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PP 7767/09/2010(025354)

Malaysia
Economic Highlights

MARKET DATELINE

30 June 2010

Broad Monetary Aggregate And Loan Growth Picked


Up In May

◆ The money supply, M3, bounced back to increase by 9.5% yoy in May, from +8.1% in April and +8.7% in
March. This was the fastest growth in six months, indicating that the underlying economic activities still remained
quite strong. Stronger growth was underpinned by a pick-up in government operations in May, after slowing down
for the last two consecutive months. This was aided by stronger growth in demand for funds by the private sector,
on the back of a faster increase in loans. These were, however, offset partially by a sharper decline in external
operations during the month.

◆ In the same vein, loan growth expanded at a faster pace of +11.7% yoy in May, compared with +10.0%
in April. This was on account of a pick-up in household and corporate loans during the month. We expect the banking
system’s loans to expand at a stronger pace of 9.0% in 2010, compared with +7.8% in 2009.

◆ Given that inflation will not be a major threat to the economy at this stage and Malaysia is already ahead of the
curve in normalising its monetary conditions, we believe Bank Negara Malaysia will not be in a hurry to increase
interest rates and it will likely take a pause in the next policy meeting in July. We expect the Central Bank
to resume its rate hike in September and by 25 basis points, bringing the OPR to 2.75% for the rest of this
year.

The broad monetary aggregate and loan growth picked up in


June. The broader money supply, M3, bounced back to Table 1
Money And Banking Statistics
increase by 9.5% yoy in May, from +8.1% in April and
+8.7% in March (see Table 1). This was the fastest growth L/D
in six months, indicating that the underlying economic activities M1 M2 M3 Deposits Loans* Ratio
still remained quite strong. Stronger growth was underpinned % yoy %
by a pick-up in government operations in May, after slowing
2008 8.3 13.4 11.9 11.9 12.8 73.5
down for the last two consecutive months. This was aided by
2009 9.8 9.5 9.1 9.3 7.8 77.9
stronger growth in demand for funds by the private sector, on
‘10 Apr 8.9 8.5 8.1 8.1 10.0 79.9
the back of a faster increase in loans. These were, however, May 12.1 9.8 9.5 9.0 11.7 80.5
offset partially by a sharper decline in external operations
% mom
during the month. Similarly, M1 bounced back to +12.1% yoy
‘10 Apr -1.2 -0.6 -0.6 -0.4 0.6 1.0
in May, from +8.9% in April and compared with +12.0% in
May 4.9 0.6 0.7 0.3 1.4 0.8
March, due to a pick-up in demand deposits. Mom, M1 grew % yoy, moving-average
by 4.9% in June, a rebound from -1.2% in May and -2.6% in
April. Similarly, M2 and M3 rebounded to increase by 0.6% ‘10 Apr 12.0 8.6 8.4 8.0 9.9 79.6
and 0.7% mom respectively in May, from -0.6% each in April. May 11.0 9.0 8.8 8.2 10.4 79.8

* Including loans sold to Cagamas and Danaharta.


L/D series have been revised to exclude deposits & loans placed
between the babking system beginning April 2009.

Peck Boon Soon


(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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30 June 2009

In the same vein, loans expanded at a faster pace


of +11.7% yoy in May, compared with +10.0% in Table 2
April (see Table 2). This was on account of a pick-up Banking System - Loans By Sectors
in household and corporate loans during the month.
2008 2009 2010 2010
Household loans strengthened to 12.5% yoy in May,
Apr May Apr May
the sixth straight month of picking up and from +12.2%
Key Sectors (% yoy) Chg, RMbn (% yoy)
in April. This was reflected in a pick-up in loans
extended for the purchase of passenger cars and houses Manufacturing 8.8 -6.3 -0.2 0.9 3.4 5.5

as well as for personal use and credit cards. The pick- Construction&real estate 1 4 . 5 1 4 . 1 0.3 -0.1 1 3 . 9 1 1 .2
Wholesale & Retail 9.0 -1.2 0.3 1.2 5.6 7.0
up in corporate loans was driven by stronger growth in
business loans, which rebounded to 6.1% yoy in May, Transport & Storage 53.8 9.1 -0.4 1.0 -1.1 26.0
Finance, Ins. & Bus. 21.0 2.6 -0.4 0.3 8.7 11.5
from +3.9% in April. This was, however, offset partially
Household sector 9.7 9.8 5.0 4.8 1 2 . 2 12.5
by a slowdown in small and medium scale enterprises
(SMEs) loans to 1.0% yoy, from +4.5% during the Total Loans* 12.8 7.8 4.5 11.2 10.0 11.7
same period. Stronger growth in corporate loans was
reflected in a pick-up in loans extended to agriculture; *Including loans sold to Cagamas and Danaharta
mining; manufacturing; wholesale & retail trade and
restaurant & hotel; finance, insurance & business; and education & healthcare sectors. These were aided by a rebound
in loans extended to transport, storage & communications sector during the month. These were, however, offset partially
by a slowdown in loans given to real estate and utilities sectors. We expect the banking system’s loans to expand at
a stronger pace of 9.0% in 2010, compared with +7.8% in 2009. Mom, the net amount of loans disbursed by the
banking system grew by 1.4% or RM11.2bn in May, faster than +0.6% or RM4.5bn in April.

Total deposits also increased at a faster pace of 9.0% yoy in May, compared with +8.1% in April. Mom, deposits
bounced back to increase by 0.3% mom or RM3.2bn in May, from -0.4% or -RM4.0bn in April. This was due to a rebound
in deposits placed by business enterprises and statutory authorities. These were, however, offset partially by declines
in deposits placed by financial institutions and individuals during the month. As a result, the loan-deposit ratio of the
banking system rose to 80.5% at end-May, from 79.9% at end-April.

Going forward, inflation will likely increase at a faster pace and we expect it to trend up to an average of 2.0% in 2010,
from +0.6% in 2009, in line with a pick-up in domestic demand. Higher crude oil and commodity prices will also contribute
to higher inflationary pressure. In addition, the Government plans to gradually remove some of the subsidies in order
to reduce its financial burden. Although inflation is expected to rise but it will not create a major threat to the economy
at this stage, in our view. However, given that economic growth is gaining momentum and maintaining interest rates
at too low a level over an extended period could encourage excessive risk taking behaviour and unhealthy build up of
financial imbalances, there is a need to bring back interest rates to a more normal level. As a result, BNM has begun
to normalise its monetary conditions. Indeed, the Central Bank raised its overnight policy rate (OPR) by another 25 basis
points to 2.5% on 13 May, the second time in a row. However, we believe Malaysia is already ahead of the curve and
faster compared to regional economies in terms of normalising its monetary conditions. Furthermore, the recovery in
the global economy will likely be uneven. As a result, we believe Bank Negara Malaysia will not be in a hurry to increase
interest rates and it will likely take a pause in the next policy meeting in July. We expect the Central Bank to
resume its rate hike in September and by 25 basis points, bringing the OPR to 2.75%. Thereafter, the OPR will
likely stay at this level for the rest of this year. We expect the Central Bank to raise its key policy rate again in early
part of 2011 and by a total of 50-75 basis points during the year, pushing the OPR to a more normal level of 3.25-3.50%
by end-2011.

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