Wednesday, February 6, 2013

December 2012 Monetary Conditions

The other day, I characterised monetary conditions as boring – seems I might have spoken too soon. What is going on in the interbank and money markets? (RM millions)


Trading volume on the money market for 2012 (which covers MGS, T-Bills, BNM Bills, NIDs and BAs – I know, that’s a lot of acronyms) is a quarter below the average of 2011. December 2012 trading volume was just RM21.5 billion, which is less than half the average for 2012 – much of the drop has occurred in the last two months of the year.

Meanwhile, action on the interbank market (i.e. interbank deposits) has gotten a lot healthier (RM millions):


Much of the trading volume lost on the money market has shifted instead into the interbank market. It’s certainly not for a lack of tradeable securities, as net issuance of MGS alone totalled RM46.7 billion in 2012, and BNM Bills outstanding leaped over 40% or RM45.1 billion:



Yet trade volume in these two money market mainstays has fallen drastically in the last two months of 2012.

My working hypothesis is a flight to safety…or a flight to liquidity, which amounts to pretty much the same thing in practice (election jitters? possibly). That’s borne out by the breakdown by maturity – the increase in interbank turnover is all in deposits under 1 week.

The funny thing is, there’s not much change in prices of money market instruments, indicating that demand is still there:



The primary market is still solid, and the lack of trade volume on the secondary market isn’t impacting yields or prices much. It would be interesting to see if volumes return over the next couple of months, or if this state of affairs will last beyond the general election.

Looking further afield, money supply growth has also really slowed in the last couple of months (log annual and monthly changes; seasonally adjusted):


I’m not overly concerned about this, in fact a little bit of the opposite. Part of the slowdown is coming from slowing loans growth (log annual and monthly changes):


…which impacts deposit creation, and hence the money supply. Both money supply and loans are closer to my comfort level in terms of growth, and I’d be pretty happy if they both stay around this rate of increase, which is about on par with Malaysia’s long term growth rate of nominal GDP.

However, there is a fly in the ointment, though this might simply be due to the runup to CNY – growth in both loan applications and approvals are still slowing (log annual and monthly changes; seasonally adjusted):


This won’t impact loan growth just yet – my squiggly ruler forecast says loan growth should be back over 11% in January and February – but something to keep an eye on.

Technical Notes:

All data from the December 2012 Monthly Statistical Bulletin from Bank Negara Malaysia

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