economic outlook : a new economic model as recovery gains pace - 11/03/2010
TRANSCRIPT
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8/14/2019 Economic Outlook : A New Economic Model As Recovery Gains Pace - 11/03/2010
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11 March 2010
Economic Outlook
A New Economic Model As Recovery Gains Pace
The Malaysian economy emerged from a recession in the 4Q of last year, underpinned by
a recovery in exports and the Governments stimulus spending. We expect the export
recovery to be sustained in 2010 despite various challenges that threaten to derail it.
Similarly, we expect domestic demand to gain momentum, and consumer and business
spending will likely take up the slack left by the government stimulus spending when it fizzles
out in 2H 2010. As a whole, we expect the Malaysian economy to bounce back and expand
by 4.5% in 2010, from -1.7% in 2009.
As the Malaysian economic recovery gains pace, the Government is set to unveil its neweconomic model (NEM) by end-March. The NEM could contain key initiatives to move the
country towards a high-income economy through innovation, knowledge and R&D as well as
improve efficiency and productivity. It will also entail further liberalisation and a gradual
phasing out of subsidies to bring about a more competitive economy.
Meanwhile, the prospects of a sustainable global economic recovery have improved
significantly in recent months, in our view. As a result, policymakers around the globe have
begun to exit their extremely loose policies. However, these are normalisation measures and
will unlikely have a significant impact on global economic recovery. As a whole, a recovery
in external demand will likely lift Malaysias exports in 2010.
Domestic demand is projected to bounce back in 2010, in line with an improvement in
consumer and business confidence. However, public spending will likely fall during the year
in tandem with a fiscal consolidation. Consequently, the fiscal deficit will likely narrow to
5.6% of GDP, as planned, from a deficit of 7.0% estimated for 2009.
The current account in the balance of payments will record a smaller surplus in 2010 but will
remain large to fuel domestic liquidity and provide an underlying support to the ringgit. We
expect the ringgit to fluctuate at between RM3.30 and RM3.40 against the US dollar in the
1H of the year, before settling at around RM3.30/US$ by end-2010.
Inflation will likely trend up but remain manageable at 2.0% in 2010, from +0.6% in 2009.
The Central Bank, however, will continue to normalise monetary conditions and the overnight
policy rate (OPR) will likely be raised by another 25 basis points in July and stay at 2.5%
until the end of the year.
Executive Summary
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
Malaysia
PP7
767/09/2010(025354)
MARKETDA
TELINE
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A New Economic Model As Recovery Gains Pace
The Malaysian economy emerged from a recession in the 4Q of last year,
underpinned by the Governments stimulus spending and a recovery in exports.
We expect the export recovery to be sustained in 2010 despite various
challenges that threaten to derail it. Similarly, we expect domestic demand to
gain momentum, underpinned by a pick-up in consumer spending, on the backof an improvement in the job market, while businesses will likely resume their
investment during the year. As a whole, we expect the Malaysian economy to
expand by 4.5% in 2010, from -1.7% in 2009. Meanwhile, as the Malaysian
economic recovery gains pace, the Government is set to unveil its new economic
model (NEM), which would chart the direction for the countrys development
towards 2020, by end-March. The current account surplus in the balance of
payments will likely narrow, as the recovery of the economy will suck in more
imports. The surplus, however, will remain large and provide an underlying
support to the ringgit, which is projected to strengthen to around RM3.30/US$
by end-2010. Inflation will likely trend up but remain manageable at 2.0% in
2010. The Central Bank will likely raise the OPR by another 25 basis points to
2.5% in July.
Economic Recovery Strengthening
Like many other countries in this region and the developed economies, the Malaysian
economy emerged from a recession in the 4Q of last year, underpinned by a
recovery in exports and the Governments stimulus spending. We expect the export
recovery to be sustainable in 2010 despite various challenges that threaten to derail
it, including budget deficit and debt woes in some countries in the Euroland (see
Charts 1 & 2), concerns over a double dip in the global economic recovery as
government spending fizzles out and policy tightening on the back of asset price
inflation in Asia and emerging economies. Similarly, we expect domestic demand to
gain momentum, and consumer and business spending to gradually take up the slack
left by the fiscal stimulus spending when it fizzles out in 2H 2010. This will likely
be underpinned by a pick-up in consumer spending, which is improving steadily in
the last three consecutive quarters, on the back of an improvement in job market.
In the same vein, investors will likely resume their investment given brightening
economic prospects. As a whole, we expect the Malaysian economy to expand
by 4.5% in 2010, from -1.7% in 2009.
Chart 1High Defic it Levels In Some European
Economies
Greece
Source: European Commission
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
2005 2006 2007 2008 2009 2010f 2011f
% GDP
Spain
Portugal
Ireland
Chart 2High Debt Levels In Some European
Economies
% GDP
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010f 2011f
Portugal
Ireland
Spain
Greece
Source: European Commission
We expect the economy
to expand by 4.5% in
2010, compared with a
recession in 2009, on the
back o f a p i c k -up i n
exports and strengthening
domestic demand
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A New Economic Model To Lead The Country Forward
As the Malaysian economic recovery gains pace, the Government is set to unveil
its new economic model (NEM), which would chart the direction for the countrys
development towards 2020, by end-March. The NEM could contain eight key
initiatives for the country to achieve a high-income economy by the year 2020,
according to a recent news report citing certain sources. Among the proposed action
plans that are likely to be included in the NEM are strategies to create a morecompetitive and high-income economy, the phasing out of subsidies, the continued
gradual removal of affirmative action policies and restrict the employment of foreign
workers. Also, the NEM will include measures to promote green industry.
We understand that the NEM will likely be based on innovation, knowledge and
R& D to improve Malaysias productivity and efficiency to bring about a more
competitive economy. At the same time, the country will exploit new sources of
growth in high value-added industries and services through further
liberalisation to help the nation achieve a balanced and sustainable growth over
the longer term. The sectors that the Government will likely place more emphasis
on are the healthcare, leisure & tourism, creative industry & ICT, biotech & life
sciences, new agriculture & herbal and renewable energy industries (see our reportdated 28 January on New economic model What To Look For?). Similarly,
emphasis on branding to promote Malaysias products and services could be featured
in the NEM. On its part, the Government will embark on a new set of privatisation
initiatives called the Public-Private Partnership (PPP) in helping the Government to
implement its development projects. Under the PPP, the public sector will be the
main purchaser of output and funding will be provided by the private sector. The
Governments involvement is through enforcement of key performance index (KPI)
to ensure that high quality of output or services are delivered by the private sector.
The move could help the Government to contain its budget deficit and spread the
spending over the concession period as well as promote private investment.
Whilst the NEM will chart new direction for the economy, we believe the impact willonly be felt more significantly over the medium term given the challenges
that the country is facing. The country is suffering from brain drain and the shortage
of skilled manpower for it to move up the value chain and to be transform into a
services based economy. Meanwhile, Malaysian companies are venturing abroad in
search for growth and business opportunities, while the country is facing keen
competition in attracting foreign direct investment (FDI). As a result, the country
suffered a net outflow of direct investment in the last three consecutive years.
Indeed, we believe the successful implementation of the NEM still l ies with the
execution of key policy initiatives and the political will to force through
changes. Whilst the launching of a Government Transformation Programme on 28
January to improve the Governments delivery system is a good start, much remainsto be done to bring about a more competitive high-income economy.
Normalisation Of Extremely Loose Monetary Conditions Has Begun
In Some Countries
Meanwhile, the prospects of a sustainable global economic recovery have
improved significantly in recent months , in our view, despite various
challenges that threaten to derail it. This is primarily on account of a combination
of factors, including aggressive policy stimulus around the globe where policymakers
are unlikely to roll it back prematurely, significant improvement in financial markets
and risk appetite of investors and more importantly, asset prices have reached a
favourable inflection point. Unlike during the crisis, investors are no longer fearful
of catching a falling knife and more substantial weakness in asset prices will be taken
as investment opportunities. As a result, policymakers around the globe have
The NEM cou ld conta in
eight key initiatives aimed
at assisting the country to
ach i eve a more
compet i t i ve and h igh
income economy by the
year 2020
The NEM wi l l l i ke ly be
based on i nnova t i on ,
knowledge and R&D as
we l l as to exp lo i t new
sources of growth in high
va l ue -added i ndus t r i e s
and services
Prospects of a sustainable
global economic recovery
have imp roved
s i gn i f i c an t l y i n re cen t
months and t he
normalisat ion of pol ic ies
has begun i n some
countries
The Gove rnment w i l l
embark on a new set of
privatisation initiatives to
imp lement i t s
development projects
The impact of the NEM,
however, will only be felt
more s ign i f i cant l y over
the medium term given
the chal lenges that the
country is facing
The success of the NEM
still lies with the execution
and the pol it ical wi l l to
force through changes
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begun to exit their extremely loose policy and emergency lending
programmes, but the process remains gradual in our view, suggesting that its
impact on economic activities will unlikely be significant.
In the US, the normalisation of monetary conditions has already started when the
US Federal Reserve stopped buying the US$300bn US Treasury bills in October 2009
and raised its discount rate by 25 basis points to 0.75% with effect from 19 February.
In Euroland, the European Central Bank (ECB) outlined part of its exit strategy inDecember 2009 and it further phased out some emergency tools in early March. In
a number of countries in Asia, such as China, India, Taiwan, Hong Kong, South Korea
and Singapore, policymakers in these countries have taken measures to tighten
credit conditions to prevent asset bubbles from building up. In Malaysia, Bank
Negara Malaysia has begun normalising the countrys monetary conditions by raising
its key policy rate by 25 basis points to 2.25% on 4 March.
Global Economic Recovery Picks Up Momentum
Indeed, the global economic recovery is gaining momentum. As it stands,
global manufacturing activities picked up for the last seven consecutive months,
albeit at a more moderate pace in February, while services activities strengthenedduring the month (see Chart 3). Similarly, the OECD composite leading indicators
12-month rate of change strengthened to 9.6% in January, the fifth successive month
of increase and from +8.1% in December and +6.0% in November (see Chart 4).
The improvement was across the board, suggesting that prospects of OECD
countries economies are likely to improve in the months ahead.
In the US, the economy grew at a stronger pace in the 4Q, underpinned by inventory
rebuilding and an increase in business spending. Indeed, manufacturing activities
continued to expand in February, albeit at a more moderate pace, while services
activities picked up during the month. The improvement is gradually trickling
down to a better job market, as indicated by employment of temporary workers,
which picked up for the last five consecutive months up to February (see Chart 5).
As a result, non-farm payrolls recorded a significantly smaller drop of an average
of 31,000 jobs a month in January-February, compared with a loss of 557,000 a
month in 1H 2009, while the unemployment rate was stable at 9.7% in February, the
same level as in January, after hitting a peak of 10.0% in November-December. An
improvement in the job market helped to sustain consumer spending in the country.
As it stands, the personal consumption expenditure (PCE) strengthened to an
annualised rate of 2.1% in January, from +1.7% in December and after hitting a low
of +1.1% in November (see Chart 6). Although an improvement in the housing
sector has weakened somewhat, it will unlikely pose a major drag to the US
economic recovery. As a whole, the US economy will likely recover to around
+3.0% in 2010, from -2.4% in 2009.
Chart 4OECD Composite Leading
Indicator Points To Brighter EconomicProspects
% 12-mth annualised rate of change
-20
-15
-10
-5
0
5
10
15
20
25
30
00 01 02 03 04 05 06 07 08 09 10
Total OECD Japan US Euroarea China
Source: OECD
Chart 3Global Manufactur ing And
Activ it ies Picking Up
Index
Source: Markit Economics
ISMManufacturing
ISMServices
30
35
40
45
50
55
60
65
05 06 07 08 09 10
Bank Negara Malaysia has
begun no rma l i s i ng t he
coun t ry s mone ta ry
condit ions by raising itskey policy rate by 25 basis
po i n t s t o 2 .25% on 4
March
The g l oba l e conom i c
recove ry i s ga i n i ng
momentum
Improvement in the US
economy i s g radua l l y
trickling down to a better
job market and a
sus t a i ned i nc rease i n
consumer spending
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Similarly, we expect the Euroland s economy to gradually recover, despite the
emergence of sovereign debt worries of late. As it stands, manufacturing activities
continued to expand and at a faster pace in February, although services activitiesmoderated somewhat during the month (see Chart 7). Similarly, business
confidence continued to improve, while consumer confidence held up at the highest
level in more than a year. Given its export dependency, the Japanese economic
recovery will likely be sustained into 2010 as well, in tandem with a recovery in
exports. Indeed, Japans exports surged by 40.9% yoy in January, after recording
a growth of 12.0% in December (see Chart 8), due partly to a lower base effect and
partly to a pick-up in global demand for the countrys exports.
In the same vein, Chinas economy will likely continue to expand in the months
ahead, after recording +10.7% yoy in the 4Q. As it stands, manufacturing activities
continued to expand for the last 12 consecutive months up to February, underpinned
by a recovery in exports, which strengthened to 45.7% yoy in February, from
+21.0% in January and +17.6% in December (see Chart 9). Although fixed-asset
investment in urban areas and money supply eased in January, growth remained
strong. Meanwhile, the Chinese authorities have stepped up their efforts to control
credit expansion, particularly to local governments, in a move to moderate the pace
of asset price inflation and reduce the potential risks of default.
Chart 5US: Job Market Gradually Improving
Source: US Bureau of Labor Statistics
(000) %
-1000
-800
-600
-400
-200
0
200
400
600
00 01 02 03 04 05 06 07 08 09 10
0
2
4
6
8
10
12
Employment in temporary help services (LHS)
Non-farm payrolls (LHS)
Unemployment rate (RHS)
Chart 6US: Consumer Spending
Head ing Up
%annualised
-4
-3
-2
-1
0
1
2
3
4
5
2005 2006 2007 2008 2009 2010
(Personal consumptionexpenditure)
Source: US Bureau of Economic Analysis
Chart 7Euro land: Manufactur ing And Serv ices
Activ it ies On Recovery Path
Source: Bloomberg
Index P M I
PMI Manufacturing
30
35
40
45
50
55
60
65
00 01 02 03 04 05 06 07 08 09 10
Chart 8Japan: A Strong Turnaround In Exports
% yoy
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
00 01 02 03 04 05 06 07 08 09 10
Source: Bloomberg
The Eurolands economy
will l ikely improve, while
exports recovery will l ift
the Japanese economy
Chinas economy will likely
continue to expand in the
months ahead ,
unde rp i nned by a
recovery in exports and
an increase in domestic
demand
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Index % yoy
Exports
PMI mfg.
3 5
4 0
4 5
5 0
5 5
6 0
6 5
2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0
- 4 0
- 3 0
- 2 0
- 1 0
0
1 0
2 0
3 0
4 0
5 0
6 0
Chart 9China: Exports Picking Up, While Manufacturing Activ it ies Easing
But Likely To Be Temporary
Source: Bloomberg
The global economic recovery in 2010 will, however, remain gradual and
uneven , in our view, given sustained high unemployment situation in the key
developed countries, debt problems in some of the European countries, and deflationin Japan.
Exports On The Path To Recovery
As a whole, we expect a pick-up in global economic activities to translate into higher
demand for the countrys manufactured goods and commodity products. Already,
worldwide semiconductor sales, one of the Malaysias key exports, strengthened to
47.1% yoy in January, the third consecutive month of increase and from +28.8% in
December. Also, the industry experts, the Semiconductor Industry Association and
Gartner, projected worldwide semiconductor sales to a record growth of 10.2% and
10.3% respectively in 2010, a rebound from -9.0% in 2009. As a whole, we expect
the countrys real exports to record a growth of 6.5% in 2010 , a rebound from-10.1% in 2009.
Domestic Demand Will Likely Improve
Domestically, consumer and business confidence will likely improve further and
translate into stronger spending, on the back of an improvement in economic
prospects. As a result, domestic demand is projected to rise by 3.2% in 2010
(see Table 1), from -0.4% in 2009. This will likely be driven by an increase in
consumer spending, which is envisaged to grow at a stronger pace of 4.8% in
2010, after slowing down to +0.8% in 2009. The pick-up in consumer spending will
be underpinned by an improvement in the job market, while firmer commodity prices
will encourage rural households to spend. Also, the Government has put in moreefforts to promote the tourism industry. As it stands, manufacturers have started
to recruit workers for the last seven consecutive months up to December, while
tourist arrivals held up at 1.9 million in January or an increase of 1.4% yoy. These
will be supported by the one percentage point reduction in personal income tax rate
and the increase in personal relief implemented in the 2010 Budget. Similarly, we
believe high savings and rising consumerism as well as pent-up demand will continue
to provide support to consumer spending in the country. Although the imposition of
a service tax on credit and charge cards could impact consumer spending to some
extent, we believe it would unlikely be significant.
Domes t i c demand i s
projected to rise by 3.2%
in 2010 , d r i ven by an
i nc rease i n consumer
spending
The countrys real exports
are projected to record a
growth of 6.5% in 2010, a
rebound from -10.1% in
2009
The g l oba l e conom i c
recove ry i n 2010 w i l l ,
however, remain gradual
and uneven
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In the same vein, we believe the private investment will likely bounce back in
2010, albeit from a low base, as investors resume their investment on the back of
an improvement in global economic outlook. Also, a rise in capacity utilisation rate,
which rose to 74% in the 4Q, from 73% in the 3Q, will encourage some investors
to increase spending. These will likely be enhanced by an improvement in business
confidence as indicated by MIERs business confidence index, which rose to 118.8 in
the 4Q, the highest level in nearly two years and from 113.7 in the 3Q. Already,
businesses have begun spending as reflected in a pick-up in the imports of capital
goods, which turned around to record a growth of 17.4% yoy in the 4Q, the first
increase in six consecutive quarters and from -13.2% in the 3Q. Similarly,
manufacturing investment approvals by the Malaysian Industrial Development
Authority rose by 42.8% yoy in the 4Q, after four consecutive quarters of
contraction. Public investment, however, is projected to contract in 2010, in line
with a cutback in development expenditure by the Federal Government due to fiscal
consolidation. This will likely be made worse by a sharper drop in non-financial
public enterprises (NFPEs) development spending during the year. Still, fixed
capital formation is envisaged to increase by 3.0% in 2010, a rebound from -5.5%
in 2009, as a pick-up in private investment will mitigate the decline in public
investment. Meanwhile, public consumption will likely contract during the year, in line
with the governments efforts to cut its budget deficit.
Fiscal Consolidation Will Hold Back Growth
In its 2010 Budget, the Federal Government has undertaken a bold move to
reduce its budget deficit, after rising sharply due to the implementation of two
economic stimulus totaling RM67bn to cushion the Malaysian economy from a severe
global recession. This will be achieved via the improvement in quality and efficiency
of spending on subsidies, supplies & services and in other areas. Indeed, we
understand that the Governments procurement of goods and services will be based
on competitive bidding to ensure transparency and value for money. As a result,
the Federal Governments budget deficit is projected to narrow
significantly to 5.6% of GDP or RM40.5bn in 2010 (see Table 2), from a deficit
of 7.0% of GDP or RM47.4bn in 2009. Indeed, the budget deficit incurred in 2009
was smaller than the initial estimate of 7.4% of GDP or RM51.1bn due partly to a
smaller-than-expected development expenditure.
2007 2008 2009 2008 2009 2010(f) 2011(f)
4Q 1Q 2Q 3Q 4Q
% Growth in Real Terms
GDP 6.2 4.6 -1.7 0.1 -6.2 -3.9 -1.2 4.5 4.5 5.0
Consumption:
Private 10.4 8.5 0.8 5.3 -0.7 0.5 1.5 1.7 4.8 6.0
Public 6.5 10.9 3.7 12.7 2.1 1.0 10.9 1.3 -2.5 4.5
Total investment 9.6 0.8 -5.5 -10.2 -10.8 -9.6 -7.9 8.2 3.0 8.2
Private 11.8 0.8 -30.4 n.a n.a n.a n.a n.a 10.0 12.7
Public 7.1 0.7 22.6 n.a n.a n.a n.a n.a -1.5 4.9
Goods & services:
Exports 4.5 1.3 -10.1 -13.3 -15.2 -17.3 -13.4 7.3 6.5 7.7
Imports 6.0 1.9 -12.5 -10.2 -23.5 -19.7 -12.9 6.9 9.9 9.1
Agg.domestic demand 9.6 6.8 -0.4 2.8 -2.9 -2.2 0.4 3.0 3.2 6.3
(f): RHBRI's forecasts
Table 1GDP By Demand Aggregate (2000=100)
Pr ivate inves tment w i l l
also likely bounce back in
2010, albeit from a low
base, as investors resume
their investment on the
back of an improvement
in the g loba l economic
outlook
Public spending, however,
is projected to contract
during the year, in l ine
with a fiscal consolidation
The Federal Governments
budget deficit is projected
to narrow significantly to
5.6% of GDP or RM 40.5bn
in 2010, from a deficit of
7.0% of GDP or RM 47.4bn
in 2009
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Table 3GDP By Industr ial Origin At 2000 Prices
The bold move to contain its budget deficit, in our view, will prevent the countrys
sovereign credit rating from deteriorating . This remains a key concern to the
authorities, after the Fitch Rating Agency downgraded Malaysias long-term local
currency rating to single-A on 9 June 2009, from single-A-plus, on concerns over the
countrys ballooning budget deficit. The Governments move, together with a
cutback in development expenditure by non-financial public enterprises (NFPEs),
however, will contribute to a projected reduction of 0.8 percentage points from real
GDP growth in 2010.
Manufacturing Sector To Bounce Back And Services Sectors To
Strengthen
On the supply side, we envisage a broad-based recovery in economic activities from
manufacturing to services, construction, agriculture and mining sectors. Value added
in the manufacturing sector is projected to bounce back and expand by 7.5% in
2010, from -9.3% in 2009 (see Table 3). Growth will likely be driven by a pick-up
in output of export-oriented industries, on the back of an improvement in global
demand for the countrys exports. As it stands, output of the export-oriented
industries rebounded to increase by 5.0% yoy in the 4Q, the first increase in six
quarters and from -10.0% in the 3Q, on account of a pick-up in the production of
E&E products; chemical products; wood & wood products; rubber and pulp, paper &
board products as well as a smaller decline in the production of textiles, apparel &
footwear. Similarly, output of domestic-oriented industries will likely pick up, on
account of an improvement in consumer spending and private investment. Already,
the production of domestic-oriented industries grew by 5.5% yoy in the 4Q, a
rebound from -5.7% in the 3Q. This was the first increase after four consecutive
quarters of contraction, due to a pick-up in output of consumer-related products such
as food and beverages & tobacco as well as a smaller decline in the production of
transport equipment. A smaller drop in the production of building materials also
helped.
2007 2008 2009 2008 2009 2010(f) 2011(f)
4Q 1Q 2Q 3Q 4Q
% Growth in Real Terms
GDP 6.2 4.6 -1.7 0.1 -6.2 -3.9 -1.2 4.5 4.5 5.0
Agriculture 1.4 4.0 0.4 0.5 -4.3 0.3 -0.5 6.0 2.3 2.8
Mining 2.0 -0.8 -3.8 -5.7 -5.2 -3.6 -3.5 -2.8 1.2 2.0
Manufacturing 3.1 1.3 -9.3 -8.8 -17.9 -14.5 -8.6 5.3 7.5 8.0
Construction 4.7 2.1 5.7 -1.6 1.1 4.5 7.9 9.2 3.1 2.8
Services 9.6 7.2 2.6 5.7 -0.2 1.6 3.4 5.1 4.5 4.7
(f) : RHBRI's forecasts
Table 2Federal Government Financial Posit ion
2008 2009(e) 20101(f) 2009(e) 2010(f)
(RM bil) (% , change)
Revenue 159.8 158.6 148.4 -0.7 -6.4
Operating Expenditure 153.5 157.1 138.3 2.3 -12.0
Current balance 6.3 1.5 10.2
Gross development expenditure 42.8 49.5 51.2 15.5 3.5
Less : Loan recoveries 1.0 0.6 0.6 -40.0 0.0
Net development expenditure 41.9 48.9 50.6 16.7 3.6
Overall balance -35.6 -47.4 -40.5
% to GDP -4.8 -7.0 -5.6
1 Budget estimate, excluding 2009 tax measures e : Estimates f : Forecasts
Source : MOF's Economic Report 2009/2010
The Governments move,
together with a cutback in
development expenditure
by NFPEs, will contribute
to a projected reduction in
real GDP growth in 2010
Manufacturing sector will
rebound in 2010, on the
back o f a p i c k -up i n
expo r t s and domes t i cdemand
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In the same vein, the broad services sector is projected to grow at a faster
pace of around +4.5% in 2010, compared with +2.6% in 2009, in line with higher
consumer spending and trade activities. Also, the Governments efforts to promote
the sector and a sustained increase in tourist arrivals as a result of an improvement
in confidence will boost activities in the sector. As a result, we expect activities in
transport & storage sub-sector to turn around during the year. At the same time,
activities in communications, wholesale & retail trade and accommodation &
restaurants sub-sectors will likely strengthen. We also expect activities in finance &insurance and real estate & business sub-sectors as well as output of utilities to pick
up, in tandem with an improvement in business activities during the year.
The agriculture sector is also envisaged to bounce back to +2.3% in 2010,
after slowing down to +0.4% in 2009. This is on account of a pick-up in palm oil
production due to the low base effect as well as expanded matured areas. As it
stands, palm oil production fell by 1.0% in 2009, compared with +12.1% in 2008.
At the same time, the decline in output of saw logs will likely narrow further, after
falling by a smaller magnitude of around 10.9% in January-November 2009,
compared with -14.8% in 2008. Similarly, the production of rubber will likely bounce
back during the year, given better pricing and after going through three consecutive
years of decline. Meanwhile, the non-commodity sub-sector such as fisheries,livestock and crops will contribute to growth as well, on the back of the
implementation of various projects by the Government.
Similarly, we expect mining output to record a modest growth of 1.2% in
2010, after two consecutive years of contraction and compared with -3.8% in 2009.
This is mainly on account of a pick-up in the production of crude oil and liquefied
natural gas (LNG) due to higher demand. Also, several new oil fields are expected
to start production, while the expansion of MLNG Dua is expected to increase
production of LNG during the year. Meanwhile, crude oil production contracted by
4.1% in 2009, after slowing down to +0.8% in 2008, while LNG output fell by 3.7%,
compared with +0.1% during the same period.
In tandem with a slower increase in the Governments development expenditure,
construction activities are projected to moderate to 3.1% in 2010, from
+5.7% in 2009. As a result, we expect the growth in civil engineering sub-sector
to moderate during the year. This, however, will likely be mitigated by a pick-up in
construction activities in the residential property sub-sector as demand conditions
have improved and property developers are coming up with more launches, while
construction activities in non-residential property sub-sector are still ongoing. As it
stands, new permits for sales and advertising of houses strengthened for the second
consecutive quarter to +100.8% yoy in the 4Q, after four consecutive quarters of
decline. Similarly, housing approvals by the Ministry of Housing and Local
Government surged by 111.6% yoy in the 4Q, the second consecutive quarter of
increase and after four straight quarters of contraction.
Monetary And Loan Expansion To Remain Supportive Of Economic
Growth
The broader money supply, M3, moderated to +7.9% yoy in January 2010, after
reaching a high of +10.0% in November. Despite the moderation, growth remained
commendable, indicating that the underlying economic activities are still expanding.
The slower growth was reflected in a slowdown in government operations due to a
more moderate increase in disbursement of government funds after picking up
strongly in mid-2009. This was, however, mitigated by a pick-up in demand for funds
by the private sector, mainly on account of a stronger loan growth, which was offset
partially by a slowdown in the issuance of securities. An improvement in net
external operations, on account of inflow of foreign portfolio funds, also helped. As
it stands, total holdings in fixed income instruments by foreign investors increased
to RM73.3bn in January 2010, from RM69.2bn in December. This was the seventh
consecutive month of increase and the highest level in 17 months. Going forward,
Min i ng va l ue added i s
p ro j ec t ed t o i n c rease
modes t l y , ma in l y on
account of a pick-up in the
production of crude oil and
LNG
Agr i cu l t u re sec t o r i s
env i saged t o rebound ,
mainly on account of a
p i c k -up i n pa lm o i l
production
The se rv i c es sec t o r i s
p ro jec ted to g row at a
faster pace, as consumer
spend i ng and t rade
activities pick up
Const ruc t ion ac t i v i t i es ,
however , w i l l l i k e l y
moderate due to f i sca l
consolidation
Monetary policy to remain
support i ve o f economic
growth and M3 growth to
expand at a faster pace
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ECONOMIC OUTLOOK10
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we expect monetary policy to remain supportive of economic growth and M3 will
likely pick up to around 10.5% in 2010, from+9.1% at end-2009, in line with
a pick-up in economic activities.
Loan growth, however, strengthened to 8.6% yoy in January, from +7.8% in
December and a low of +7.0% in November. This was the strongest growth in eight
months, underpinned by a pick-up in corporate and household borrowings during the
month. The stronger growth in corporate loans was driven by a pick-up in businessloans, which strengthened to 3.5% yoy in January, from +2.6% in December and
a low of +0.6% in November. This was aided by a smaller drop in loans extended
to small and medium enterprises (SMEs), which fell by 0.1% yoy during the
month, compared with -6.0% in November, suggesting that business activities of the
SMEs are gradually improving. In terms of sector, a faster increase in loans was
due to a pick-up in loans extended to agriculture, utilities, real estate and transport,
storage & communications sectors. These were aided by a smaller decline in loans
given to the manufacturing sector and a turnaround in loans channelled to wholesale
& retail trade and restaurant & hotel sectors. These were, however, offset partially
by a slowdown in loans extended to the mining & quarrying, construction and
finance, insurance & business sectors. Similarly, household loans grew at a faster
pace of 10.4% yoy in January, compared with +9.8% in December and +9.5% inNovember. This was reflected in loans extended for the purchase of passenger cars
and houses as well as for credit cards during the month. Going forward, we expect
the banking systems loans to expand by 9.0% in 2010, from 7.8% in 2009, in
tandem with the pick-up in the economy.
In terms of asset quality, the expansion in loan base, coupled with the recovery in
non-performing loans (NPLs) and bad debt written-offs, further reduced the banking
systems NPL ratios. As a result, the 3-month gross NPL ratio of the banking system
eased to 3.20% of total loans in January, from 3.36% in November and a high of
4.11% in January last year. Similarly, the 3-month net NPL ratio fell to 1.73% of
total loans in January, from 1.92% in November and 2.20% a year ago. Going
forward, NPLs will likely improve in 2010 , in line with the recovery in theeconomy. As a whole, we expect the banking systems 3-month gross and net NPL
ratios to ease to around 3.0% and 1.5%, respectively, by end-2010, compared with
3.2% and 1.8%, respectively, at end-2009.
Current Account Surplus To Narrow And Ringgit Will Likely
Appreciate
In tandem with a pick-up in economic activities, imports are expected to rise faster
than that of exports. This will lead to a smaller trade surplus and we expect the
merchandise trade account surplus to narrow to RM133.2bn in 2010, from a surplus
of RM141.5bn in 2009. At the same time, we envisage the deficit in the income
account to widen during the year, as non-resident controlled companies repatriatehigher dividend on the back of improving corporate earnings. These, however, will
likely be mitigated by an improvement in the services account, which is projected
to record a larger surplus during the year, in line with a pick-up in travel receipts.
Similarly, repatriations of salaries and wages by foreign workers are likely to drop,
in line with the Governments policy of reducing the employment of foreign workers.
As a result, we expect the current account surplus of the balance of payments
to narrow to around RM97.1bn or 13.4% of GNI in 2010, from a surplus of
RM112.7bn or 17.3% of GNI in 2009 (see Table 4). Still, the current account surplus
remains sizeable and will contribute to a build-up in the countrys foreign exchange
reserves and fuel domestic liquidity in the financial system. As at end-February
2010, excess liquidity (including repos) mopped up by the Central Bank from the
banking system remained sizeable at RM220.2bn, albeit marginally lower than
RM236.4bn at end-February last year.
Loans will pick up in 2010,
in tandem with a recovery
in the economy
The NPL ratios are likely
to improve in 2010
The cu r ren t ac coun t
surplus of the balance of
payments is projected to
narrow in 2010
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Capitaloutflow , on the other hand, will likely ease further to RM35.5bn in 2010,
after slowing down to RM82.9bn in 2009. This is on account of a pick-up in portfolio
investment in 2010, after recording a small inflow in 2009, in line with an
improvement in the countrys economic prospects. Similarly, net direct investment
is projected to record a net inflow in 2010 due to higher inward direct investment,
as investors resume their investment, in tandem with an improvement in global
economic prospects. These, however, will likely be offset partially by an increase
in Malaysians other investments abroad, including loans and trade credits, as
businesses look for new opportunities overseas.
As a whole, the overall balance of payments is projected to record a larger
surplus of around RM36.6bn in 2010, compared with a surplus of RM13.9bn in 2009,
after taking into account a larger deficit in errors & omissions. Consequently, the
countrys foreign exchange reserves will likely increase to US$111.5bn by end-2010,
from US$96.7bn at end-2009.
The build-up in foreign exchange reserves will continue to provide an underlying
support to the ringgit. The movement of the ringgit, however, has been volatile in
recent months, as investors adjusted to changes in policy and the pace of economic
recovery. This was further complicated by concerns over Greeces deficit problem
that had weighed down the euro. Nevertheless, the ringgit has resumed itsappreciation against the US dollar by 1.2% from 1 February to 4 March, after
weakening by 0.5% in the previous two months and compared with a gain of 4.0%
in September-November. The stronger ringgit was partly reflecting of the hike in
interest rate by Bank Negara Malaysia on 4 March. This was also in line with the
appreciation of Singapore dollar, Japanese yen and the euro, which rose by 0.5%,
0.9% and 0.5% respectively against the US dollar from 1 February to 4 March, after
falling by the corresponding rates of 1.6%, 4.3% and 7.3% in the previous two
months. Chinese renminbi, however, remained stable during the period, as it has
been unofficially pegged to the US dollar since July 2008. As a whole, we expect
the ringgit to fluctuate at between RM3.30 and RM3.40 against the US
dollar, before settling at around RM3.30/ US$ by end-2010, as Asian
currencies (ex-Japan) strengthen against the US dollar on account of a strongereconomic recovery in Asia and a faster pace of policy normalisation. Based on the
real effective exchange rate (REER) model, the fair value of the ringgit is currently
estimated at around RM3.43/US$.
Capi tal out f low, on the
other hand, will likely ease
further in 2010, in line with
an improvement in the
coun t ry s e conom i c
prospects
The ove ra l l ba l ance o f
payments is projected to
record a l arger surp lus
and f o re i gn exchange
reserves will rise in 2010
The r i ngg i t w i l l l i k e l y
f l u c t ua t e a t be tween
RM3.30 and RM3.40
aga ins t the US do l l ar ,
before settling at around
RM3.30 by end-2010
Table 4Balance Of Payments
2008 2009 2008 2009 2010(f) 2011(f)
4Q 1Q 2Q 3Q 4Q
(RMbn)
Current account 129.5 112.7 29.6 31.4 28.8 25.3 27.3 97.1 98.5
(% of GNI) (18.1) (17.3) n.a n.a n.a n.a n.a (13.8) (13.0)Goods 170.6 141.5 38.8 37.0 33.1 33.4 38.0 133.2 132.9
Services 0.2 3.2 0.4 2.5 1.0 0.1 -0.4 1.1 1.7
Income -23.7 -12.6 -5.6 -3.9 -1.5 -1.6 -5.5 -22.2 -23.1
Current transfers -17.5 -19.4 -4.0 -4.2 -3.9 -6.7 -4.7 -15.0 -15.0
Capital account 0.6 -0.2 -0.0 -0.0 -0.0 -0.0 -0.0 0.0 0.0
Financial account -118.5 -82.9 -71.8 -29.8 -24.2 -11.1 -17.9 -35.5 -21.5
Errors & omissions* -29.9 -15.7 -19.6 1.7 -2.4 -2.7 -12.3 -25.0 -20.0
Overall balance -18.3 13.9 -61.9 3.3 2.1 11.5 -3.0 36.6 57.0
Outstanding reserves^ 317.4 331.3 317.4 320.7 322.9 334.4 331.4 367.9 424.9
(US$)^ 91.5 96.7 91.5 87.8 91.5 96.0 96.7 111.5 132.8
(f): RHBRI's forecast ^: As at end-period* : Reflect mainly revaluation gains/losses from Ringgit depreciation/appreciation and statistical discrepancies
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ECONOMIC OUTLOOK12
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Higher Price Pressure In 2010, But Manageable
The headline inflation rate picked up to 1.3% yoy in January, compared with
+1.1% inDecember and -0.1% in November (see Chart 10). This was the second
straight month of increase and at a faster pace, as the higher base effect is wearing
off and food prices as well as the core inflation rate are rising, on the back of rising
demand. Food & non-alcohol beverage prices inched up to 1.2% yoy in January,
from +1.1% in December and +0.9% in November, due to rising commodity prices.Similarly, the core inflation rate grew at a faster rate of 1.4% yoy in January,
compared with +1.1% in December. This was the second consecutive month of
increase due to a pick-up in the costs of transport, which rebounded to increase by
0.7% yoy in January, from -0.9% in December and -6.8% in November, as the
higher base effect is gradually wearing off. This was made worse by a faster
increase in the costs of recreation services and a smaller drop in the prices of
clothing & footwear. These were, however, mitigated by slower increases in the
prices of furnishing & household products, the costs of healthcare and education as
well as charges at restaurants & hotels.
Chart 10Inflat ion Trending Up And Normalisat ion Of Monetary Condit ions
Has Begun
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
3 .0
3 .5
4 .0
0 5 0 6 0 7 0 8 0 9 1 0
-4
-2
0
2
4
6
8
1 0
Source: Department of Statistics
% p.a
TotalC P I
(RHS)
O PR
% yoy
Going forward, 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 other
commodity prices will also contribute to a pick-up in consumer 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. At the same time, it is reviewing whether to reduce or remove the
cooking oil subsidy. As a whole, we believe inflation will likely trend up to 2.0%in 2010, from +0.6% in 2009. Meanwhile, the Government has decided on 4 March
to scrap its petrol subsidy restructuring scheme, following negative feedback from
the public and after postponing its initial rollout plan in May. As a result, the
Domestic Trade, Cooperatives and Consumerism Minister said that the Government
has no plans to raise or reduce petrol pump prices for now.
Normalisation Of Interest Rates Will Continue
While the headline inflation is likely to gradually trend up, we believe it will likely be
manageable. Nevertheless, following the rate hike by the Central Bank on 4 March,
in a move to normalise interest rates from the current unprecedented low levels, we
believe it will raise it again, albeit at a measured pace. As a result, we expect BankNegara to raise its OPR by another 25 basis points in July 2010 to 2.5%
and the OPR will likely stay at this level until the end of the year. We believe the
Central Bank would not raise interest rates at every policy meeting given
expectation of a slow and uneven global economic recovery. Nevertheless, as the
Inflat ion rate wi l l l ikely
trend up to 2.0% in 2010,
on the back of stronger
domestic demand
We expect Bank Negara to
raise its OPR by another
25 bas i s po ints in Ju ly
2010 to 2.5% and the OPR
will likely stay at this level
until the end of the year
Head l i ne i n f l a t i on ra t e
p i cked up i n re cen t
months
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economy has turned around in the 4Q of last year and is expected to improve
further in 2010, there is a need to bring interest rates back to a more neutral level
to prevent financial imbalances from building up. This is considered as
normalisation and not tightening per se, as 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. Assuming that the Malaysian economy goes
back to trend growth of around 5-6% in the next few years, a more neutral level
of the OPR will likely be around 3.0-3.5%, in our view.
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