dr yeah kim leng group chief economist

Dr Yeah Kim LengGroup Chief Economist

4th June, 2012

Malaysia’s Economic Outlook for 2012 and 2013:

How resilient to a global slowdown?

RAM Economics Research

Briefing to Heads of Department

Economics Research

1 Global conditions

Outline

Domestic growth expectations2

3 Assessment of key risks and potential impact

2

Economics Research

1 Global conditions

Outline



3

Economics Research

Global manufacturing activity remains weak… Symptomatic of easing global demand Exacerbated by rising risk aversion

Global conditions

4

Overview

2007 2008 2009 2010 2011 201230

35

40

45

50

55

60

Global PMISource: Bloomberg

Minimal growth in manufacturing and trade activity in the past 10 months

Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-120

500

1000

1500

2000

2500

Baltic Dry Index

Economics Research

Commodity prices have stabilized but remain elevated Risks of supply shocks (Middle East) had heightened speculation …but is mitigated by easing global demand pressures

Global conditions

5

Overview

2005 2006 2007 2008 2009 2010 2011 20120

50

100

150

200

250

300

Food price index Average oil index

2005

= 1

00

Source: IMF

Food prices 8.5% below April 2011 peak

Oil prices 16.1% below July 2008 peak

Economics Research

Employment situation has improved, but the American economy remains weak… Lack of fiscal support in the economy due to political deadlock and fiscal constraints Risk aversion remains high as a result of the European debt crisis

Global conditions

6

United States

20082008

20092009

20102010

20112011

-10

-8

-6

-4

-2

0

2

4

6

Private consumption Private fixed capital formationPublic sector Net exportsGDP

Perc

enta

ge p

oint

cont

ributi

on/a

nnua

l ch

ange

(%)

39083 -1033m/yy

yy

39234 -1033m/yy

yy

39387 -1033m/yy

yy

39539 -1033m/yy

yy

39692 -1033m/yy

yy

39845 -1033m/yy

yy

39995 -1033m/yy

yy

40148 -1033m/yy

yy

40299 -1033m/yy

yy

40452 -1033m/yy

yy

40603 -1033m/yy

yy

40756 -1033m/yy

yy

40909 -1033m/yy

yy-1,000

-800

-600

-400

-200

0

200

400

600

Private Public

Net c

hang

e in

em

ploy

men

t

Public sector drag on the US economy

Economics Research

Poor demand conditions and extended austerity programmes coupled with policy constraints will push Europe into a recession Traditional fiscal remedies to stimulate the economy are hindered by poor public

finances and restrictive legislation Outlook for most non-exporting European nations are likely to deteriorate in the

near-term as funding sources become limited.

Global conditions

7

Europe

2008 2009 2010 2011 20120

200

400

600

800

1000

1200

Spain Italy Ireland

Basi

s poi

nt s

prea

d ab

ove

corr

espo

ndin

g Ge

rman

bun

d

Source: Bloomberg and RAM Economics

Fiscal conditions, IMF forecasts

Fiscal balance

(% of GDP)

Debt burden

(% of GDP)

Current Account balance

(% of GDP)

Yield, zero-coupon 10Y

bond (28 May)

Spain -6.0 79 -2.1 6.7%

Italy -2.4 123 -2.2 5.9%

Ireland -8.5 113 1.0 7.4%

Portugal -4.5 112 -4.1 12.0%

Source: IMF and Bloomberg

Market confidence has deteriorated since the start of 2012, increasing the relative cost of deficit funding

Economics Research

China’s growth remains robust, but is undermined by poor external conditions and the need for structural reform… China’s external sector is expected to slow considerably, as a substantial proportion

of its exports are directed to the weakened advanced economies This will have strong implications on its economic development – should domestic

demand weaken – as well as regional growth and commodity prices

Global conditions

8

China

ASEAN9%

Hong Kong, Japan, Korea26%

EU19%

USA17%

Others29%

Source: General Administration of Customs, China and RAM Economics

China's 2011 export value: USD1.9 trillion

Economics Research

1 Global conditions

Outline



9

Economics Research

Economy expanded by 4.7% in 1Q 2012 Supported by robust private sector growth Substantial improvements in gross fixed investment growth However, weak external conditions had slowed growth

Domestic growth expectations

10

GDP

-10

-5

0

5

10

15

Private sector Public sector Net exports GDPPerc

enta

ge p

oint

con

trib

ution

to G

DP

(%)

Source: DOS and RAM Economics

-10

-5

0

5

10

15

Consumption Investment Net ExportsPerc

enta

ge p

oint

con

trib

ution

to G

DP

(%)


Economics Research


11

GDP (cont.)

Annual change (%) 2Q 2011 3Q 2011 4Q 2011 1Q 2012

ConsumptionPrivate 6.6 7.6 7.3 7.4

Public 6.0 21.1 22.9 5.9

InvestmentsPrivate 7.6 2.9 18.8 19.8

Public -5.4 9.4 1.9 10.3

External sector

Exports 4.6 4.8 5.5 2.8

Imports 4.0 3.9 7.8 6.8

Near-term growth outlook supported by private investments Domestic demand conditions still remain adequately stable Weak external sector may slow certain sectors of the economy, but is mitigated by

China’s robust growth

Annual change (%) 2Q 2011 3Q 2011 4Q 2011 1Q 2012

Agriculture 7.7 8.8 6.9 2.1

Mining -9.3 -5.9 -3.8 0.3

Manufacturing 2.6 5.4 5.2 4.2

Construction 1.8 4.0 7.5 15.5

Services 7.1 7.1 6.6 5.0

Substantial growth in private investments and construction activity

Economics Research

Consumption supported by healthy employment levels and policy measures Relatively steady employment generation had enabled the robust growth in private

consumption The increases in public sector wages and enactment of minimum wage will boost

domestic consumption


12

Consumption

39142 -1033m/yy

yy

39234 -1033m/yy

yy

39326 -1033m/yy

yy

39417 -1033m/yy

yy

39508 -1033m/yy

yy

39600 -1033m/yy

yy

39692 -1033m/yy

yy

39783 -1033m/yy

yy

39873 -1033m/yy

yy

39965 -1033m/yy

yy

40057 -1033m/yy

yy

40148 -1033m/yy

yy

40238 -1033m/yy

yy

40330 -1033m/yy

yy

40422 -1033m/yy

yy

40513 -1033m/yy

yy

40603 -1033m/yy

yy

40695 -1033m/yy

yy

40787 -1033m/yy

yy

40878 -1033m/yy

yy0

50

100

150

200

250

300

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

3.0%

Employment Unemployment rate (RHS)

Chan

ge fr

om p

revi

ous q

uart

er (t

hous

ands

)

Perc

ent o

f lab

our f

orce

(%)

Source: Department of Statistics and RAM Economics

Significant employment generation in 2011

Economics Research

Domestic private sector investment activities had picked up Spurred on by Government initiatives to boost investments An accommodative interest rate environment had supported capital formation Lower investor risk aversion had supported financing capability through domestic

banks and the bond markets


13

Investments

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

-

10,000

20,000

30,000

40,000

50,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

PDS issuedEquity issuedBank loans to non-financial, non-household sectors (RHS)

Source: Bank Negara Malaysia and RAM Economics

Mar-10

Jun-10Sep

-10Dec-

10

Mar-11

Jun-11Sep

-11Dec-

11

Mar-12

020406080

100120140160180200

300320340360380400420440460480500

AAA AA1 A1 (RHS)

Basis

poi

nt sp

read

aga

inst

MGS

Basis

poi

nt sp

read

aga

inst

MGS

Lower and more stable market risk aversion

Economics Research

Pre-election expenditure and development programmes will ensure public sector growth in the near-term Commitments to various ETP projects and supporting infrastructure will likely cause

Government development expenditure to increase Boost to public sector wages has already affected the growth in operating

expenditure in 2011, and is likely to continue this year


14

Public sector

1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012-40

-20

0

20

40

60

80

Operating expenditure Development expenditure

Annu

al ch

ange

(%)

Source: Ministry of Finance, Bank Negara Malaysia and RAM Economics

Economics Research

As commodity prices stabilize, export earnings have decelerated The uneven growth conditions in Malaysia’s major export destinations had caused

some volatility in export earnings Speculation of weaker global demand had slowed the growth of commodity prices

and had suppressed export earnings as well


15

External sector

EU

China

USA

South East Asia

Japan

-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0

15.9

20.7

14.5

45.4

22.3

Annual change of exports in 1Q 2012 (%)

Value of exports in 1Q 2012


-60

-40

-20

0

20

40

60

Commodities Manufactures

Annu

al ch

ange

(%)


Deceleration of commodity export earnings growth

Economics Research

Slight rebound in export-oriented manufacturing in 1Q 2012 However a more sustainable growth would require external conditions to normalize Domestic-oriented industries benefit from robust domestic demand growth and

Government initiatives to promote private investments


16

Key industrial indicators

-30

-20

-10

0

10

20

30

Manufacturing IPI Export-oriented IPI Domestic-oriented IPI

Annu

al ch

ange

(%)

Source: Bank Negara and RAM Economics

-6

-5

-4

-3

-2

-1

0

1

Export Oriented Domestic Oriented

Capa

city

utiliz

ation

, num

ber o

f sta

ndar

d de

viati

ons f

rom

mea

n

Source: Bank Negara and RAM Eco-nomics

Currently, industries are only operating slightly above their long-term capacity rates

Economics Research

Construction activity grew significantly in 1Q 2012 Supported by robust domestic demand and various Government initiatives A relatively accommodative interest rate environment had also allowed sufficient

demand for construction activity, especially with regard to residential and non-residential construction


17

Construction activities

RM millionValue of construction work done

Total Residential Non-residential Infrastructure Special Trade

1Q 2011 15,519 3,491 6,578 4,363 1,087

2Q 2011 15,040 3,775 6,513 3,530 1,222

3Q 2011 16,037 4,180 6,166 4,355 1,335

4Q 2011 17,661 4,610 5,958 6,057 1,036

1Q 2012 17,726 4,885 6,807 5,119 915

Significant residential and non-residential construction activitySource: DOS

Economics Research

Sustained growth in the services sector Robust domestic demand through rising wages and employment continues to

support the services sector However, recent BNM responsible lending guidelines may have slowed domestic

consumption activity in 1Q 2012. This effect is expected to normalize over time as banks adopt more sustainable lending practices.


18

Services activities

3Q 2011 4Q 2011 1Q 20120.02.04.06.08.0

10.012.014.016.018.0

10.39.3

5.2

Total distributive trade index Wholesale indexRetail trade index Motor vehicles index

Annu

al c

hang

e (%

)

Economics Research

With the subsidy scheme intact, domestic price pressures are driven by improving demand conditions Price pressures from food and transport components of the CPI have been minimal

as subsidies remain intact However, demand pressures had accelerated other components of the CPI


19

Inflation

39448 -1033m/yy

yy

39600 -1033m/yy

yy

39753 -1033m/yy

yy

39904 -1033m/yy

yy

40057 -1033m/yy

yy

40210 -1033m/yy

yy

40360 -1033m/yy

yy

40513 -1033m/yy

yy

40664 -1033m/yy

yy

40817 -1033m/yy

yy

40969 -1033m/yy

yy-6.0-4.0-2.00.02.04.06.08.0

10.0

Food Transport Other

Perc

enta

ge p

oint

con

trib

ution

to C

PI

grow

th

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Food at home Food away from home

Annu

al c

hang

e (%

)

Clear and sustained divergence in growth rates in recent months

Economics Research

BNM has held the OPR at 3.00% since April 2011 The benign pace of inflation has pushed the adjusted OPR to near pre-crisis levels In-house calculation suggests that Malaysia currently operating at its potential

output BNM not seen to adjust interest rates as it has to balance the risk of domestic

growth from the European debt crisis against the recent acceleration in household loans


20

Interest rates

39083 -1033m/yy

yy

39173 -1033m/yy

yy

39264 -1033m/yy

yy

39356 -1033m/yy

yy

39448 -1033m/yy

yy

39539 -1033m/yy

yy

39630 -1033m/yy

yy

39722 -1033m/yy

yy

39814 -1033m/yy

yy

39904 -1033m/yy

yy

39995 -1033m/yy

yy

40087 -1033m/yy

yy

40179 -1033m/yy

yy

40269 -1033m/yy

yy

40360 -1033m/yy

yy

40452 -1033m/yy

yy

40544 -1033m/yy

yy

40634 -1033m/yy

yy

40725 -1033m/yy

yy

40817 -1033m/yy

yy

40909 -1033m/yy

yy

41000 -1033m/yy

yy-6.00-4.00-2.000.002.004.006.00

OPR OPR adjusted for prevailing inflation rate

Perc

ent (

%)

Economics Research

High global risk aversion to growth suppressed the appreciation of the ringgit Heightened risk aversion in recent months had caused the demand for safe haven

assets such as the US Treasury to increase; thereby depreciating the ringgit There have been some exchange rate effects on Malaysia’s trade balance since mid-

2010


21

Exchange rate

Dec-11

Dec-11

Dec-11Jan-12

Jan-12Fe

b-12Fe

b-12

Mar-12

Mar-12

Mar-12Apr-1

2Apr-1

2

May-12

May-12

1.5

1.7

1.9

2.1

2.3

2.5

2.7 2.85

2.90

2.95

3.00

3.05

3.10

3.15

3.20

3.25

US Treasury yield USDMYR (RHS, reverse order)

Yiel

d (%

)

2007 2008 2009 2010 2011 20128,000.0

8,500.0

9,000.0

9,500.0

10,000.0

10,500.0

11,000.0

11,500.0

12,000.0

12,500.0

88

90

92

94

96

98

100

102

104

Trade balance REER

2005

= 1

00,

high

er v

alue

= re

al a

ppre

ciatio

n

Inverse relationship between REER and trade balance

Economics Research

Banking system remains stable Well positioned to meet Basel III requirements Non-performing loans ratio remains low at 2.5% but is unevenly distributed across

sectors Relatively rapid growth in loans is a potential risk, but mitigated by BNM’s

responsible lending guidelines


22

Banking sector

Electricity, Gas & Water Supply

Manufacturing

Mining & Quarrying

Primary Agriculture

Finance, Insurance & Business Act (FI)

Total

0.0 2.0 4.0 6.0 8.0 10.0

Non-performing loan ratioAs a % of total corresponding loans

Banking sector indicator As at March 2012

Loans growth 12.1%

Loans-to-deposit ratio 76.7%

Risk-weighted CAR 14.7%

Core capital ratio 13.0%

Impaired loan ratio 1.7%

Annualized return on assets 1.7%

Annualized return on equity 19.1%

Economics Research

Bond market experienced healthy growth Increased risk appetite for longer-tenured Malaysian Government Securities Increased participation in the PDS market in 2011 with RM69.6 billion issued

(33.6% increase from the previous year). Large issuances in 1Q 2012 suggest that bond markets will continue to be a stable funding source for the private sector

Improving domestic demand conditions coupled with Government initiatives are likely to spur the bond market this year


23

Bond market

2008 2009 2010 2011 20120

50

100

150

200

250

Basi

s poi

nt s

prea

d 10

Y-2Y

MGS

Foreign holdings of domestic bonds

Bank Negara MGS PDS

Value (RM billion)

Jan-11 38.3 76.7 14.2

Mar-12 64.7 111.3 15.2

% of corresponding

Jan-11 39.7% 21.7% 5.6%

Mar-12 45.5% 27.3% 5.3%

Increased in foreign participation in the MGS market

Economics Research

Pre-election spending and government initiatives to spur growth prevent substantial fiscal consolidation Commitments to ETP projects and the continuation of the subsidy programmes

limit Government’s efforts to reduce the fiscal deficit despite efforts to improve the delivery system

However, domestic financing conditions remain sufficiently healthy for medium-term deficit financing


24

Fiscal conditions

2010 2011 2012fRM billion

Government revenue 159.7 185.4 186.9

Operating expenditure 151.6 182.6 181.6

Development expenditure (net) 51.3 45.3 48.3

Fiscal balance -43.3 -42.5 -43.0

Government debt 347.0 468.8

% of GDPFiscal balance -5.4 -4.8 -4.5

Government debt 51.8 53.2

Economics Research

BNM responsible lending guidelines Will have a short-term adverse impact on consumption and lending activity Unlikely to cause a significant structural setback

Various ETP & GTP announcements Will enhance investor confidence Spur domestic demand activity through multiplier effects of the investments

Budget 2012/13 Growth-oriented budget is likely to be announced However, much needed structural reforms are needed to sustained ETP-target

growth rates

Minimum wage Unlikely to have significant labour market impact in urban areas May heighten inflationary expectations going forward


25

Key domestic policy announcements

Economics Research

No Eurozone breakup, but weak global conditions Quite likely a ‘kick-the-can-down-the-road’ scenario will occur until sufficient

structural adjustments are made in Europe As a result global demand conditions are expected to remain weak

Stable commodity prices Due to the reduced risk of supply shocks and slower China growth Assumes that global manufacturing activity will not be adversely affected by it

Growth-oriented domestic public policy The Government is likely to step in and provide sufficient support to domestic

growth prior to the elections. Further stimulus – monetary and fiscal – will be warranted should external conditions deteriorate


26

Key assumptions for growth projections

Economics Research


27

Key estimates

GDP growth (%) 2012 2013US 2.1 -EU-17 -0.7 -Japan 1.8 -China 8.0 -Malaysia 4.6 5.2

Growth by GDP components, 2012 (%)By expenditurePrivate consumption 5.9Public consumption 4.8Private investments 8.9Public investments 4.5Exports 3.2Imports 3.0By industryAgriculture 5.1Mining -3.8Manufacturing 3.9Construction 4.5Services 6.4

Other key forecasts/assumptions

Inflation rate: 2.6%

Exchange rate: RM2.90-95

Interest rate (end-year): 3.00%

Oil price (end-year): USD100-105

MGS issuance: RM90-95 bn

PDS issuance: RM85-90 bn

Fiscal balance: -4.7% of GDP

Economics Research

1 Global conditions

Outline



28

Economics Research

Eurozone breakup A possibility – the degree of impact depends on the ability of policy makers to

ensure an orderly breakup and limit contagion risk Regardless, will adversely affect investor confidence and may cause an appreciation

in safe haven assets

Further fiscal drag in America Will further slow consumption in the world’s single largest economy affecting global

demand Political brinkmanship will delay much needed fiscal assistance during this

weakened period

Commodity price shock While commodity price shocks in the short-term benefit Malaysian (a net

commodity exporter), over the long-term it can suppress industrial activity and may thus affect global demand

Assessments of key risks and potential impact

29

External risks

Economics Research

Unwarranted spikes in inflation Heightened inflationary expectations – due to minimum wage and robust domestic

demand – may cause domestic prices to remain on the upward trend Will have significant implications on public finances which maintain domestic

subsidies

Policy mis-steps Mistiming or underestimating the severity of a possible external demand shock can

reduce the potential output of the economy The relatively accommodative monetary policy stance may have to be reviewed

should the domestic economy grow faster than anticipated

Assessments of key risks and potential impact

30

Domestic risks

RAM Economics ResearchLevel 19, The Gardens South Tower

Mid Valley City, Lingkaran Syed Putra59200 Kuala Lumpur

Tel: (603) 7628 1000 www.ram.com.my

Thank youThank you

dr yeah kim leng group chief economist

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