● M3 growth advanced to an 18-month high in August (6.4% YoY; Jul: 6.1%) against the backdrop of a low interest rate environment and massive fiscal injection

- MoM: eased to a 6-month low (0.1%; Jul: 0.5%).

- Growth was underpinned by the fourth straight month of a double-digit expansion in M1 (17.8%; Jul: 15.7%), reflecting a bullish stock market, outpacing slight moderation in narrow quasi-money (3.76%; Jul: 3.85%).

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

- Net external reserves (6.0%; Jul: 3.1%): highest growth in 28 months underpinned by a spike in accumulation of net foreign reserves by the banking system (13.3%; Jul: 0.8%).

- Net claims on government (48.2%; Jul: 49.0%): softened marginally on a slowdown in credits extended to the government (20.8%; Jul: 26.5%), albeit remaining at a relatively high level in line with the ongoing fiscal expansion.

● Loan growth eased marginally to 4.4% (Jul: 4.5%)

- By purpose: due to a slowdown in loan growth for working capital (2.6%; Jul: 4.6%), as more businesses resumed operations, generating an improved revenue. This was partly offset by the first expansion in 21 months for vehicle loans (1.5%; Jul: -0.2%) amid ongoing sales tax exemption.

- By sector: moderation in loan growth for finance, insurance and business activities (4.2%; Jul: 7.1%) masked the rising credit growth for the household sector (4.8%; Jul: 4.3%).

- MoM: increased to 0.5% (Jul: 0.3%), as the weighted average lending rate of commercial banks decreased further, to a record low of 3.64% (Jul: 3.70%).

● Deposit growth remained at 4.5% (Jul: 4.5%)

- Soaring foreign currency deposits (13.4%; Jul: 4.0%), specifically those held by businesses, and demand deposits (19.6%; Jul: 16.3%) were counteracted by a steeper decline in fixed deposits (-2.1%; Jul: -1.5%).

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

- The recent spike in COVID-19 cases domestically and implementation of a Targeted Enhanced Movement Control Order in affected zones are expected to weigh on business and consumer confidence, consequently slowing down loan growth and the ongoing economic recovery.

- However, barring a nationwide reinstatement of lockdown measures, we still expect the BNM to retain the policy rate at 1.75% for the remainder of 2020, consistent with its less-dovish monetary policy statement and given that the government is already scheduled to disburse additional fiscal stimulus in the 4Q20.

Source: Kenanga Research - 1 Oct 2020