● M3 growth softened in February (3.7% YoY; Jan: 3.9%) …

- MoM: first contraction in six months (-0.1%; Jan: 0.0%).

- Moderation led by narrow quasi-money, followed by deposits placed at other banking institutions, outpacing higher growth of M1.

● …as a contraction in net external reserves outweighed higher growth in public spending and private sector

- Net external reserves (-2.4%; Jan: 0.3%):steepest contraction in five months, steered by those of the banking system (-12.0%; Jan: -2.6%), signalling increased liquidation of foreign assets.

- Net claims on government (12.4%; Jan: 7.8%): increased to a five-month high on a substantial pick up in credits extended to the government (8.7%; Jan: 1.8%), potentially to finance a portion of the COVID-19 stimulus package.

- Claims on private sector (4.0%; Jan: 3.9%):edged slightly higher on increased holdings of securities (5.0%; Jan: 4.2%) by the banking system.

● Loan growth edged up, matching a three-month high (3.9%; Jan: 3.5%)

- By purpose: underpinned by higher growth in loans for working capital (0.6%; Jan: -0.4%) and construction purposes (6.1%; Jan: 9.2%).

- By sector: rebound in credit growth in the finance, insurance & business activities (0.6%; Jan: -1.7%) offset continued easing in loans extended to the household sector (4.4%; Jan: 4.5%), suggesting pessimism among households with regards tofuture income.

- MoM: expanded by 0.2% amid lower weighted average lending rate of commercial banks (4.60%; Jan: 4.64%).

● Deposit growth eased to a three-month low (2.8%; Jan: 2.9%)

- Weighed primarily by a 34-month low growth in fixed deposits (2.2%; Jan: 2.5%) and a further contraction in other deposits accepted (-3.2, Jan: -2.3%).

● 2020 loan growth forecast revised down to 1.0%-2.0% from 4.0% (2019: 3.9%) in tandem with the bleak economic outlook

- COVID-19 pandemic to weigh on economic activities, consequently affecting loan growth, engendering an economic contraction in 2020 (KIB preliminary forecast: -1.9%; 2019: 4.3%). Harsh impact on global supply chain and economic growth of major trading partners is expected to trigger a ripple effect to the services and manufacturing sectors.

- Coupled with subdued inflationary pressure amid sharply lower oil price and the absence of demand-pull pressure, we still see scope for BNM to lean towards a 50 basis points rate cut at an emergency meeting or the next policy meeting in May, bringing the OPR to settle at 2.00% for this year, the level last seen during the Global Financial Crisis back in 2009.

Source: Kenanga Research - 1 Apr 2020