Regional outlook forum 2013 10 january 2013

MALAYSIA: ECONOMIC & POLITICAL OULOOK 2013

AZRUL AZWAR AHMAD TAJUDIN

CHIEF ECONOMIST

Strictly Private & Confidential

2

3

STILL LANGUISHING GLOBAL ACTIVITIES

Spots of deterioration in the global

economy since 3Q2012 with

heightened downside risks – part of

sluggish and bumpy recovery OR

beginning of a more prolonged

downturn? Global economic

challenges: o Short-term : Proactive response to short-

run slowdown

o Medium-term: The global economy is

operating in a world of high public debt

and/or budget deficits in particular rising

doubts over: the viability of the Euro zone as

weaknesses in the periphery appears to

have spread to core economies

capability of peripheral Euro countries to

deliver the required fiscal and structural

adjustments

Sources: JP Morgan & Markit, Bank Islam

Sources: OECD, Bank Islam

30

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Mar-04

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Sep-12

Dec-12

GLOBAL PURCHASING MANAGERS' INDICES (PMI)

Composite PMI Manufacturing PMI Services PMI

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0

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10

15

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25

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Jan-96M

ay-96Sep-96Jan-97M

ay-97Sep-97Jan-98M

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ay-00Sep-00Jan-01M

ay-01Sep-01Jan-02M

ay-02Sep-02Jan-03M

ay-03Sep-03Jan-04M

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ay-05Sep-05Jan-06M

ay-06Sep-06Jan-07M

ay-07Sep-07Jan-08M

ay-08Sep-08Jan-09M

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ay-10Sep-10Jan-11M

ay-11Sep-11Jan-12M

ay-12Sep-12

OECD LEADING INDICATORS (12-MONTH ANNUALISED GROWTH)

China India Brazil Russia Japan Euro US UK Total

LIMITED IMPROVEMENT TO GLOBAL TRADE

The World Trade Organisation (WTO)

cut its global trade growth forecasts to

2.5% for 2012 from 3.7% and to 4.5%

for 2013 from 5.6%: o given heightened risks on the downside

due largely to the prolonged Euro zone

crisis, sub-trend US growth, China’s

slowdown (after expanding by 7.7%

during the first 3Qs of 2012, official GDP

growth targets of 7.5% in 2012 and

7.0%-7.5% in 2013) and Japan’s

subdued growth

o Improving trade growth outlook in

developing economies given tentative

signs of a pick-up in recent export

performance could be limited mainly to

Asian economies whose supply chain

networks closely integrated with China

and could only partially fill up the global

slack

Sources: IMF, Bank Islam

Sources: SIA, SEMI, Bank Islam

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-10

-8

-6

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12

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197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012 F2013F2014 F2015 F2016 F2017 F

ANNUAL WORLD MERCHANDISE TRADE GROWTH

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

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10.0

15.0

20.0

25.0

30.0

Jan-95M

ay-95Sep-95Jan-96M

ay-96Sep-96Jan-97M

ay-97Sep-97Jan-98M

ay-98Sep-98Jan-99M

ay-99Sep-99Jan-00M

ay-00Sep-00Jan-01M

ay-01Sep-01Jan-02M

ay-02Sep-02Jan-03M

ay-03Sep-03Jan-04M

ay-04Sep-04Jan-05M

ay-05Sep-05Jan-06M

ay-06Sep-06Jan-07M

ay-07Sep-07Jan-08M

ay-08Sep-08Jan-09M

ay-09Sep-09Jan-10M

ay-10Sep-10Jan-11M

ay-11Sep-11Jan-12M

ay-12Sep-12

GLOBAL CHIP INDUSTRY

Global Semiconductor Sales (US billion, LHS) US Book-to-Bill Ratio (RHS)

5

SLOW AND UNEVEN RECOVERY IN SIGHT

Potential major causes of

disappointing global growth in

2H2012 and 1H2013: o No let-up in the intensity of the Euro zone

sovereign debt crisis

o Short-term contractionary effects on

growth due to austerity measures and

fiscal cutbacks worldwide especially in

Europe in particular peripheral Euro

zone, the US and UK and spillovers on

developing countries

o Weak financial institutions and

inadequate policy responses in key

advanced economies

o Tail-off in Japan’s disaster reconstruction

spending

o Downshift in prospects for China, India

and Brazil

Sources: JP Morgan & Markit, Bank Islam

Sources: OECD, Bank Islam

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EU MANUFACTURING PURCHASING MANAGERS' INDICES (PMI)

Eurozone Germany France Italy UK

-15

-10

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5

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15

20

25

30

Jan-96M

ay-96Sep-96Jan-97M

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ay-00Sep-00Jan-01M

ay-01Sep-01Jan-02M

ay-02Sep-02Jan-03M

ay-03Sep-03Jan-04M

ay-04Sep-04Jan-05M

ay-05Sep-05Jan-06M

ay-06Sep-06Jan-07M

ay-07Sep-07Jan-08M

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OECD LEADING INDICATORS (12-MONTH ANNUALISED GROWTH)

China India Brazil Russia Japan Euro US UK Total

6

SLOW AND UNEVEN RECOVERY IN SIGHT (continued)

o The 11th hour compromised deal only averted the immediate pain of the “fiscal cliff”,

a harsh combination worth US$609 billion of harsh spending cuts (US$109 billion in

defence and non-defence programmes) and sharp tax increases (US$500 billion)

due to take effect 1 Jan 2013 BUT not all possible negative impact: another potential political bickering and gridlock in the Congress as early as mid-Feb

2013 over the need to raise the US$16.4 trillion US Federal Govt debt ceiling as the

Treasury Dept exhausts “extraordinary measures” taken since 31 Dec 2012 to finance

about US$200 billion in deficits – possible damage to fragile consumer and business

confidence

2-month delay to automatic spending cuts or “sequestration” (US Govt’s belt-tightening to

pare down deficits) but to finally take effect on 1 March 2013 – US growth to slow

especially in the 1H2013 but not grind to a halt

o Possibility of waning momentum in domestic demand in developing economies due

to fiscal constraints (Malaysia), overheating concerns (Indonesia) and a host of

other factors

o Stalled E&E turnaround? US SEMI book-to-bill ratio, a forward-looking indicator for the global chip industry

remained below parity for the 6th month in a row in November 2012 to 0.79x after

tentative signs of recovery with above the 1x-threshold for a short period of 4 consecutive

months between Feb 2012 and May 2012. The World Semiconductor Trade Statistics (WSTS) forecast modest growth in global

semiconductor sales in 2013 and 2014, by 4.5% and 5.2% to US$303 billion and US$319

billion respectively vs. a 3.2% decline in 2012 to US$290 billion .

7

SLOW AND UNEVEN RECOVERY IN SIGHT (continued)

On 9 October 2012, the IMF downgraded

its global growth forecasts to 3.3% (from

3.5%) for 2012 and 3.6% (from 3.9%) for

2013 – global slowdown to persist

especially in the earlier part of 2013 on: o Lacklustre US recovery

o Flimsy turnaround from recession in the

Euro zone and the UK

o Stalled recovery in Japan

o Sub-par growth in China, India and Brazil

Asia will continue to power the global

growth at a faster clip than the global

economy despite risks of the Asian growth

slowing to levels last seen during the 2009

global financial crisis.

Sources: IMF, Bank Islam

Sources: IMF, national authorities, Bank Islam

2008 2009 2010 2011 2012 F 2013 F 2012 F 2013 F 2012 F 2013 F

World Output 2.8 -0.6 5.3 3.9 3.5 4.1 3.5 3.9 3.3 3.6Advanced Economies 0.0 -3.6 3.2 1.6 1.4 2.0 1.4 1.9 1.3 1.5* United States -0.3 -3.5 3.0 1.7 2.1 2.4 2.0 2.3 2.2 2.1* Euro Zone 0.4 -4.3 1.9 1.5 -0.3 0.9 -0.3 0.7 -0.4 0.2* Japan -1.0 -5.5 4.4 -0.7 2.0 1.7 2.4 1.5 2.2 1.2* United Kingdom -1.1 -4.4 2.1 0.7 0.8 2.0 0.2 1.4 -0.4 1.1* Canada 0.7 -2.8 3.2 2.4 2.1 2.2 2.1 2.2 1.9 2.0* Newly Industrialized Asia 1.8 -0.7 8.5 4.0 3.4 4.2 2.7 4.2 2.1 3.6* Malaysia 4.8 -1.6 7.2 5.1 4.4 4.7 4.0 4.7 4.4 4.7* China 9.6 9.2 10.4 9.2 8.2 8.8 8.0 8.5 7.8 8.2* India 6.2 6.6 10.6 7.1 6.9 7.3 6.1 6.5 4.9 6.0

9-Oct-12

International Monetary Fund's Forecasts16-Jul-12

Selected Economies

17-Apr-12

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3Q12

QUARTERLY REAL OR CHAINED GDP GROWTH OF SELECTED BRIC & OECD COUNTRIES (YoY %)

US UK EU Japan China India Brazil

8

GRAVITY-DEFYING FIRST 3QS OF 2012

Stronger-than-expected GDP showing in

the first 3Qs of 2012 in particular the

surprise 5.2% YoY pace in 3Q2012 and

the upgrade in 2Q2012 reading to 5.6%

YoY from 5.4% YoY. Key takeaways in

3Q2012: o 3.0% YoY contraction in exports, the first

decline on a quarterly basis since 3Q2009

after decelerating for 2 consecutive Qs

(2Q2012:+2.1% YoY, 1Q2012:+2.8% YoY)

– external demand to remain a major drag

on the Malaysian economy at least until

1H2013

o Very robust domestic demand, sustaining

double-digit growth of 11.4% YoY

(2Q2012:+14.0% YoY, 1Q2012:+10.0%

YoY), led by both public and private

sectors in particular:

Sources: BNM, Bank Islam

Sources: BNM, Bank Islam

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QUARTERLY DEMAND SIDE PERFORMANCE (% YoY)

Overall GDP Private Consumption Public Consumption Private Investment

Public Investment Exports Imports

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3Q2012

QUARTERLY SECTORAL PERFORMANCE (% YoY)

Overall GDP Agriculture Mining & Quarrying

Manufacturing Construction Services

GRAVITY-DEFYING FIRST 3QS OF 2012 (continued)

22.7% YoY spike in GFCF

(2Q2012:+26.1% YoY, 1Q2012:+16.1%

YoY), supported by both domestic and

foreign investments of which public

investment was up by +22.4% YoY

(2Q2012:+28.9% YoY, 1Q2012:+10.3%

YoY) and private investment by +22.9%

YoY (2Q2012:+24.6% YoY,

1Q2012:+19.8% YoY)

8.5% YoY jump in household spending

(2Q2012:+8.8% YoY, 1Q2012: +7.4%

YoY), lifted by Govt cash transfers and

assistance benefits while public

consumption was up by 2.3%

YoY(2Q2012:+10.9% YoY, 1Q2012:

+9.1% YoY)

Sources: Department of Statistics, MATRADE, Bank Islam

Sources: MIER, Bank Islam

50

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1Q98

3Q98

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1Q12

MIER INDICATORS

Consumer Sentiment Index Business Conditions Index

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YoY GROWTH (3-MONTH MOVING AVERAGE BASIS)

IPI Gross Exports

GRAVITY-DEFYING FIRST 3QS OF 2012 (continued)

o Growth moderation across almost all sectors: Construction sector remained the major growth leader: +18.3% YoY (2Q2012:+22.2%

YoY, 1Q2012: +15.5% YoY), led by the civil engineering sub-sector spanning across

various industries/sub-sectors in particular roads/highways/bridges, transportation,

utilities, oil & gas and services related as well as residential sub-sector

Pick-up in services output growth to 7.0% YoY (2Q2012:+6.6% YoY, 1Q2012:+5.7% YoY),

underpinned domestic-oriented activities

Apparent slowdown in manufacturing activities, increasing by just 3.3% YoY

(2Q2012:+5.6% YoY, 1Q2012:+4.4% YoY) on moderation in export-oriented and

domestic-oriented industries

Return to the positive territory for the agriculture sector despite a marginal 0.5% YoY

growth (2Q2012:-4.7% YoY, 1Q2012:+2.1% YoY) thanks to a turnaround in CPO output

Unexpected slump in mining activities with a 1.2% YoY drop (2Q2012:+2.3% YoY,

1Q2012:+0.3% YoY) as a result of lower natural gas production due to planned facility

shutdowns

MALAYSIA: 2013, YEAR OF 2 HALVES?

The progress of economic rebalancing

and transformation, on a journey to

become a developed, high-income

nation by 2020 to gain traction.

Pockets of weakness in the 1H2013 with o erratic export performance given the still

tentative global recovery

o uncertainties related to GE13

A pick-up in Malaysia’s growth

momentum in 2H2013 with significant

export recovery on the widely expected

global turnaround thanks to: o Clarity about resolution to the Euro zone

crisis - resumption of recovery by mid-

2013 particularly for core countries and

return to growth for all nations by 2014

o More conclusive signs of sustainable

bottoming out in the US and China

Sources: Department of Statistics, MATRADE, Bank Islam

Sources: MIER, Bank Islam

50

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110

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1Q98

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1Q11

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1Q12

MIER INDICATORS

Consumer Sentiment Index Business Conditions Index

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-8.00

-3.00

2.00

7.00

12.00

Jan-97Apr-97Jul-97O

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YoY GROWTH RATES OF LEADING, COINCIDENT & LAGGING INDICATORS

Leading Index Coincident Index Lagging Index

13

PROSPECTS IN 2013

Notwithstanding a multitude of

uncertainties in the global economy and

financial environment, the latest official

GDP growth guidance of between 4.5%-

5.0% for 2012 and 4.5%-5.5% for 2013

seems reasonably realistic - In-house

GDP growth forecasts of 5.1% for 2012

and 5.3% for 2013 respectively exceed

or at the upper-end of official targeted

ranges: o Domestic demand (+11.8% YoY during

the first 3Qs of 2012), proven so far to

be more than adequate to withstand

external headwinds and absorb external

shocks, will continue to anchor growth

on disposable income enhancement

measures and other domestic demand

supportive incentives under Budget

2013, particularly led by: Sources: BNM, Economic Report 2012/2013, Bank Islam

GROWTH (%) 2008 2009 2010 2011 1H2012 2012 BI 2012 MoF 2013 BI 2013 MoF

GDP (constant prices, 2000=100) 4.8 -1.5 7.2 5.1 5.1 5.1 4.5-5.0 5.3 4.5-5.5

Demand Side

Final Consumption Expenditure 8.4 1.4 5.8 8.9 8.1 7.8 7.9 5.2 4.2

* Private Consumption 8.7 0.6 6.6 7.1 8.1 8.0 7.0 6.2 5.7

* Public Consumption 6.9 4.9 2.9 16.1 8.4 7.2 11.3 1.2 -1.2

Gross Fixed Capital Formation (GFCF) 2.4 -2.7 10.4 6.5 21.3 19.9 13.5 10.2 9.3

* Private Investment 0.1 -7.4 15.5 12.2 22.4 19.7 11.7 11.7 13.3

* Public Investment 5.2 2.9 5.0 -0.3 19.5 20.1 15.9 8.3 4.2

Domestic Demand 6.6 0.3 7.0 8.2 11.8 11.1 9.4 6.6 5.6

Exports 1.6 -10.9 11.3 4.2 2.5 1.4 1.6 4.2 2.8

Imports 2.3 -12.7 15.6 6.2 7.5 6.5 5.1 5.7 3.6

Supply Side

Agriculture, Fishing & Forestry 3.8 0.05 2.4 5.9 -1.5 -0.6 0.6 1.8 2.4

Mining & Quarrying -2.4 -6.5 -0.4 -5.7 1.3 1.0 1.5 2.5 2.7

Manufacturing 0.8 -9.0 11.9 4.7 5.0 4.3 4.2 5.1 4.9

Construction 4.4 6.2 6.0 4.6 18.9 18.1 15.5 11.0 11.2

Services 8.6 2.9 7.2 7.0 5.8 6.0 5.5 5.9 5.6

14

PROSPECTS IN 2013 (continued)

investment revival, both private and public

consumer spending notwithstanding expectations of public consumption slowdown given

limited room for further fiscal stimulus

o Across-the-board expansion in all sectors in 2013 with construction, services

and manufacturing sectors as growth leaders: double-digit growth rates for construction activities, anticipated to persist in 2012 and

2013 with huge multiplier effects on the overall economy

increase in services activities to sustain above 5.5% underpinned particularly by robust

activities in financial, real estate, communications segments

respectable manufacturing output growth, driven by both export-oriented and domestic-

oriented industries

15


Direct measures to further boost foreign and domestic direct investments

(FDIs and DDIs), private or public sector led: o RM3 billion allocation to accelerate the implementation of the Entry Point Projects

(EPPs) under the 12 National Key Economic Areas (NKEAs) including the RM1

billion Domestic Investment Strategic Fund under the Malaysian Investment

Development Authority (MIDA) announced in July 2012 to promote DDIs and

accelerate the participation of Malaysian companies in the global supply chain

while leveraging on outsourcing activities and acquisition of technology by

Malaysian companies

o RM6 billion allocation under the Private Finance Initiatives (PFI 2) to implement

various projects such as refurbishment and maintenance of schools & health

clinics, housing development, water tanks, flood mitigation plans and sport facility

building to ensure the people’s well-being while spurring investment activities

16


Notwithstanding the marginal 0.6% YoY increase in exports during the first

3Qs of 2012 of which the 3Q2012 suffered a 3% contraction as evidence of

the impact of global slowdown, the baseline scenario points to improving

prospects towards 1H2013, paving the way for a commendable acceleration

especially towards 2H2013 and in 2014 due to: o Optimism from stimulus measures such as aggressive monetary easing and/or

reflationary fiscal policy or other pro-growth macroeconomic policies already or will

be undertaken by the world’s major economies, coordinated or otherwise After spending US$2.3 trillion in QE1 and QE2, the US QE3 was announced in mid-Sep

2012, comprising a monthly programme to purchase mortgage-backed bonds worth

US$40 billion until a sustained turnaround in the job market, most probably after the

unemployment rate dips to way below 7% (although still above the desired 5%-6% range)

while helping to nurse the housing market to recovery

China’s CNY1 trillion infrastructure stimulus package over 3 to 8 years to build subway

lines, railways, roads, highways, ports, etc announced in early Sep 2012

Launch of the Outright Monetary Transactions (OMT) in September 2012 (but ready to

activate from Day 1), the European Central Bank’s (ECB) new bond buying programme to

calm financial markets and bring down sovereign bond spreads of troubled countries (with

high borrowing costs) – sterilised purchase of unlimited amounts of sovereign bonds of

Euro zone countries that seek assistance and agree to fiscal adjustment programmes and

sound economic policies

.

17


A 10-trillion yen extension, announced in Sep 2012 to Bank of Japan’s asset-buying

programme amounting to 80 trillion yen in total – 5 trillion yen on short-term bills by June

2013 and another 5 trillion yen on long-term bonds by end-Dec 2013

o Tentative signs of a shift in US household borrowing patterns in 2Q2012 and

3Q2012, indication of the beginning of an end to the long private sector’s

deleveraging process in particular households who may demonstrate greater

willingness to loosen their purse strings despite muted income growth as debt has

increasingly become less of a burden – if corporate deleveraging subsides at the

same time, then deleveraging will no longer be a big drag on the economy

o Rather stable commodity prices in particular related to energy and food could to a

certain extent cushion the downside risks to global growth although it may not be

able to spur a meaningful economic recovery. Lower commodity prices: help boost domestic demand to partially make up for sluggish exports thanks to improved

capacity to spend with better consumers’ purchasing power and businesses’ balance

sheets

provide the scope for monetary policy support as central banks should be able to maintain

or even lower interest rates if necessary

come as a relief for Governments struggling to pay national subsidy bills

18

DOMESTIC AREAS OF VULNERABILITY?

Some domestic-driven risk factors that could potentially constrain growth

potential in 2013: o Delay in holding the 13th General Election (GE13) - negative for the economy given the

inclination among both businesses and consumers to adopt a wait-and-see attitude,

deferring their spending decisions as well as a potential burden on the Federal Govt’s

finances if the ruling party continues dishing out more generous handouts

o Delay in the full start-up of Malaysia’s Gumusut-Kakap deep-sea oilfield (2nd deepwater

development after Kikeh field offshore Sabah) with a full production capacity of up to

135,000 bpd to the 2H2013 (instead of the 2H2012) due the longer-than-expected time

needed to construct the floating production facility - protracted modest growth for the

mining sector. However, its maiden production was made possible since Nov 2012 via an

interim crude evacuation system (ICES) by tying back or linking its 2 wells to the existing

Kikeh field and is expected to hit the maximum of 25,000 bpd.

o Limitations of domestic demand after 4 straight quarters of beyond expectations -

concerns whether it has further leg to hold up and provide support to Malaysia’s economic

growth if the global slowdown prolongs; sudden upturn in inflationary pressures especially

from food and fuel prices; escalating household and Govt indebtedness which may

require some macroeconomic policy tightening and pending potential policy shift in

general in particular post-GE13

19

TAME INFLATION OUTLOOK

Very subdued inflationary pressures as

headline CPI growth in Nov 2012 remained

stuck at 1.3% for 3 months in a row, the

slowest pace since March 2010, reflecting: o high base effects

o price declines for communications;

recreation services & culture and clothing &

footwear

o slowdown in price gains for food & non-

alcoholic beverages; transport; alcoholic

beverages & tobacco and housing, utilities

& fuels

Continued easing in core inflation to

below 1.0% YoY since July 2012 and

negative PPI growth since June 2012, an

indication of cooling price pressures or

limited pass-through effects on the ground.

Sources: Department of Statistics, Bank Islam


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91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

BI

20

13

BI

ANNUAL HEADLINE CPI GROWTH

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Jan-0

6M

ar-06

May-0

6Ju

l-06

Sep

-06

No

v-06

Jan-0

7M

ar-07

May-0

7Ju

l-07

Sep

-07

No

v-07

Jan-0

8M

ar-08

May-0

8Ju

l-08

Sep

-08

No

v-08

Jan-0

9M

ar-09

May-0

9Ju

l-09

Sep

-09

No

v-09

Jan-1

0M

ar-10

May-1

0Ju

l-10

Sep

-10

No

v-10

Jan-1

1M

ar-11

May-1

1Ju

l-11

Sep

-11

No

v-11

Jan-1

2M

ar-12

May-1

2Ju

l-12

Sep

-12

No

v-12

CPI vs. PPI (YoY Growth)

Headline CPI Headline PPI

20

TAME INFLATION OUTLOOK (continued)

However, remain cautious of the upside risks to inflation emanating from both

external and domestic factors such as: o Sudden reversal in global commodity prices particularly related to energy, food and

building materials – surge in global surplus liquidity; rising risk premium of global oil

prices due to heightened geopolitical concerns; supply chain disruptions due to natural

catastrophes and adverse weather conditions due to climate change

o Strict implementation of the PEMANDU’s Subsidy Rationalisation Programme (SRP) –

removal or significant reduction to subsidies (price hikes and upward tariff reviews) that

have shielded somewhat the impact of higher global commodity prices on selling prices of

goods & services in Malaysia and their impact on the Malaysian economy

o Sticky food inflation could bump up the overall CPI as the Food & Non-Alcoholic

Beverages is the largest CPI component (30.3%)

o Income effects from the implementation of minimum wage policy for some 3.2 million

private sector workers and 7%-13% increments for some 1.4 million civil servants

21

TAME INFLATION OUTLOOK (continued)

Notwithstanding these upside risks to inflation and the relative strength in

domestic demand, the current easing cycle in inflation should be able to sustain

thanks to: o Significant excess capacity in the economy that should help contain inflationary

pressures despite robust domestic demand

o Cost-push and demand-pull inflation dynamics have yet to show signs of a breakout in

the absence of significant price pressures from labour market, credit expansion or

supply bottlenecks

o Moderate pressures from food and energy inflation as global commodity prices in

particular agricultural commodities and oil & gas are expected to stay within

acceptable/manageable ranges despite expectations of much improved global

economic conditions in 2H2013

o Relatively well-anchored inflation expectations

Assuming no upward revision to retail prices of subsidised items in particular

petrol and diesel and barring other unforeseen circumstances, CPI growth: o may have hit bottom at 1.3% YoY in November 2012

o may gain some ground in December 2012 but still to average around 1.7% in 2012

(way below the BNM’s targeted range of 2.0%-3.0%) vs. 3.2% in 2011

o should average below 2.5% in 2013 with a spike nearing the implicit tolerance

levels of 3% in the 2H2013 on base-effect lapses, changes to administrative prices by

mid-2013 and an uptick in demand-pull inflation

22

OPR PAUSE TO CONTINUE WITH A SLIGHT UPSIDE RISK

The outlook for both growth and inflation

should be carefully assessed to avoid

over or under adjustment of monetary

policy.

While rather benign inflation outlook in

2013 provides the scope for OPR cuts or

at least extended rate-pause, there is a

minor tightening risk to OPR towards

the later part of 2013 especially if growth

turns out much stronger than expected,

exerting a strain on inflation.

Deemed accommodative and adequate to

support domestic demand while

preventing a build-up of financial

imbalances, OPR should remain at

normalised levels of 3% throughout 2013.

Stable OPR outlook in 2013 while the

earliest rate-hike delayed to 1H2014?


Sources: Bank Negara Malaysia, Bank Islam

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Ap

r-0

4Ju

n-0

4A

ug

-04

Oct

-04

De

c-0

4F

eb

-05

Ap

r-0

5Ju

n-0

5A

ug

-05

Oct

-05

De

c-0

5F

eb

-06

Ap

r-0

6Ju

n-0

6A

ug

-06

Oct

-06

De

c-0

6F

eb

-07

Ap

r-0

7Ju

n-0

7A

ug

-07

Oct

-07

De

c-0

7F

eb

-08

Ap

r-0

8Ju

n-0

8A

ug

-08

Oct

-08

De

c-0

8F

eb

-09

Ap

r-0

9Ju

n-0

9A

ug

-09

Oct

-09

De

c-0

9F

eb

-10

Ap

r-1

0Ju

n-1

0A

ug

-10

Oct

-10

De

c-1

0F

eb

-11

Ap

r-1

1Ju

n-1

1A

ug

-11

Oct

-11

De

c-1

1F

eb

-12

Ap

r-1

2Ju

n-1

2A

ug

-12

Oct

-12

De

c-1

2F

eb

-13

Ap

r-1

3Ju

n-1

3A

ug

-13

Oct

-13

De

c-1

3

ACTUAL AND FORECAST REAL SHORT-TERM INTEREST RATES

CPI OPR Real OPR

-25

-20

-15

-10

-5

0

5

10

15

20

25

Jan-

06M

ar-0

6M

ay-0

6Ju

l-06

Sep

-06

No

v-0

6Ja

n-07

Mar

-07

May

-07

Jul-0

7Se

p-0

7N

ov-0

7Ja

n-0

8M

ar-0

8M

ay-0

8Ju

l-08

Sep

-08

No

v-0

8Ja

n-09

Mar

-09

May

-09

Jul-0

9Se

p-0

9N

ov-0

9Ja

n-10

Mar

-10

May

-10

Jul-1

0Se

p-1

0N

ov-1

0Ja

n-1

1M

ar-1

1M

ay-1

1Ju

l-11

Sep

-11

No

v-1

1Ja

n-12

Mar

-12

May

-12

Jul-1

2Se

p-1

2N

ov-1

2YoY GROWTH OF SELECTED CPI COMPONENTS

Headline CPI Adjusted or Non-Food CPI Food CPI Housing, Utilities & Fuel CPITransport CPI

23

RATHER BULLISH MYR OUTLOOK

Sources: Bloomberg, Bank Islam


Although we can expect some volatility in

the 1H2013, the general uptrend that MYR

has experienced since August 2012

should persist for much of 2013 without

being out-of-synch vis-à-vis its regional

peers. Asian currencies should draw

strength from: o Capital inflows particularly portfolio funds

in search of high-yielding assets. The

Institute of International Finance (IIF)

estimates that private flows into emerging

markets to hit US$1.1 trillion in 2013 trillion

(vs. US$1 trillion in 2012) of which 46.3%

or US$0.51 to reach Asia. By default,

Asian currencies should benefit since Asia

vis-à-vis other regions: is projected to be the world’s fastest-

growing region with the most reliable and

exciting growth story

has solid underlying fundamentals

MYR PERFORMANCE VS. USD & EUR

COMPARATIVE NORMALISED PERFORMANCE : MYR, SGD, KRW, TWD

24

RATHER BULLISH MYR OUTLOOK (continued)



o Boost to risk appetite for emerging

currencies due to rosier economic

prospects especially for Asian economies

thanks to some form of stimulus measures

to be or already undertaken by the world’s

largest economies to stem the slowdown –

improving export outlook for trade-

dependent economies hence widening

current account surpluses

o Reduced safe-heaven appeal of USD due

to QE3 in favour of other currencies with

better economic growth potential and more

favourable yield prospects such as Asian

currencies

Asian currencies may gain significant

grounds towards year-end and hence,

MYR may end at a RM2.97-3.02

range from RM3.052 as at end-2012.

COMPARATIVE NORMALISED PERFORMANCE : MYR, CNY, THB, IDR

8.88

7.64

5.68

4.50 4.33 3.82

1.20

0.20

-2.76

-6.03

-12.17-13.00

-8.00

-3.00

2.00

7.00

KRW PHP SGD TWD MYR THB CNY HKD INR IDR JPY

SPOT PERFORMANCE OF SELECTED ASIAN CURRENCIES VS. USD (%) -1 JAN 2012 TO DATE

25

26

GE13: D-DAY IS A GUESSING GAME

The constitutional Parliamentary

term is valid from 29 April 2008, the

date of the Parliament’s first sitting after

the 12th General Election (GE12). As

such, the Parliament must be dissolved

by 28 April 2013. From the dissolution

date, the GE13 must be held within 60

days. Historically, Malaysia has never

come close to the full term of 5 years

except for the GE3 in 1969 and GE4 in

1974.

Given deep changes in Malaysia’s

political landscape since 8 March 2008,

it’s difficult for the PM to arrive at a

perfect time to dissolve the Parliament

and to hold the GE13.

Sources: Election Commission, Bank Islam


Polling Date Interval Period

GE1: Wednesday, 19 August 1959

GE2: Saturday, 25 April 1964 4 years 8 months

GE3: Saturday, 10 May 1969 5 years

GE4: Saturday, 24 August 1974 5 years 3 months

GE5: Saturday, 8 July 1978 3 years 10 months

GE6: Thursday, 22 April 1982 3 years 9 months

GE7: Sunday, 3 August 1986 4 years 3 months

GE8: Sunday, 21 October 1990 4 years 3 months

GE9: Tuesday, 25 April 1995 4 years 6 months

GE10: Monday, 29 November 1999 4 years 7 months

GE11: Sunday, 21 March 2004 4 years 4 months

GE12: Saturday, 8 March 2008 3 years 11 months

GE13: March 2013? 5 years?

The Gap Period Between Two Consecutive Election Dates

27

GE13: FREE & FAIR ELECTION?

As at 16 August 2012, explosion in the

number of registered voters, crossing

the 13 million mark to 13.05 million

people and surging by 19.5%: o compared to a very mild growth of ONLY

between 6%-7% as at GE10, GE11 and

GE12

o from just 10.92 million at GE12, equivalent

to 2.13 million increase, the biggest in

Malaysia’s history

o out of whom 274,247 people or 2.1% are

absent voters comprising armed forces,

police and overseas voters – Top 3 states

with most absent voters are Federal

Territory of KL (40,543 people), Perak

(38,367) and Johor (25,058) while Selangor

has the highest number of overseas voters

with 579 people



Dewan Rakyat Dewan Undangan Negeri

Perlis 3 15

Kedah 15 36

Penang 13 40

Perak 24 59

Selangor 22 56

Negeri Sembilan 8 36

Melaka 6 28

Johor 26 56

Pahang 14 42

Terengganu 8 32

Kelantan 14 45

Sarawak 31 71

Sabah 25 60

FT Kuala Lumpur 11 N/A

FT Putrajaya 1 N/A

FT Labuan 1 N/A

TOTAL 222 576

SEAT DISTRIBUTION AT HOUSE OF REPRESENTATIVES AND STATE LEGISLATIVE ASSEMBLIES

Year No of Registered Voters Growth (in number) Growth (%)

1959 2,171,097

1964 2,763,077 591,980 27.27

1969 3,843,782 1,080,705 39.11

1974 4,132,032 288,250 7.50

1978 5,059,689 927,657 22.45

1982 6,081,628 1,021,939 20.20

1986 6,964,960 883,332 14.52

1990 7,968,640 1,003,680 14.41

1995 9,012,173 1,043,533 13.10

1999 9,564,071 551,898 6.12

2004 10,284,591 720,520 7.53

2008 10,922,139 637,548 6.20

2012* 13,052,374 2,130,235 19.50

VOTER BASE

28

GE13: FREE & FAIR ELECTION? (continued)

Although there are still about 3.2 million unregistered eligible voters (out of

16.3 million eligible voters), concerns whether this phenomenon of sharp

increases in voter registry really reflects increased voter awareness, growing

political interest and voter registration efforts by political parties– rising

pressures on the Election Commission (EC) to: o speed up the clean-up of the electoral roll from dubious entries

o address the 8 demands by BERSIH especially related to free and fair electoral

system and election process

29

GE13: CHALLENGES OF PREDICTING

The unprecedented Opposition’s victory on 8 March 2008 at the GE12 and

continued close cooperation of Opposition parties even post-GE 12 until the

establishment of Pakatan Rakyat (PR), the first cohesive, credible and viable

alternative coalition in Malaysia since Independence to challenge BN has

fundamentally transformed expectations of what could be the outcome of

future elections.

As no two GEs can provide almost exactly the same reading and in view of the

surprise GE12 results, predicting the outcome of the GE13 could prove very

challenging and a highly speculative attempt. However, we will focus only on

the outcome for Parliamentary seats since that will determine the composition

of the Federal Government.

While acknowledging that economists are in no way political analysts, we will

try to predict the outcome of GE13 and look for clues by: o Analysing:

current voter profile (age groups, gender, ethnic groups, urban-rural, income brackets,

etc), etc

past voting trends in all GEs in particular GE12

30

GE13: CHALLENGES OF PREDICTING (continued)

results of all 16 by-elections where both BN and PR secured an equal share of 8 seats of

which the final 5 by-elections were captured by BN with bigger majorities compared to

GE12 (Kerdau in Pahang, Merlimau in Melaka, Tenang in Johor, Galas in Kelantan and

Batu Sapi in Sabah)

results of Sarawak state elections in April 2011 where PR made major inroads (securing

16 state seats from 9 previously with 44.6% of popular votes vs. 38.2% previously) could

provide indications of how “fierce” battles of GE13 will be and voting trends of

Sarawakians and Sabahans

o Taking stock of the feedback from our ground visits to selected areas nationwide to

gauge the underlying voter sentiment

o Identifying election issues, local or national that could affect voters’ decisions

o Assessing possible voting patterns among “wild card” groups that could swing

either way, namely: newly registered voters

young voters

urban voters

voters in Sabah and Sarawak (with 56 Parliamentary seats)

voters in Felda constituencies (54 Parliamentary seats)

17 “marginal” seats where the winning majority was less than 1,000 votes at GE12 (a

swing of 500 votes in these constituencies may sway the election results either way)

31

GE13: GREATER POLITICAL TSUNAMI

Based on the analysis of selected factors that we think could affect the

election outcome, we have outlined 3 possible scenarios: o Scenario with moderate probability or best-case scenario: Narrow win for BN,

securing 112-122 Parliamentary seats (narrow loss for PR: 100-110) Failure to retake Kedah, Penang, Selangor and Kelantan

Lose control of Perak and Negri Sembilan

o Scenario with high probability or base-case scenario: Narrow loss for BN,

securing only 97-107 Parliamentary seats (narrow victory for PR: 115-125) Failure to retake Kedah, Penang, Selangor and Kelantan

Lose control of Perak, Negri Sembilan, Terengganu and Perlis

Narrowly retain Pahang and Johor

Lose significant grounds in Melaka, Sabah and Sarawak

o Scenario with low probability or worst-case scenario: Big loss for BN, securing

only 82-92 Parliamentary seats (big victory for PR: 130-140) Failure to retake Kedah, Penang, Selangor and Kelantan

Lose control of Perak, Negri Sembilan, Terengganu, Perlis and Pahang

Narrowly retain Johor and Melaka

Lose significant grounds in Sabah and Sarawak

32

GE13: GREATER POLITICAL TSUNAMI? (continued)

Assumptions for the base-case scenario (no 2/3 majority but enough for PR to

form the Federal Govt):

o 2-cornered fights

o 75%-80% in overall national voter turnout

o Conservative but realistic voting tendency/share of votes for BN by ethnic

breakdown: 55%-60% among Malays, 20%-25% among Chinese, 45%-50%

among Indians and 60%-65% among Others

o Electoral fraud cases such as phantom voters, vote rigging, ballot stuffing, etc

make up less than 5% of total voter turnout

No. of Seats Won Change from % of Total Seats % of Popular Votes No of Seats Won Change from % of Total Seats % of Popular Votes No of Seats Registered Voters Voter Turnout

Previous GE Previous GE (million) (%)

1959 74 71.2 51.7 30 28.9 48.3 104 2.17 73.3

1964 89 15 85.6 58.5 15 -15 14.4 41.5 104 2.76 78.9

1969 95 6 66 49.3 49 34 34.0 50.7 144 3.84 73.6

1974 135 40 87.7 60.7 19 -30 12.3 39.3 154 4.13 75.1

1978 130 -5 84.4 57.2 24 5 15.6 42.8 154 5.06 75.3

1982 132 2 85.7 60.5 22 -2 14.3 39.5 154 6.08 74.4

1986 148 16 83.6 57.3 29 7 16.4 42.7 177 6.96 70.0

1990 127 -21 70.6 53.4 53 24 29.5 46.6 180 7.97 72.6

1995 162 35 84.4 65.2 30 -23 15.6 34.8 192 9.01 71.4

1999 148 -14 76.6 56.3 45 15 23.3 43.5 193 9.60 71.1

2004 199 51 90.8 63.9 20 -25 9.2 36.1 219 10.28 73.5

2008 140 -59 63.1 50.4 82 62 36.9 49.6 222 10.92 76.0

2012? 97 to 107? (33) to (43)? 43.7 to 48.2 ? 115 to 125? 33 to 43? 51.8 to 56.3? ? 222 13,052,374* 75 to 80?

* as last gazetted on 16 August 2012 out of whom 12,778,127 ordinary voters and 274,247 absent voters

ALLIANCE/BN OPPOSITION TOTAL

Year

GE RESULTS FOR PARLIAMENTARY SEATS

33

GE13: GREATER POLITICAL TSUNAMI? (continued)

We can expect negative, knee-jerk (over)reaction on the first day of trading

of financial markets post-GE13 on fears over political instability,

administrative uncertainties and policy inconsistency; short-term

nervousness over power handover and transition; perceived up-tick in

Malaysia’s political risk, among others: o Sell-down in equity, bond and foreign exchange markets – the “circuit breaker”

could be triggered in Bursa Malaysia i.e. the KLCI is down by more than 10% in a

trading session; sudden spike in bond yields and slide in MYR

o Other factors mostly external such as emergence of more conclusive signs of

resumption of a global recovery; improving global risk appetite, etc to significantly

limit the downside

Number of days before or after GE -180 -90 -30 -7 -1 1 7 30 90 180

GE8 -9.1% -23.8% -6.0% 1.6% 1.6% 4.0% 4.9% 0.2% 2.2% 24.9%

GE9 -11.5% 12.0% 1.8% 1.3% -0.3% -1.7% -2.5% 6.6% 7.2% -1.6%

GE10 -0.5% -2.8% 0.4% 1.7% 1.0% -1.5% -2.6% 7.9% 34.4% 18.6%

GE11 22.7% 16.7% 5.0% 2.3% 0.3% 0.5% -1.0% -4.8% -9.1% -5.0%

GE12 0.4% -9.6% -8.4% -4.5% -0.3% -9.5% -7.8% -5.8% -3.7% -16.3%

FBMKLCI PERFORMANCE PRE-AND-POST GENERAL ELECTIONS


34

GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA

In the medium-to-long term, after this mild political “revolution” or the so-

called “Malaysian spring”, the stiff competition for the hearts and minds of

voters will make the PR-led Federal Government always disposed to prove

that it can strike the balancing act between meeting the aspirations of the

people and the needs of the business/investing community i.e. conducive

environment for both the people and businesses not at the expense of the

other within a short period of time by implementing recommended measures

in Buku Jingga.

Success stories of PR states in particular Selangor and Penang and

thumbs-up from the Auditor-General in his annual report should be a clear

indication what’s in store with a PR Federal Government.

Malaysia may even emerge as an even more attractive and viable

investment destination as proven by the capability of Penang and Selangor,

2 PR-held states in luring the most approved manufacturing investments in

2010 and 2011.

Faster reduction in budget deficits and public debt levels as proposed in the

PR Alternative Budget 2013 compared to the BN Govt?

35


(continued)

Given the anticipated narrow PR win, the presence of relatively strong

opposition in the Parliament should keep the PR government on its toes at all

times and help push through: o a well functioning and genuine check-and-balance system to protect the rights of all

citizens, consistent with the Federal Constitution

o the reformist agenda acceleration - economic, structural, institutional, political,

social and law reforms, required to raise Malaysia’s long-term competitiveness

o greater transparency, accountability, governance and integrity in all aspects in

particular award of Govt contracts (through open tender), procurement process and

other business practices & dealings, necessary to regain and retain investor

confidence

o promotion of business-friendly and free-market policies without imposing hardship

on the rakyat

o zero-tolerance for corruption and rent-seeking culture as well as dismantling of

monopolies/oligopolies and cumbersome regulations should in turn reduce the

overall costs of doing business in Malaysia and create a more conducive business

environment

o lower long-term risk premium assigned to Malaysia

36


(continued)

Increased well-being of the rakyat and strengthening of the democratic

process:

o No amendment to the Constitution at whims and fancies since constitutional

amendments under Articles 159 (3), 159 (5) and 161 E require a supermajority of

2/3

o The emergence of a genuine “two-coalition system”, mirroring the “two-party

system” that exists in the UK, the US, etc as well as other changes to the

Governmental system such as limiting to 2 terms a person can hold the position as

PM, limiting to only 1 key cabinet portfolio a minister can hold. For example, the

PM cannot become the Finance Minister to avoid conflict of interest

o Adjustments to the affirmative action such as NEP and other welfare policies that

have deviated from the original objectives; transformation to a needs-based, merit-

based and market-oriented affirmative action for all instead of a race-based

programme to flush out NEP-related shortcomings and abuses in particular

cronyism, corruption and systemic inefficiency while assisting the poor and

marginalized

o Positive changes in policy-making process with policies that serve the interest of

the masses especially the “small people” rather than enriching the politically

connected elite group (within the inner circle of people in power)

37


(continued) o Higher quality debates in the Parliament and State Assemblies

o Perhaps, more freedom for MPs to vote in the Parliament based on their wisdom

or the feedback from the people they represent?

Among major concerns if PR unseats BN:

o “Economic sabotage”, resistance and non-cooperation by those in the business

community and civil service who are aligned to the losing coalition

o Perceptions of political instability especially during the period of power transition

with threats of chaos by some political leaders, simmering ethnic and religious

tensions (delicate race-religion relations), protests against the PR’s reform

policies especially the needs-based affirmative action to correct socio-economic

imbalances

o No assurance of continuity of Govt policies and guarantee of the sanctity of

contracts in particular related to lopsided concession agreements

o No introduction of GST, much needed to diversify the Govt’s revenue base

Email: [email protected] Phone: +603-20888075

Originating Department 38

THANK YOU

mailto:[email protected]

Documents

Regional outlook forum 2013 10 january 2013