● Broad money supply or M3 expanded to a 9-month high at 4.4% YoY in April (Mar: 3.7%).

- MoM: expanded to a 4-month high (1.3%; Mar: 0.5%).

- Better growth was attributable to higher M1 growth (9.6%; Mar: 7.9%), partly a reflection of a rebound in the equity market after a large sell down in March in response to the initial impact of large fiscal and monetary stimuli.

● …due to higher growth in public spending, private sector and net external reserves

- Net claims on government (34.2%; Mar: 25.8%): surged to a 11- month high on sharp increase in credit extended to the government (19.1%; Mar: 11.0%), largely to part-finance the RM260.0b economic stimulus package.

- Claims on the private sector (4.0%; Mar: 3.9%): edged slightly higher on increased holdings of securities (4.1%; Mar: 3.1%) by the banking system.

- Net external reserves (1.8%; Mar: -2.9%): rebounded at a fastest pace in 21 months, mainly driven by rising central bank reserves (5.2%; Mar: 4.7%) and a sharply MoM rebound of 23.6% (Mar: - 15.6%), resulting in a reduced YoY contraction in reserves in the banking system (-11.1%; Mar: -30.4%).

● Loan growth was sustained at a nine-month high (4.0%; Mar: 4.0%)

- By purpose: supported by better growth in loans for working capital (4.9%; Mar: 3.5%) as more businesses utilized all economic sectors facility under the government PRIHATIN economic stimulus package.

- By sector: steered by a steady increase in credit growth for manufacturing (9.2%; Mar: 8.7%) and finance, insurance, and business activities (6.8%; Mar: 4.5%).

- MoM: moderated slightly by 0.1% (Mar: 0.5%) in spite of lower weighted average lending rate of commercial banks (4.26%; Mar: 4.40%) as a result of monetary easing by BNM.

● Deposit growth edged up to 2.8% (Mar: 2.7%)

- Backed by steady growth in demand deposits (1.7%; Mar: 1.6%) and saving deposits (1.5%; Mar: 1.1%).

● Loan growth forecast maintained at a range of 1.0%-2.0% (2019: 3.9%), on the back of the COVID-19 triggered recession

- Uncertainties over health, jobs and finance due to the COVID-19 pandemic, coupled with the extension of the Conditional Movement Control Order to June 9th, are expected to severely impact economic activities. This will adversely impact loan growth and would probably raise nonperforming loans after the moratorium period ends.

- Along with the expectation of a weaker labour market and the absence of demand-pull pressure, we believe that BNM still has ample room to ease the monetary policy. Hence, we expect BNM to cut the overnight policy rate by at least 25 bps at its next Monetary Policy Committee meeting in July, bringing it to settle at a record low of 1.75%.

Source: Kenanga Research - 1 Jun 2020