● M3 growth edged higher to a 10-month highinMay (4.7% YoY; Apr: 4.4%), amid a record low policy rate and sizeable fiscal stimulus

- MoM: moderated to a 2-month low (0.6%; Apr: 1.3%).

- The increase was steered by a double-digit growth in M1, followed by narrow quasi-money, outpacing steeper decline in deposits placed with other banking institutions.

● Higher growth in net external reserves outweighed softer growth in public spending

- Net external reserves (3.9%; Apr: 1.8%): hit a near two-year high, led by bigger accumulation of net foreign reserves by the BNM (6.9%; Apr: 5.2%).

- Net claims on government (30.4%; Apr: 34.2%): softened on slight slowdown in credits extended to the government (15.7%; Apr: 19.1%), though it remained relatively elevated in line with the ongoing fiscal easing.

● Loan growth eased marginally, matching a four-monthhigh (3.9%; Apr: 4.0%)

- By purpose: attributable to lower growth in loans for purchase of residential (6.6%; Apr: 6.9%) and non-residential property (1.3%; Apr: 2.1%) as households and businesses reined in purchases of big-ticket items amid the sombre economic backdrop.

- By sector: a marked slowdown in loans extended to the construction sector (0.8%; Apr: 3.0%), potentially due to projects being halted by the COVID-19 containment measures, outpaced further acceleration in credit growth in the finance, insurance & business activities (9.5%; Apr: 6.8%).

- MoM: expanded by 0.2% (Apr: 0.1%) amid lower weighted average lending rate of commercial banks (4.01%; Apr: 4.26%).

● Deposit growth was sustained at 2.8% (Apr: 2.8%)

- A surge in demand deposits growth (11.6%; Apr: 10.2%) equally offset a moderation in repos (11.2%; Apr: 41.6%).

● 2020 loan growth forecast maintained at 1.0%-2.0% (2019: 3.9%) on lingering COVID-19 worries

- Continued concerns over a resurgence of COVID-19 infections in spite of the recent economic reopening is expected to limit recovery in confidence amongst households and businesses, dampening economic activities and consequently affecting loan growth.

- Along with the deflationary environment and active monetary easing by centrals banks in the developed region, we view that the BNM has ample room to embark on further easing, potentially slashing the OPR by 25 bps at the MPC meeting next week

Source: Kenanga Research - 1 Jul 2020