PP 7767/09/2010(025354)

Malaysia
Economic Highlights
ïMARKET DATELINE

1 April 2010

Broad Monetary Aggregate And Loan Growth Picked

Up In February

.
◆ The broader money supply, M3, grew at a faster pace of 8.2% yoy in February, compared with +7.9% in
January. This was attributed to a faster increase in the government operations, in tandem with a pick-up in the
disbursement of funds. A pick-up in demand for funds by the private sector, on the back of higher loan growth,
also helped. These were, however, offset partially by a slowdown in external operations.

◆ Similarly, loan growth picked up to 10.0% yoy in February, from +8.6% in January. This was on account of
stronger growth in both household and corporate loans during the month. Going forward, we expect the banking
system’s loans to expand by 9.0% in 2010, in tandem with a recovery in the economy.

◆ Whilst inflation is not a major concern for policymakers, the threat of a fundamental recession is diminishing. This
implies that a very high degree of monetary stimulus is considered no longer warranted. As a result, BNM has begun
to normalise its monetary conditions by raising the overnight policy rate (OPR) by 25 basis points to 2.25% on 4
March. We expect Bank Negara to raise its OPR at a measured pace and by another 25 basis points in
July 2010 to 2.5%. Thereafter, the OPR will likely stay at this level until the end of the year.

The broad monetary aggregate and loan growth picked up

Table 1
in February. The broader money supply, M3, grew at a
Money And Banking Statistics
faster pace of 8.2% yoy in February, compared with
+7.9% in January (see Table 1). This was attributed to a L/D
faster increase in the government operations, in tandem M1 M2 M3 Deposits Loans* Ratio
with a pick-up in the disbursement of funds. A pick-up in % yoy %
demand for funds by the private sector, on the back of
2008 8.3 13.4 11.9 11.9 12.8 73.5
higher loan growth, also helped. These were, however,
2009 9.8 9.5 9.1 9.3 7.8 77.9
offset partially by a slowdown in external operations. M1
‘10 Jan 10.4 8.1 7.9 8.4 8.6 78.4
also strengthened to +15.0% yoy in February, from +10.4%
Feb 15.0 8.4 8.2 7.4 10.0 79.7
in January, on account of a pick-up in demand deposits and
% mom
currency in circulation due to festive season. Mom, M1 grew
‘10 Jan 1.0 0.2 0.3 -0.4 0.9 0.6
at a faster pace of 1.5% in February, compared with +1.0%
Feb 1.5 0.0 0.1 -0.9 1.5 1.7
in January. M3, on the other hand, eased to 0.1% mom
% yoy, moving-average
during the month, from the +0.3% in the previous month,
while M2 remained unchanged. ‘10 Jan 11.2 9.3 9.0 9.4 7.8 78.1
Feb 11.7 8.7 8.4 8.4 8.8 78.7
Similarly, loan growth picked up to 10.0% yoy in
February, from +8.6% in January (see Table 2). This was * Including loans sold to Cagamas and Danaharta.
L/D series have been revised to exclude deposits & loans placed
on account of stronger growth in both household and
between the babking system beginning April 2009.
corporate loans during the month. Household loans
strengthened to 11.1% yoy in February, the third straight
month of picking up and from +10.4% in January. This was driven by higher demand for loans for the purchase of
passenger cars and houses as well as for credit card and personal use. In the same vein, the pick-up in corporate
loans was driven by a pick-up in business loans, which inched up to 4.2% yoy in February, from +3.5% in January.

Peck Boon Soon

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

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 1 April 2010

A turnaround in SME loans, which rebounded to

Table 2
increase by 2.0% yoy during the month, from -0.1%
Banking System - Loans By Sectors
in the previous month, also helped. Stronger growth
in corporate loans was broad-based from mining & 2008 2009 2010 2010
quarrying to utilities; wholesale & retail trade and Jan Feb Jan Feb
restaurant & hotel; construction; real estate; Key Sectors (% yoy) Chg, RMbn (% yoy)
transport, storage & communications finance;
Manufacturing 8.8 -6.3 1.0 0.7 -3.7 -0.4
insurance & business; and education & healthcare
Construction&real estate 14.5 14.1 -0.2 0.4 12.5 13.2
sectors. These were aided by a smaller decline in
Wholesale & Retail 9.0 -1.2 0.8 0.1 1.8 2.8
loans given to manufacturing sector. Going forward,
Transport & Storage 53.8 9.1 0.0 2.7 7.2 16.0
we expect the banking system’s loans to expand at
Finance, Ins. & Bus. 21.0 2.6 0.1 3.6 1.7 6.3
a stronger pace of 9.0% in 2010, compared with
Household sector 9.7 9.8 5.3 4.5 10.4 11.1
+7.8% in 2009, in tandem with a recovery in the
economy. Mom, the net amount of loans disbursed Total Loans* 12.8 7.8 7.2 11.5 8.6 10.0
by the banking system rose by 1.5% or RM11.5bn in
*Including loans sold to Cagamas and Danaharta
February, compared with +0.9% or RM7.2bn in
January.

Total deposits, however, slowed down to 7.4% yoy in February, from +8.4% in January. Mom, deposits fell
by 0.9% or -RM9.4bn in February, compared with -0.4% or -RM4.3bn in January. This was dragged down by declines
in deposits placed by business enterprises and the Federal Government as well as a smaller amount of deposits placed
by individuals. These were, however, mitigated by a pick-up in deposits placed by statutory authorities and state
governments as well as a smaller decline in deposits placed by financial institutions during the month. As loans grew
compared to that of a decline in deposits, the loan-deposit ratio of the banking system rose to 79.7% at end-
February, from 78.4% at end-January. Despite the rise in loan-deposit ratio, liquidity remains ample in the system.

Going forward, we believe inflation rate will likely inch up, on the back of stronger domestic demand. Higher crude
oil price, which is projected to fluctuate at between US$80-100/barrel in 2010, compared with an average of US$62/
barrel in 2009, and commodity prices will also contribute to a pick-up in prices. In addition, the Government plans
to gradually remove some of the subsidies in order to reduce its financial burden. Already, the Government has allowed
sugar price to be increased by 20 sen and it has removed the subsidy for white bread at the beginning of the year.
As a whole, we believe inflation will likely trend up to 2.0% in 2010, from +0.6% in 2009. Meanwhile, the
Government said that it had scrapped its petrol subsidy restructuring scheme, which it plans to implement in May,
following negative feedback from the public and it has no plan to raise or reduce retail petrol prices for now.

Whilst inflation is not a major concern for policymakers, the threat of a fundamental recession is diminishing. This
implies that a very high degree of monetary stimulus is considered no longer warranted. Also, maintaining interest
rates at too low a level over an extended period could encourage excessive risk taking behaviour, and the unhealthy
build up of financial imbalances. As a result, BNM has begun to normalise its monetary conditions by raising the
overnight policy rate (OPR) by 25 basis points to 2.25% on 4 March. We expect Bank Negara to raise its OPR at
a measured pace and by another 25 basis points in July 2010 to 2.5%. Thereafter, the OPR will likely stay
at this level until the end of the year. We do not expect the Central Bank to raise interest rates at every policy meeting
given expectation of a slow and uneven global economic recovery. Given that this is a normalisation of policy, the
Central Bank indicated that its monetary policy will remain accommodative and supportive of the economy. We believe
a mild and gradual increase in interest rates from an extremely low level would unlikely affect consumer spending and
business activities in a material way.

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 1 April 2010

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