.70%).

Deposit growth rose 2.9% matching December’s increase

• Weighed by steady growth in repurchase agreement (1.4%; Dec: -8.9%) and foreign currency deposits (9.0%; Dec: 6.7%).

Loan growth is projected to ease in the 1H20 with possibility for improvement to 4.0% in the 2H20 (2019: 3.9%; 2018: 7.7%)

• GDP growth slowdown coupled with the impact of COVID-19 is anticipated to weigh on loan growth for the year. The continuous global spread of the virus has magnified downside risk in both domestic and external sectors, disrupting the global supply chain which is largely controlled by China. The ripple effect of the epidemic is hurting the services and the manufacturing sector, while the prolonged trade dispute between the US and China would continue to put pressure on global trade amid positive progress of the phase-one agreement.
• BNM hinted that there is ample room for another round of overnight policy rate (OPR) cut which may help to cushion the adverse impact of COVID-19 and trade war. We foresee that the BNM may slash the OPR by another 25 basis points to 2.50% at the next Monetary Policy Committee (MPC) meeting (Mar 3)

Source: Kenanga Research - 2 Mar 2020