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8/8/2019 Economic Outlook : Slowing Growth, But Recovery On Track- 08/09/2010
1/13
8 September 2010
Economic Outlook
Slowing Growth, But Recovery On Track
The economy softened to 8.9% yoy in the 2Q, after hitting a peak of +10.1% in the 1Q.
We expect the growth to decelerate further in the 2H of the year and this will likely continue
into 2011, on the back of a slowdown in exports. The surge in the ringgit in a short span
of time, coupled with the removal of subsidies and rising borrowing costs which happened
at around the same time, is likely to slow down exports and business spending further.
This, in turn, will likely affect job prospects and consumer spending as well. Consequently,
we expect real GDP growth to normalise to around 5.0% in 2011, after a strong rebound
to an estimate of +7.3% in 2010.
Developed nations policies have titled toward loosening bias given prospects of a sharper
slowdown in the global economy. We believe policy tightening in Asia will slow down as
well. Furthermore, the strengthening of regional currencies against the US dollar will
naturally dampen these countries exports, resulting in indirect tightening effect on the
economy. This is especially the case for Malaysia. As a whole, we expect the countrys
real exports to slow down to 7.6% in 2011, from an estimate of +11.7% in 2010.
Domestic demand will likely soften in 2011 as well, on the back of weaker consumer and
business spending as well as public investment. Growth, however, will likely be resilient
due to the sustained increase in consumer spending, on account of rising consumerism and
high savings. Fiscal consolidation will likely continue into 2011 and the Federal Government
is projected to cut its budget deficit to 4.2% of GDP or RM34.5bn during the year.
The current account surplus in the balance of payments is envisaged to widen as the
economy slows. This will provide an underlying support to the ringgit, which will likely
fluctuate at between RM3.10-3.20/US$ for the rest of this year, before settling at around
RM3.10/US$ in 2011.
Inflation will likely trend up to an average of 2.8% in 2011, from an estimate of +2.0%
in 2010, on the back of a gradual reduction in subsidies by the Government. Meanwhile,
Bank Negara Malaysia is expected to resume its policy normalisation in 1H 2011 and the
overnight policy rate will likely be raised by 50-75 basis points to 3.25-3.50%.
Executive Summary
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
Malaysia
PP
77
67/09/2010(025354)
MARKETDATELINE
8/8/2019 Economic Outlook : Slowing Growth, But Recovery On Track- 08/09/2010
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ECONOMIC OUTLOOK2
Slowing Growth, But Recovery On Track
The economy softened to 8.9% yoy in the 2Q, after hitting a peak of +10.1% inthe 1Q. We expect the growth to decelerate at a faster pace in the 2H of the yearand this will likely continue into 2011, on the back of a slowdown in exports. Thesurge in the ringgit in a short span of time, coupled with the removal of subsidies
and rising borrowing costs which happened at around the same time, is likely toslow down exports and business spending further, as they adjust to higher coststructure. This, in turn, will likely affect job prospects and consumer spending aswell. Consequently, we expect real GDP growth to normalise to around 5.0% in2011, after a strong rebound to an estimate of +7.3% in 2010. Meanwhile, thecurrent account surplus in the balance of payments is projected to widen as theeconomy slows. This will continue to provide an underlying support to the ringgit,which we expect it to fluctuate at around RM3.10-3.20/US$ for the rest of theyear before settling at RM3.10 in 2011. Inflation will likely trend up to an averageof 2.8% in 2011, on the back of a gradual removal of subsidies. The Central Bankwill likely resume its policy normalisation in 1H 2011, after taking a pause for therest of this year.
Economic Growth Likely To Normalise To Around 5.0% In2011
The slowdow n in the w orlds major economies, from the US to Japan and China,
has become more widespread since the 2Q, after a strong rebound from the
worst recession since the world war II. Indeed, the latest economic data releases
suggest that the growth in these countries will likely soften further in the 2H of the
year and extend into 1H 2011. Also, effect of the dissipating global stimulus spending
will also likely be felt in the 2H. Already, the annualised personal consumption
expenditure in the US moderated further in July, while manufacturing activities in
Japan and China turned softer in July-August. Although the Euroland, India and
Indonesias economies picked up in the 2Q, their economic activities are likely to
have peaked and will likely soften going forward, in our view. In particular, theEurolands economy will likely feel the pinch when the austerity measures start to bite
in the 2H of the year.
Back on the home front, the economy softened to 8.9% yoy in the 2Q, after hitting a
peak of +10.1% in the 1Q. We expect the growth to decelerate further in the 2H of the
year and this will likely continue into 2011, on the back of a slowdown in exports. The
surge in the ringgit in a short span of time, coupled with the removal of subsidies and
rising borrowing costs which happened at around the same time, is likely to squeeze
companies earning and make the business environment more challenging to operate,
especially for exporters. As a result, businesses are likely to turn cautious in recruiting
workers and for expansion, in our view. This, in turn, will likely affect job prospects
and consumer spending as well. Already, the countrys exports slowed down furtherin July, the fourth consecutive month of slowing down and the slowest pace of growth
in eight months. Consequently, we expect real GDP growth to normalise to
around 5.0% in 2011, after a strong rebound to an estimate of +7.3% in 2010.
Developed Nations Ready To Ease Policies, If SituationWarrants
Sensing the renewed weakness in the economy, the US Federal Reserve has acted
fast and shifted its policy towards a loosening bias on 10 August whereby it
pledged to roll over Treasury securities and reinvest proceeds from mortgage-related
securities as and when it matures to prevent its balance sheet from shrinking. While
the direct effect of the Feds move is not significant, it shows its willingness and ability
to go further if economic conditions worsen. This will likely prevent the US economy
from falling back into a recession , in our view, even though it is slowing down
and the recovery will likely be uneven and gradual.
The slowdown in the worlds
major economies, from the
US to Japan and China, has
become more widespread
since the 2Q
We expect Malaysias real
GDP growth to normalise
to around 5.0% in 2011,
after a strong rebound to
an est imate of +7.3% in
2010
The US Federa l Reserve
has sh i f t ed i t s po l i c y
towards a loosening bias
8/8/2019 Economic Outlook : Slowing Growth, But Recovery On Track- 08/09/2010
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ECONOMIC OUTLOOK3
Similarly, the Bank of Japan (BOJ) conducted an emergency meeting on 30 August
and stepped up its monetary stimulus for the first time since March by
expanding a bank-loan programme by 10 trn (US$116bn) to a total of 30 trn, after
the economys recovery weakened and the yen surged to a 15-year high recently.
The strong gain in yen at a time when global demand is weakening will likely hurt the
countrys exportsand the export-dependent Japanese economy the most. We believe
Japan will likely do more to help the economy, particularly in addressing the
sharp rise in yen. It is an irony that investors still prefer to buy the yen even though
Japans economic fundamentals are weaker than its counterparts such as the US or
the Euroland. The most prominent among the reasons why investors prefer to buy
yen is that while it may not be the best investment in the world, it beats the alternatives,
offering a relative safe haven in a treacherous global economy.
Meanwhile, the Euroland has already eased its policies in May by reactivating its
unlimited 3-month fixed-rate loan offers to financial institutions and unveiling an
unprecedented emergency stabilisation loan package of as much as 750bn (US$962bn)
when the sovereign debt crisis in the region deepened. These, coupled with the
austerity measures undertaken by the highly-indebted nations in the region and the
subsequent release of the stress test results in late July, have successfully stopped
the sovereign debt crisis from deepening. Although the Euroland has yet to feel the
effect of the austerity drive, it will likely come back to haunt the economy and theeuro towards the end of the year. This suggests that monetary conditions are
likely to remain loose in the region in the near term. Already, the European
Central Bank (ECB) said that it will extend its offer of unlimited liquidity to
banks into early 2011, while keeping its key policy rate at a record low of 1.0% for
the 17th straight month in September. Earlier in May, the ECB has committed to lend
banks unlimited cash until at least 12 October.
Policy Tightening In Asia Likely To Slow Dow n
Asian central banks, on the other hand, continued to normalise/tighten monetary
conditions in recent months. Singapore for instance, tightened its mortgage policy
on 30 August. The curbs marked the third set of major measures Singapore hastaken in 12 months to cool the property market. Similarly, Hong Kong tightened its
mortgage lending rules to cool down the property market in early August. Thailand
also started to normalise its monetary policy and it raised its key policy rate for the
second time in August to 1.75% given that its interest rates are still too low, while
India raised its benchmark interest rate for the fourth time this year to 5.75% in July
in a move to curb rising inflation. In the same vein, South Korea raised its key
policy rate in July by 25 basis points to 2.25%, before taking a pause in August. The
countrys central bank indicated that it plans to raise it again in September given that
its interest rates are still low.
China, on the other hand, has introduced a series of tightening measures to cool
down its property market and rapid credit expansion since last year. The measures
have yielded positive results and we believe the country will unlikely tighten further
for the rest of this year and investors are now expecting the authorities to ease back.
Similarly, we believe most central banks in the region are likely to slow dow n
their policy tightening or pause in view of the risk of a sharper slowdown in the
global economy.
Malaysia will likely follow suit after it took a pause and maintained its overnight
policy rate (OPR) at 2.75% on 2 September. Bank Negara Malaysia (BNM) raised its
OPR three times this year and by a total of 75 basis points. We believe BNM is likely
to have done with its interest rate hikes for the rest of this year. The Central Bank,
however, will likely resume its policy normalisation in 1H 2011 and we expect
the OPR to be brought to a more neutral level of 3.25-3.50%.
Furthermore, regional currencies have appreciated quite sharply against the US dollar
due to inflow of foreign capital in search for higher returns in recent months. The
strengthening of their currencies wil l naturally dampen these countries
exports , resulting in indirect tightening effect on the economy (see Charts 1 & 2).
The Bank of Japan stepped
up its monetary st imulus
fo r t he f i r s t t ime s i nce
Ma r c h b y e x p and i ng a
bank- loan programme in
August
The European Central Bank
said that it will extend its
offer of unlimited liquidity
to banks into 2011
Asian central banks, on the
other hand, continued to
tighten policies in recentmonths...
... but most central banks
are likely to slow dow n or
pause in view of the risk of
a sharper slowdown in the
global economy
Malaysia has also taken a
p au s e and w i l l l i k e l y
resume i t s po l i c y
normalisation in 1H 2011
Strengthening of regional
cu r renc i e s w i l l d ampen
expo r t s , re su l t i ng i n
indirect tightening effect
8/8/2019 Economic Outlook : Slowing Growth, But Recovery On Track- 08/09/2010
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ECONOMIC OUTLOOK4
This is especially the case for Malaysia as the ringgit has appreciated by 9.9% against
the US dollar year-to-date, one of the strongest gains in the region after the yen.
Signs Of Slow ing Global Growth Become More Apparent
Meanwhile, signs of slowing global growth are becoming more apparent. Already,
global manufacturing (see Chart 3) activities have slowed down for the fourth
straight month in August and it was the slowest pace of increase in nine months. In
particular, manufacturing new orders weakened to the slowest pace of growth in 14
months and since it turned into positive growth in July 2009, indicating that global
manufacturing activities are likely to moderate further in the months ahead. Similarly,
global services activities slowed down for the fourth consecutive month in August.
In the same vein, the OECD composite leading indicator ,has been trending lower
for the last few months (see Chart 4), indicating that OECD countries economies are
likely to expand at a slower pace in the months ahead.
In the US, the economy grew at a weaker-than-expected annualised rate of 1.6% in
the 2Q. Also, personal consumption expenditure (PCE) slowed down to 1.7% in July,
from +2.0% in June and the peak of +2.5% in April-May, suggesting that consumer
spending is losing momentum (see Chart 5). However, the PCE grew m-o-m for the
third month out of four months, indicating that consumer spending is likely to remain
resilient in the months ahead in supporting the US economy. Indeed, personal incomehas been on the rise given that the economy has been creating jobs for the last eight
consecutive months even though it has weakened somewhat. As it stands, a total of
67,000 jobs were created by the private sector in August, albeit lower than 107,000
jobs created in July but off a high of 241,000 jobs recorded in April (see Chart 6). As
Signs o f s low ing g loba l
growth are becoming more
apparent
The US economy i s
projected to moderate to
2.8% in 20 11, from +3.0%
estimated for 2010
Chart 3
Global Manufacturing And
Services Activities Heading South
Index
P M IManufacturing
30
35
40
45
50
55
60
65
05 06 07 08 09 10
P M IServices
Chart 4
OECD Composite Leading
Indicator Points To A Slowing
Economic Growth
% 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 Euro area China
Chart 1
Ringgit Gained The Most Against
The US Dollar In The Region
% YTD Vis-a-Vis US$
10.0
0
2
4
6
8
10
12
MYR SGD THB Peso Rupiah
4.2
7.3
4.44. 1
Chart 2
Chinese Yuan Hardly
Move Despite Adopting A More
Flexible Exchange Rate
% YTD Vis-a-Vis US$
-2
0
2
4
6
8
10
12
Yen Yuan KRW TWD INR
10.3
0. 5 -1.3 0. 1 -0.3
8/8/2019 Economic Outlook : Slowing Growth, But Recovery On Track- 08/09/2010
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ECONOMIC OUTLOOK5
a whole, the US economy is projected to moderate to 2.8% in 2011 , from
+3.0% estimated for 2010.
Similarly, Japans manufacturing activities weakened to the slowest pace in 14 months
in August and exports eased for the fifth straight month in July (see Chart 7), suggesting
that the export-dependent Japanese economy will likely remain weak. In the
same vein, the Eurolands economy is likely to have peaked in the 2Q , as its
export engine, which powered the 2Qs GDP growth, has started to moderate. As a
result, manufacturing and services activities have begun to trend down (see Chart 8).
In China, retail sales moderated for the second consecutive month to 17.9% yoy in
July and fixed-asset investment in urban areas slowed down to 24.9% yoy in January-
July, from the corresponding period of +32.9% in 2009 (see Chart 9). Similarly,
industrial production headed south for the fourth straight month to 13.4% yoy in July,
while growth of money supply has been easing since December last year. Although
the PMI manufacturing index rebounded in August, manufacturing activities remained
weak. As a whole, Chinas economyis l ikely to slow down further in the 2H of
the year and in 2011, after recording a more moderate growth of +10.3% yoy in the
2Q.
J ap ane s e e c o no m y w i l l
l ikely remain w eak and the
Euro l and s e conomy i s
likely to have peaked in the
2Q
Chinas economy is likely to
moderate further in the 2H
of the year and in 2011,
after record ing a s lower
growth of +10.3% yoy in
the 2Q
Chart 6
US: The Economy Is Still Creating
Jobs, Albeit At A More Moderate
Pace
( 000)
Chart 5
US: Consumer Spending Slowing
But Resilient
% yoy
-4
-3
-2
-1
0
1
2
3
4
5
2005 2006 2007 2008 2009 2010
(Personal consumption expenditure)
-1000
-800
-600
-400
-200
0
200
400
600
05 06 07 08 09 10
Chart 8
Euroland: Manufacturing And
Services Activities Moderating
Index
Chart 7
Japan: Manufacturing Activities
And Exports Weakening
Index
0
10
20
30
40
50
60
2007 2008 2009 2010
-60
-40
-20
0
20
40
60
Exports(RHS)
PM imanufacturing
(LHS)
% yoy
30
35
40
45
50
55
60
65
05 06 07 08 09 10
PMI Manufacturing
P M IServices
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ECONOMIC OUTLOOK6
Exports Of E&E Products Will Likely Moderate
In tandem with a more moderate growth in the global economy, demand for electrical
& electronic (E&E) products, which accounts for about 45% of Malaysias total exports
in 2009, and other non-E&E manufactured goods is likely to soften in 2011. Already,worldwide semiconductor sales eased to 37.0% yoy in July, from +42.6% in June and
after reaching a high of +59.9% in March. This suggests that a sharp rebound in sales
due to a spike-up in demand and inventory rebuilding are normalising. As a whole, in
tandem with a slowdown in the global demand, we expect the countrys realexports
to slow dow n to 7.6% in 2011, from an estimate of +11.7% in 2010.
Domestic Demand Will Likely Be Resilient
While exports are likely to slow down, domestic demand will likely be resilient, on the
back of a sustained increase in consumer and business spending, albeit at a more
moderate pace. As a result, we expect domestic demand to hold up at 5.5% in
2011, albeit at a more moderate pace, compared with +5.6% estimated for 2010 and
-0.5% in 2009 (see Table 1). In line with a weaker export growth, which will likely
translate into a slowdown in production and employment, consumers are likely to turn
cautious in spending. As a result, consumer spending is projected to moderate to
5.4% in 2011, but remain relatively strong compared with +5.6% estimated for 2010.
Apart from weaker job prospects, the reinstatement of employees contribution to the
Employees Provident Fund (EPF) back to 11%, from 8% when it was cut in 2009, will
likely affect consumer spending somewhat. Consumer spending, however, will likely
remain resilient, on the back of high savings and rising consumerism.
In tandem with a slowdow n
in g l oba l demand , we
expect the countrys real
exports to s low down to
7.6% in 2011
We expec t domes t i c
demand to hold up in 2011,
albeit at a more moderate
pace
Consumer spend i ng i s
projected to moderate in
2011
2007 2008 2009 2009 2010 2010(e) 2011(f)
2Q 3Q 4Q 1Q 2Q
% Growth in Real Terms
GDP 6.5 4.7 -1.7 -3.9 -1.2 4.4 10.1 8.9 7.3 5.0
Consumption:
Private 10.5 8.5 0.7 0.3 1.3 1.6 5.1 7.9 5.6 5.4
Public 6.6 10.7 3.1 1.5 9.4 0.7 6.3 6.9 -0.4 4.5
Total investment 9.4 0.7 -5.6 -9.6 -7.9 8.2 5.4 12.9 9.7 6.3
Private 13.1 1.0 -17.2 n.a n.a n.a n.a n.a 8.6 7.8
Public 5.3 0.5 8.0 n.a n.a n.a n.a n.a 10.8 4.9
Goods & services:
Exports 4.1 1.6 -10.4 -17.9 -12.9 6.0 19.3 13.8 11.7 7.6
Imports 5.9 2.2 -12.3 -19.4 -13.2 7.0 27.5 21.9 16.5 8.4
Agg.domestic demand 9.6 6.8 -0.5 -2.2 0.1 2.8 5.3 9.0 5.6 5.5
(f): RHBRI's forecasts (e): RHBRIs estimates
Table 1
GDP By Demand Aggregate (2000=100)
Chart 9
China: Fixed-Asset Investment, Retail Sales And
Industrial Production Softening
% yoy % yoyRetail sales(LHS)
0
5
10
15
20
25
00 01 02 03 04 05 06 07 08 09 10
0
10
20
30
40
50
60
Fixed asset
Ip i(LHS)
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ECONOMIC OUTLOOK7
Similarly, we expect businesses to slow down their investment due to economic
uncertainties. In addition, the surge in the ringgit in a short span of time, coupled with
the removal of subsidies and rising borrowing costs which happened at around the
same time, is likely to squeeze companies earning and make the business environment
more challenging, especially for exporters. As a result, the private investment is
envisaged to soften to 7.8% in 2011, after recovering to +8.6% estimated for 2010.
In the same vein, public investment is projected to expand at a slower pace of
4.9% in 2011, after two consecutive years of strong growth, as the previous two
years growth was boosted by the Governments stimulus spending which will unlikely
be repeated next year. Consequently, we expect fixed capital formation to ease
to 6.3% during the year, from +9.7% estimated for 2010. A stronger growth in public
consumption, however, will likely help mitigate the slowdown. We expect public
consumption to grow by 4.5% in 2011, after slipping into a contraction of 0.4% estimated
for 2010.
Further Cut In Budget Deficit Likely
The budget deficit reached a high of 7.0% of GDP in 2009, the highest in 22 years,
caused mainly by the implementation of two economic stimulus packages to cushion
the economy from the severe global recession. However, the Government has begun
to consolidate its fiscal position in 2010. As a result, the Government expects itsbudget deficit to be reduced to 5.3% of GDP or RM40.3bn in 2010. We expect the
fiscal consolidation to continue into 2011 and the Government will likely
cut its budget deficit further to 4.2% o f GDP or RM34.5bn during the year
(see Table 2). This is likely to be carried out through a reduction in the Governments
expenditure, particularly development spending, as we believe it is not ready to
broaden its tax collection via an introduction of the Goods & Services Tax (GST).
We believe the Government is likely to cut its gross development expenditure
by about 19% in 2011. This will bring the total development expenditure to
RM43.8bn, compared with an estimate of RM54.2bn in 2010. During the year, we
believe the Government will likely shift its expenditure on physical hardwareto
soft infrastructure where the latters share has been raised to 40% of its totaldevelopment spending in the 10th Malaysia Plan (10MP), from 22% in the 9MP. This
implies that construction companies, particular small- and medium-sized contractors
that are involved in building construction and utilities works, are likely to be affected,
in our view. On the other hand, we expect companies that provide training & upgrading
of skills to benefit from the Governments development spending in 2011.
Businesses will slow dow n
the i r i nves tment due to
economic uncertainties
Pub l i c i nves tment i s
projected to expand at a
slower pace in 2011
We expec t t he f i s ca l
consolidation to continue
i n t o 2011 and t h e
Government will l ikely cut
its budget deficit to 4.2%
of GDP during the year
The Government is likely to
cut its gross development
expenditure by about 19%
in 2011 and sh i f t i t s
expenditure to build soft
infrastructure
Table 2
FEDERAL GOVERNMENT FINANCIAL POSITION
2008 2009 20101(e) 2011(f) 2010(e) 2011f)
(RM bil) (% , change)
Revenue 159.8 158.6 160.9 167.3 1.4 4.0
Operating Expenditure 153.5 157.1 147.5 158.6 -6.1 7.5
Current balance 6.3 1.5 13.4 8.7
Gross development expenditure 42.8 49.5 54.2 43.8 9.5 -19.2
Less : Loan recoveries 1.0 0.6 0.5 0.6
Net development expenditure 41.9 49.0 53.7 43.2 9.6 -19.5
Overall balance -35.6 -47.4 -40.3 -34.5
% to GDP -4.8 -7.0 -5.3 -4.2
1 Budget estimate, excluding 2009 tax measures
e : Estimates f : RHBRIs ForecastsSource : MOF's Economic Report 2009/2010, EPU
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ECONOMIC OUTLOOK8
After a sharp cutback in operating expenditure (OE) in 2010, we do not expect the
Government to do the same in 2011. Instead, we expect the Government to raise
its OE by 7.5% in the 2011 Budget, in tandem with a pick-up in its revenue as the
economy returns to growth. This is likely to be reflected in a pick-up in its expenditure
on emoluments, debt servicing, supplies & services, grants & transfers and other
expenditure. These are likely to be partially offset by a slight drop in subsidies.
Manufacturing And Services Sectors To Lead The Slowdown
On the supply side, the manufacturing and services activities are likely to lead the
slowdown, in line with weaker trade activities, while business and consumer spending
are likely to moderate as well. Also, construction activities will likely ease but will
likely be mitigated by a pick-up in agriculture and mining output during the year.
Value added in the manufacturingsector is projected to ease to 8.0% in 2011,
after picking up to +12.3% estimated for 2010 (see Table 3), on account of a slowdown
in exports and domestic demand. Already, output of the export-oriented industries
moderated to 12.3% yoy in June, from +16.8% in May and after reaching a high of
+21.3% in March. This was on account of a moderation in the production of E&E
products; wood & wood products; rubber products; petroleum products; and paper,
pulp & board products. These were, however, mitigated by a pick-up in the production
of chemical products and a smaller decline in the production of textile & apparelsduring the period. Similarly, output of domestic-oriented industries softened to 16.6%
yoy in June, the slowest in four months and after reaching a high of +24.0% in May.
This was due to a slowdown in the production of construction-related materials,
particularly iron & steel and fabricated metal products, consumer-related products
such as food, and transport equipment.
Similarly, we envisage the broad services sector to expand at a more moderate
pace of 4.6% during the year , after a rebound to an estimate of +6.3% in 2010, as
businesses and consumers turn cautious in spending and trade activities slow. The
slowdown in services activities will likely be reflected in slower increases in activities
in utilities, transport & storage, communications and real estate & business sub-sectors.
Similarly, a slowdown in consumer spending and tourist arrivals will likely result in a
slowdown in wholesale & retail trade and accommodation & restaurants sub-sectors.
In the same vein, government services will likely slacken during the period due to
fiscal consolidation. Activities in finance & insurance sub-sector, though moderating,
will likely be resilient in 2011.
Construction activities are also likely to slow dow n to 2.8% in 2011 , after
moderating to +4.2% estimated for 2010 and compared with +5.8% in 2009, as growthin the previous two years was boosted by the Governments stimulus spending. As a
result, the civil engineering sub-sector is projected to grow at a more moderate pace
during the year. Similarly, construction activities in the residential property sub-sector
will likely ease somewhat in 2011, after picking up for about one-and-a-half years,
W e ex p e c t t h e
Government to raise its OE
in 2011 , in tandem with a
pick-up in its revenue as
the economy returns to
growth
The manufacturing sector
g rowth i s p ro j ec t ed t o
ease , on ac coun t o f a
slowdown in exports and
domestic demand
Table 3
GDP By Industrial Origin At 2000 Prices
2007 2008 2009 2009 2010 2010(e) 2011(f)
2Q 3Q 4Q 1Q 2Q
% Growth in Real Terms
GDP 6.5 4.7 -1.7 -3.9 -1.2 4.4 10.1 8.9 7.3 5.0
Agriculture 1.3 4.3 0.4 0.4 -0.4 5.9 6.8 2.4 3.3 3.5
Mining 2.0 -2.4 -3.8 -3.5 -3.6 -2.8 2.1 1.9 2.1 2.3
Manufacturing 2.8 1.3 -9.4 -14.5 -8.6 5.0 17.0 15.9 12.3 8.0
Construction 7.3 4.2 5.8 4.5 7.9 9.3 8.7 4.1 4.2 2.8
Services 10.2 7.4 2.6 1.7 3.4 5.2 8.5 7.3 6.3 4.6
(f): RHBRI's forecasts (e): RHBRIs eatimates
Serv i ces ac t i v i t i e s a re
likely to moderate, as busi-
nesses and consumers turn
cautious
Construction sector is also
projected to slow down, as
growth in the previous two
years was boosted by the
Gove rnment s s t imu lus
spending
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ECONOMIC OUTLOOK9
while construction activities in non-residential property sub-sector are still ongoing.
As it stands, new permits for sales and advertising of houses strengthened to 22.6%
yoy in 1H 2010, from +12.3% in 2009, while renewal permits fell by 21.0% yoy, after
rising by 15.0% during the same period. In the same vein, housing approvals by the
Ministry of Housing and Local Government gained another 10.3% yoy in 1H 2010,
after picking up by 4.2% in 2009.
The agriculture sector, however, is envisaged to strengthen to 3.5% during
the year, after a gain of 3.3% estimated for 2010. This will likely be driven by a pick-
up in palm oil production during the year, after going through two consecutive years
of lacklustre performance. In 1H 2010, palm oil production grew modestly by 0.7%
yoy, after slipping into a contraction of 1.0% in 2009 and from +12.1% in 2008.
Slower growth in the production of rubber and saw logs, however, will likely offset
part of the gain. In 1H 2010, rubber and saw logs output bounced back strongly to
increase by 17.4% and 25.0% yoy respectively, after two consecutive years of
contraction in 2008-09. 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 inch up to 2.3% in 2011, from +2.1%
estimated for 2010. This is mainly on account of a pick-up in the production of liquefiednatural gas (LNG) due to higher demand. Already, LNG output rebounded to increase
by 9.3% yoy in 1H 2010, from -3.7% in 2009 and +0.1% in 2008. This will likely be
aided by a smaller drop in crude oil production, which contracted by a smaller magnitude
of 2.8% yoy in 1H 2010, compared with -4.1% in 2009 and +0.8% in 2008.
Softer Monetary And Loan Growth Envisaged In 2011
The broader money supply, M3, moderated to +8.1% yoy in July, from +8.8% in June
and after reaching a recent high of 9.3% in May. This was the second straight month
of easing, suggesting that the underlying economic activities have softened. The
slowdown was in line with a slowdown in government operations, as the Governments
stimulus spending is dissipating. This was made worse by a slowdown in demand forfunds by the private sector, on account of a more moderate loan growth and a slower
increase in the issuance of securities. These were, however, mitigated by a pick-up in
net external operations, on account of an inflow of foreign portfolio funds. Going
forward, we expect M3 growth to moderate to around 8.0% in 2011, from+8.7%
estimated at end-2009, in line with a slowdown in economic activities. Despite the
softer growth, monetary policy wil l l ikely remain supportive of economic
growth in 2011.
Similarly, loan growth eased to 11.9% yoy in July, after rising to a high of +12.5% in
June. This was the first easing after three consecutive months of picking up, suggesting
that loan growth is beginning to soften in line with a more moderate increase in
economic activities. This was attributed to a slowdown in corporate loans, which was
mitigated by a pick-up in household loans during the period. Our estimate shows that
corporate loans eased to 14.0% yoy in July, after reaching a peak of 15.6% in June.
This was the slowest pace of growth in three months due mainly to a slowdown in
loans given to the agriculture, utilities, construction, real estate and education &
healthcare sectors. These were, however, mitigated by a pick-up in loans extended to
the mining & quarrying and manufacturing industries. Household loans, on the
other hand, strengthened to +13.2% yoy in July, the highest in more than three years
and compared with +12.9% in June. This was due to a pick-up 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 moderate to around
8.5% in 2011, from 10.5% estimated for 2010, in tandem with the slowdown in the
economy.
In terms of asset quality, the 3-month net impaired loan ratio of the banking system
remained stable at 2.2% of total loans for the third consecutive month in July, after
rising from 1.9% in March and compared with a low of 1.8% in December last year.
The slight uptick in net impaired loan ratio might have been caused by a deterioration
M3 g ro w t h w i l l l i k e l y
moderate in 2011, but the
monetary policy will likely
be supportive of economic
growth
Mining output w ill likely inch
up due t o h i ghe r LNG
outpu t and a sma l l e r
dec l i ne i n c rude o i l
production
Agriculture output is envis-
aged to s t rengthen due
mainly to a pick-up in palm
oil production
We expec t t he bank i ng
systems loans to ease in
2011, in tandem with the
slowdow n in the economy
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ECONOMIC OUTLOOK10
in asset quality system wide due to the lagged effect of the recession in 2009, and
banks adopting the FRS139. According to Bank Negara Malaysia (BNM), beginning
Jan 2010, loans are reported based on the FRS139, although adoption by the various
banks would still depend on their respective FYE. Going forward, we expect the
banking systems 3-month net impaired loan ratio to ease slightly to 2.0% by
end-2011, from 2.2% estimated for end-2010.
Sustained Large Current Account Surplus Which Will
Remain Supportive Of The Ringgit
In tandem with a slowdown in the economy, we expect merchandise trade balance to
record a larger surplus during the year. At the same time, we envisage deficit in the
services account to narrow due to lower payment for transportation charges as imports
slow down. These, however, will likely be offset partially by a widening deficit in the
income account during the year, as repatriation of profits by non-resident controlled
companies is likely to remain large, while Malaysian corporations will likely bring back
less profits into the country. Repatriation of salaries and wages by foreign workers,
on the other hand, is likely to remain stable during the year. As a whole, we expect
the current account surplus of the balance of payments to widen marginally to
around RM98.6bn or 12.4% of GNI in 2011, from a surplus of RM97.1bn or 13.0%
of GNI estimated for 2010 (see Table 4). This will help to build up the countrysforeign exchange reserves and fuel domestic liquidity in the financial system. Indeed,
excess liquidity (including repos) mopped up by the Central Bank from the banking
system inched up to RM218.1bn at end-August, from RM214.4bn in mid-August 2010
and compared with RM223.3bn at end-2009.
In the same vein, the financial accountwill likely record a smaller outflow of
capital , as Malaysian investors turn cautious on the back of rising economic
uncertainties. As a result, we envisage outflow of capital to narrow to around RM45.5bn
in 2011, from -RM53.0bn estimated for 2010. This is on account of a slowdown in
Malaysians other investments abroad, as they turn cautious given prospects of a
slowdown in the global economy. Similarly, we expect outward direct investment toslow down, leading to a net inflow of foreign direct investment (FDI) during the year,
a turnaround from a smaller net outflow estimated for 2010. These, however, will
likely be offset partially by a smaller inflow of portfolio investment in 2011, as economic
growth in the investing country turns softer.
The banking systems 3-
month net impaired loan
ratio is projected to ease
sl ightly to 2.0% by end-
2011
The cu r ren t ac coun t
surplus of the balance of
payments is projected to
widen marginally in 2011
The financial account will
l i k e l y re co rd a sma l l e r
outflow of capital in 2011
Table 4
Balance Of Payments
2008 2009 2009 2010 2010(e) 2011(f)
2Q 3Q 4Q 1Q 2Q
(RMbn)
Current account 129.5 112.1 28.0 25.4 27.4 30.4 16.2 97.1 98.6
(% of GNI) (18.1) (16.8) n.a n.a n.a n.a n.a (13.0) (12.4)
Goods 170.6 141.8 33.2 33.4 37.9 45.0 30.8 143.1 145.2
Services 0.2 4.7 1.5 0.6 -0.1 -0.1 -0.4 -1.4 -0.9
Income -23.7 -14.6 -2.9 -1.7 -5.6 -8.9 -8.6 -26.1 -27.2
Current transfers -17.5 -19.6 -3.9 -6.8 -4.8 -5.6 -5.6 -18.5 -18.5
Capital account 0.6 -0.2 -0.0 -0.0 -0.0 -0.1 -0.1 0.0 0.0
Financial account -118.5 -80.2 -22.3 -9.4 -17.4 -19.5 0.8 -53.0 -45.5
Errors & omissions* -29.9 -17.9 -3.5 -4.5 -13.0 -30.5 -18.8 -50.0 -25.0
Overall balance -18.3 13.8 2.1 11.5 -3.0 -19.6 -1.9 -5.9 28.1
Outstanding reserves^ 317.4 331.4 322.9 334.4 331.4 311.8 309.8 325.4 353.5
(US$)^ 91.5 96.7 91.5 96.0 96.7 95.3 94.8 94.9 103.7
(f): RHBRI's forecasts (e): RHBRIs estimates ^As at end-period
*Reflect mainly revaluation gains/losses from Ringgit depreciation/appreciation and statistical discrepancies
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ECONOMIC OUTLOOK11
The ove ra l l ba l ance o f
payments is projected to
record a surplus in 2011
We expect the ringgit to
f l u c t ua t e a t a roundRM3.10-3.20/ US$ for the
res t o f 2010 , be fo re
settling at RM3.10/ US$ in
2011
Inflation rate picked up to
t he f as t es t pace i n 14
months in July
As a whole and after taking into account a smaller deficit in errors & omissions, the
overall balance of payments is projected to record a surplus of around RM28.1bn
in 2011, compared with a decline of RM5.9bn estimated for 2010. Consequently, the
countrys foreign exchange reserves will likely increase to US$103.7bn by end-2011,
from an estimate of US$94.9bn at end-2010.
The build-up in foreign exchange reserves will continue to provide an underlying
support to the ringgit. As it stands, the ringgit has already turned around and
strengthened against the US dollar in recent months. Between 18 June and 9
September, the ringgit appreciated by 4.4% against the US dollar, after falling by
2.0% between 1 May and 18 June. Year-to-date, the ringgit has appreciated by 9.9%
against the US dollar, the strongest gain in the region. This was due partly to the
improving sentiment over regional currencies, after China said that it would adopt a
more flexible exchange rate on 18 June. A widening interest rate differential in
favour of Malaysia versus the US, after Bank Negara Malaysia raised its key policy
rate three times and by a total of 75 basis points this year, also helped. The liberalisation
of administrative rules on foreign exchange transactions by the Central Bank on 18
August and the move by China to add the ringgit to a small group of currencies that
are allowed to be traded directly against the renminbi on 19 August further boosted
the ringgit. Before the addition of the ringgit, the only few currencies with that privilege
were the US dollar, pound sterling, yen, euro and Hong Kong dollar. The news sentthe ringgit to a near 13-year high of RM3.1288/US$ on 19 August, before easing back
slightly the next day. Also, the ringgit has been pushed up by the inflow of hot
money, which has risen to a 2-year high. As the hot money could come and go at
anytime, we expect the ringgit to remain volatile and w ill likely fluctuate at
around RM3.10-3.20/US$ for the rest of 2010. Going forward, we expect the
ringgit to settle at RM3.10/US$ in 2011.
Change In Administrative Pricing Will Lead To Higher Inflation
Inflation rate picked up to 1.9% yoy in July, from +1.7% in June and a low of
+1.2% in February (see Chart 10). This was the fastest rate of increase in 14 months
and the fifth consecutive month of rising, due partly to the removal of fuel and sugarsubsidies in mid July by the Government and partly the lower base effect given that
inflation contracted by a larger magnitude in the same month last year. As a result,
the core inflation rate inched up to 1.4% yoy in July, after remaining stable at 1.2% in
the last three consecutive months. This was attributed to a pick-up in the costs of
transport, which accelerated to 2.0% yoy in July, from +1.3% in June, on the back of
the increase in fuel prices by around 3%. A pick-up in the costs of housing, water,
electricity, gas & other fuels; and recreation services as well as prices of alcoholic
beverage & tobacco and furnishing & household products worsened the situation.
Similarly, the prices of clothing & footwear and the costs of communications fell by a
smaller magnitude during the month. In the same vein, food & non-alcohol beverage
prices grew at a faster pace of 2.9% yoy in July, compared with +2.7% in June and a
low of +0.8% in October last year.
Chart 10
Inflation Inching Up, But Not A Major Threat
% yoy
CoreC P I
Total
-6
-4
-2
0
2
4
6
8
1 0
1 2
0 5 0 6 0 7 0 8 0 9 1 0
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12/13
Going forward, inflation is expected to increase at a faster pace due to the
Governments move to gradually reduce its subsidies once every six months that will
lead to higher retail fuel and food prices. Already, the Government raised fuel prices
by around 3% and sugar price by 16.7% on 16 July. Our estimates showed that the
increase would add 0.2 percentage point and 0.08 percentage point respectively to
the CPI. This, together with some spill-over effect, will likely push up the CPI in 2H
2010 to around 2.6% yoy, from +1.4% recorded in the 1H. Further out, we expect
inflation to trend up to an average of 2.8% in 2011, from +2.0% estimated for
2010 and +0.6% in 2009.
Policy Normalisation To Resume In 1H 2011
Although the change in administrative pricing will lead to higher inflationary pressure,
we believe Bank Negara Malaysia (BNM) will unlikely act on it. As it stands, its interest
rate hikes thus far were geared towards normalising monetary conditions in the
economy rather than controlling inflation. Indeed, we believe the Central Bank is
likely to have done with its interest rate hikes this year, after raising it by a total of 75
basis points in three meetings and the OPR will likely stay at 2.75% until end-2010.
Further out, we believe the Central Bank will likely resume with its policy normalisation
and the OPR w ill likely be raised by 50-75 basis points in 1H 2011 to bring it to
a more neutral level of 3.25-3.50% by mid-2011.
We expec t i n f l a t i on t o
trend up in 2011, due to the
reduction of subsidies
BNM w ill likely resume with
its policy normalisation and
the OPR w ill likely be raised
by 50-75 basis points in 1H
2011
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