Economic Viewpoint

1 August 2016

Malaysia Money & Credit

Money supply growth slows in June on weak credit growth in
the private sector

Economics
Kenanga Investment Bank Berhad
wansuhaimi@kenanga.com.my
tozh@kenanga.com.my
T: 603-20791379

OVERVIEW
Money supply growth moderated in June after two consecutive months of improvement. Broad money or
M3 growth slowed to 1.9% YoY from 2.2% in May, mainly due to weak private sector demand for credit.
Narrow money supply or M1 registered a lower 0.9% YoY growth compared to 1.2% in previous month,
reflecting the weakness in consumer spending. System-wide loan growth grew at a slower pace of 0.5%
MoM (May: 0.7%), while total banking system deposits grew marginally at 0.2% MoM (May: 0.7%). As a
result, loan-to-deposit ratio edged up to 87.8% from 87.6% in May. An expected recovery in the economy in
2H16 and the recent Bank Negara Malaysia (BNM) decision of a 25 bps cut in the OPR in July to lend some
support to the domestic money supply and credit growth. As loan is expected to grow at a slow and stable
pace, the loan-to-deposit ratio is likely to remain stable with improved liquidity in the banking system. We
maintain our projection for the loan growth to shrink to 5.0% - 6.0% in 2016 in line with weaker GDP growth
(2016 forecast: 4.0-4.5%)

Broad money supply or M3 growth moderated to 1.9% YoY in June from 2.2% YoY in May, ending a two consecutive
months of accelerating growth. M3 stayed flat compared to previous month, indicating a weak recovery momentum in
broad money supply.

The slowdown in M3 growth is mainly attributable to

slower growth in loans extended to the private sector,

Graph 1: Money Supply Growth Trend

which moderated to 6.4% YoY in June from 6.7% in May.

A weaker Net Foreign Assets growth of 1.5% YoY in
June (May: 1.8%) also contributed to the tepid
performance of M3.

Narrow money supply registered a lower growth in June

despite staying in the positive growth territory. The
narrow money supply or M1 grew 0.9% YoY and 2.1%
MoM, compared with 1.2% YoY and 2.3% MoM
registered in May. This suggests that consumer spending
is still weak and vulnerable to external conditions. On the
other hand, the MIER Consumer Sentiment Index points

Source: Bank Negara Malaysia, Kenanga Research

to a convincing improvement in consumer sentiment,

with a reading of 78.5 in 2Q16 compared with 72.9 registered in 1Q16. In spite of improved sentiment, consumers are
likely taking a cautious approach in their spending amid rising uncertainties in the global and domestic economy.

PP7004/02/2013(031762)

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Economic Viewpoint

01 August 2016

Loan growth weakened to 5.6% YoY in June from 6.2% YoY in May. On a YoY basis, loan growth has remained on a
downward trajectory for ten consecutive months. The poor loan growth was within expectation as deposit growth has
severely lagged loan growth and financial institutions tightened their lending activities in an effort to build up greater buffer
and liquidity in the face of rising uncertainties.

Private sector financing slowed to 6.9% YoY from 7.2%

Graph 2: Loan and Deposit Growth Trend

in May, due to moderating growth of loans provided by

the

banking

system

and

development

financial

institutions. Similarly, business loans grew a weaker

4.2% YoY in June (May: 4.5%). The sectors that saw a
slower loan growth include manufacturing; education
and wholesale and retail trade & restaurants and hotels.
Household loans moderated to 6.0% in June from 6.2%
in May.

Deposit declined at a steeper rate of 0.5% YoY in June

from a negative 0.4% YoY growth in May. Deposits have
been falling for the fourth month on a YoY basis. Deposit
grew a smaller 0.2% MoM compared with 0.7% in May.

The gap between system-wide loan growth and deposit

Source: Bank Negara Malaysia, Kenanga Research

growth widened in June. Consequently the loan-todeposit ratio rose to 87.8% in June from 87.6% in May.

OUTLOOK

We expect a higher money supply growth in July on a low base effect, which stemmed from the large capital outflow in the
corresponding month last year. Furthermore, we expect a recovery in the economy in 2H16 to gradually lift money supply
and credit conditions. However, we believe it is a high hurdle for money supply to stage a strong recovery in the coming
months, considering the still-weak consumer and business sentiment amid volatile external conditions. Money supply
growth would likely remain tepid at best. This is reflected in our recent revision of full-year inflation forecast by 0.3
percentage points to 2.3% YoY.

Meanwhile, US Federal Reserve is expected to resume its rate hike before the end of the year. This is likely to trigger a
wave of capital outflow out of emerging markets. This might serve as additional downside risk to the recovery momentum
of domestic monetary conditions. On the other hand, we believe monetary conditions might experience some volatility in
the next few months in the case of short term capital inflows seeking higher yields in the aftermath of Brexit.

We expect the BNM decision of a 25 bps cut in the OPR in July would lend some support to the domestic money supply
and credit growth. However, the impact of the OPR cut on domestic monetary conditions in the near term would likely be
insignificant, due to the tight lending conditions, tepid consumer sentiment and the transmission lag of changes in the
monetary policy. This may provide BNM the justification to raise the OPR by another 25 bps in the event of further
deterioration of growth expectations. But for now we believe that the OPR at 3.00% is about right. Meanwhile, we maintain
our projection for the average banking system loan growth to shrink to 5.0% - 6.0% in 2016 from 7.9% recorded in 2015.

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Economic Viewpoint

01 August 2016

Table 1: Money Supply, Loan and Deposit Growth Trend

2013

2014

2015

% MoM
M1

May16

Jun16

2.3

0.8

1.0

-3.5

-1.6

2.3

2.1

8.3

2.9

3.5

-12.8

-5.6

7.8

7.4

% YoY

13.1

5.7

4.1

9.5

4.9

4.4

-1.7

-0.9

1.2

0.9

0.4

-0.5

0.9

0.1

-0.2

0.4

0.1

Chg (RM b)

103.1

107.7

44.4

6.8

-7.4

14.6

1.3

-3.0

6.5

2.2

7.7

7.5

2.9

6.4

2.3

2.8

0.9

1.4

2.1

1.8

0.4

-0.4

0.9

0.0

-0.2

0.6

0.0

Chg (RM b)

99.4

101.5

40.8

5.6

-6.3

15.0

0.7

-2.7

9.3

0.4

% YoY

7.3

7.0

2.6

5.9

2.2

2.8

0.9

1.4

2.2

1.9

1.0

0.1

0.2

0.0

-0.1

0.7

0.5

Chg (RM b)

117.7

114.1

105.4

14.0

2.2

2.6

-0.4

-1.6

10.7

6.7

% YoY

10.6

9.3

7.9

9.1

7.7

7.4

6.4

6.3

6.2

5.6

0.4

-0.7

0.7

-0.1

-0.5

0.7

0.2

% MoM

LD Ratio*

Apr16

14.0

% MoM

Deposit

Mar16

18.8

% MoM

Loans

Feb16

37.9

% YoY

M3

Jan16

Chg (RM b)

% MoM
M2

Jun15

Chg (RM b)

116.9

116.4

28.8

6.1

-11.9

12.0

-2.1

-8.9

12.0

3.6

% YoY

8.3

7.6

1.8

7.7

0.9

1.2

-0.9

-1.1

-0.4

-0.5

(%)

82.8

85.9

88.3

88.0

89.0

88.0

87.8

87.7

87.6

87.8

Source: Bank Negara Malaysia, Kenanga Research

*LD Ratio excludes loans sold to Cagamas and loans extended to financial institutions

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make
any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the
information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank
Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer
to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and
may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act
as principal or agent in dealings with respect to these companies.
Published and printed by:
KENANGA INVESTMENT BANK BERHAD (15678-H)
8th Floor, Kenanga International, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia
Telephone: (603) 2166 6822 Facsimile: (603) 2166 6823 Website: http://www.kenanga.com.my

PP7004/02/2013(031762)

Chan Ken Yew

Head of Research

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