PP 7767/09/2010(025354)

Malaysia
Economic Highlights
ïMARKET DATELINE

1 June 2010

Broad Monetary Aggregate Moderated, But Loan

Growth Bounced Back In April

◆ The money supply, M3, eased to 8.1% yoy in April, from +8.7% in March. This was due to a more moderate
increase in the government operations, in tandem with slower growth in the disbursement of funds. A decline in
external operations further worsened the situation. These were, however, mitigated by a pick-up in demand for funds
by the private sector on the back of an increase in the issuance of securities.

◆ Loan growth, on the other hand, bounced back to +10.0% yoy in April, from +9.8% in March. This was on
account of a pick-up in household loans, while corporate loans remained stable during the month. Going forward, we
expect the banking system’s loans to expand at a stronger pace of 9.0% in 2010, compared with +7.8% in 2009,
in tandem with a slowdown in the economy in the 2H of the year.

◆ Going forward, inflation will likely increase at a faster pace and we expect it to trend up and average 2.0%
in 2010, from +0.6% in 2009, in line with a pick-up in domestic demand and the Government’s move to gradually
remove some of its subsidies.

◆ 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 moderated but loan growth

Table 1
bounced back in April. The broader money supply, M3, Money And Banking Statistics
eased to 8.1% yoy in April, from +8.7% in March (see
Table 1). This was due to a more moderate increase in the L/D

government operations, in tandem with slower growth in the M1 M2 M3 Deposits Loans* Ratio
% yoy
disbursement of funds. A decline in external operations further %
worsened the situation. These were, however, mitigated by 2008 8.3 13.4 11.9 11.9 12.8 73.5
a pick-up in demand for funds by the private sector on the 2009 9.8 9.5 9.1 9.3 7.8 77.9
back of an increase in the issuance of securities. Similarly, ‘10 Mar 12.0 8.8 8.7 8.4 9.8 79.1
M1 slowed down to 8.9% yoy in April, from +12.0% in March, Apr 8.9 8.5 8.1 8.1 10.0 79.9
due to a slowdown in both demand deposits and currency in % mom
circulation. Mom, M1 fell by a smaller magnitude of 1.2% in ‘10 Mar -2.6 1.1 1.0 1.9 0.5 -0.8
April, compared with -2.6% in March. M2 and M3, on the Apr -1.2 -0.6 -0.6 -0.4 0.6 1.0
other hand, fell by 0.6% mom each in April, compared with % yoy, moving-average
the corresponding rates of +1.1% and +1.0% in March.
‘10 Mar 12.6 8.5 8.3 8.1 9.4 79.1

Loan growth, on the other hand, bounced back to +10.0% Apr 12.0 8.6 8.4 8.0 9.9 79.6

yoy in April, from +9.8% in March (see Table 2). This was * Including loans sold to Cagamas and Danaharta.
on account of a pick-up in household loans, while corporate L/D series have been revised to exclude deposits & loans placed
loans remained stable during the month. Household loans 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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grew at a stronger pace of 12.2% yoy in April, the
fifth straight month of picking up and compared with Table 2
+11.7% in March. This was on account of higher Banking System - Loans By Sectors
demand for loans for the purchase of passenger cars 2008 2009 2010 2010
and houses as well as for credit cards. These were, Mar Apr Mar Apr
however, offset partially by a slowdown in loans Key Sectors (% yoy) Chg, RMbn (% yoy)
extended for personal use. Corporate loans remained
Manufacturing 8.8 -6.3 0.1 -0.2 1.9 3.5
stable as a pick-up in demand for loans from small
Construction&real estate 14.5 14.1 0.9 0.3 1 1 . 4 14.1
and medium scale enterprises (SMEs) was offset by a
Wholesale & Retail 9.0 -1.2 0.7 0.3 4.9 5.6
slowdown in loans extended to businesses. Similarly,
Transport & Storage 53.8 9.1 -0.2 -0.4 1 0 . 3 -1.1
a pick-up in loans extended to manufacturing;
Finance, Ins. & Bus. 21.0 2.6 -1.5 0.3 7.9 8.8
wholesale & retail trade and restaurant & hotel;
Household sector 9.7 9.8 4.2 5.1 1 1 . 7 12.2
construction; real estate; finance, insurance & business;
and education & healthcare sectors was offset by a Total Loans* 12.8 7.8 4.2 4.7 9.8 10.0
slowdown in loans given to agriculture; mining &
*Including loans sold to Cagamas and Danaharta
quarrying; and utilities sectors as well as a decline in
loans provided to transport, storage & communications
sector. Going forward, we expect the banking system’s loans to expand at a stronger pace of 9.0% in 2010,
compared with +7.8% in 2009, in tandem with a slowdown in the economy in the 2H of the year. Mom, the net amount
of loans disbursed by the banking system inched up by 0.6% or RM4.7bn in April, compared with +0.5% or RM4.2bn
in March.

Total deposits, however, eased to 8.1% yoy in April, from +8.4% in March. Mom, deposits fell by 0.4% mom
or RM4.0bn in April, after rising by 1.9% or RM20.0bn in March. This was due to a decline in deposits placed by business
enterprises and statutory authorities as well as a slowdown in deposits placed by financial institutions, individuals and state
governments during the month. As loans picked up and deposits fell during the month, the loan-deposit ratio of the
banking system eased to 79.9% at end-April, from 79.1% at end-March.

Going forward, inflation will likely increase at a faster pace and we expect it to trend up to 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. 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. Also, the Subsidy Rationalisation Lab was conducted
by the Performance Management and Delivery Unit (Pemandu) on 27 May to get feedbacks from the public on its
proposals to cut subsidies. Majority of the people agreed that subsidies need to be removed but over a period of time
say 3-5 years. In addition, there is a need to address other legacy issues particularly on power tariff and toll charges
to ensure that the economy will not be burdened unnecessary when the charges are raised. Meanwhile, given that output
is recovering from low levels, the resultant pressure on inflation from the narrowing output gap is expected to be limited.

Although inflation is expected to rise but it will not be 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 the early part of 2011 and by a total of
50 basis points during the year, pushing the OPR to a more normal level of 3.25% by end-2011.

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