Dr Yeah Kim Leng Group Chief Economist
description
Transcript of Dr Yeah Kim Leng Group Chief Economist
Dr Yeah Kim LengGroup Chief Economist
4th June, 2012
Malaysia’s Economic Outlook for 2012 and 2013:
How resilient to a global slowdown?
RAM Economics Research
Briefing to Heads of Department
Economics Research
1 Global conditions
Outline
Domestic growth expectations2
3 Assessment of key risks and potential impact
2
Economics Research
1 Global conditions
Outline
Domestic growth expectations2
3 Assessment of key risks and potential impact
3
Economics Research
Global manufacturing activity remains weak… Symptomatic of easing global demand Exacerbated by rising risk aversion
Global conditions
4
Overview
2007 2008 2009 2010 2011 201230
35
40
45
50
55
60
Global PMISource: Bloomberg
Minimal growth in manufacturing and trade activity in the past 10 months
Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-120
500
1000
1500
2000
2500
Baltic Dry Index
Economics Research
Commodity prices have stabilized but remain elevated Risks of supply shocks (Middle East) had heightened speculation …but is mitigated by easing global demand pressures
Global conditions
5
Overview
2005 2006 2007 2008 2009 2010 2011 20120
50
100
150
200
250
300
Food price index Average oil index
2005
= 1
00
Source: IMF
Food prices 8.5% below April 2011 peak
Oil prices 16.1% below July 2008 peak
Economics Research
Employment situation has improved, but the American economy remains weak… Lack of fiscal support in the economy due to political deadlock and fiscal constraints Risk aversion remains high as a result of the European debt crisis
Global conditions
6
United States
20082008
20092009
20102010
20112011
-10
-8
-6
-4
-2
0
2
4
6
Private consumption Private fixed capital formationPublic sector Net exportsGDP
Perc
enta
ge p
oint
cont
ributi
on/a
nnua
l ch
ange
(%)
39083 -1033m/yy
yy
39234 -1033m/yy
yy
39387 -1033m/yy
yy
39539 -1033m/yy
yy
39692 -1033m/yy
yy
39845 -1033m/yy
yy
39995 -1033m/yy
yy
40148 -1033m/yy
yy
40299 -1033m/yy
yy
40452 -1033m/yy
yy
40603 -1033m/yy
yy
40756 -1033m/yy
yy
40909 -1033m/yy
yy-1,000
-800
-600
-400
-200
0
200
400
600
Private Public
Net c
hang
e in
em
ploy
men
t
Public sector drag on the US economy
Economics Research
Poor demand conditions and extended austerity programmes coupled with policy constraints will push Europe into a recession Traditional fiscal remedies to stimulate the economy are hindered by poor public
finances and restrictive legislation Outlook for most non-exporting European nations are likely to deteriorate in the
near-term as funding sources become limited.
Global conditions
7
Europe
2008 2009 2010 2011 20120
200
400
600
800
1000
1200
Spain Italy Ireland
Basi
s poi
nt s
prea
d ab
ove
corr
espo
ndin
g Ge
rman
bun
d
Source: Bloomberg and RAM Economics
Fiscal conditions, IMF forecasts
Fiscal balance
(% of GDP)
Debt burden
(% of GDP)
Current Account balance
(% of GDP)
Yield, zero-coupon 10Y
bond (28 May)
Spain -6.0 79 -2.1 6.7%
Italy -2.4 123 -2.2 5.9%
Ireland -8.5 113 1.0 7.4%
Portugal -4.5 112 -4.1 12.0%
Source: IMF and Bloomberg
Market confidence has deteriorated since the start of 2012, increasing the relative cost of deficit funding
Economics Research
China’s growth remains robust, but is undermined by poor external conditions and the need for structural reform… China’s external sector is expected to slow considerably, as a substantial proportion
of its exports are directed to the weakened advanced economies This will have strong implications on its economic development – should domestic
demand weaken – as well as regional growth and commodity prices
Global conditions
8
China
ASEAN9%
Hong Kong, Japan, Korea26%
EU19%
USA17%
Others29%
Source: General Administration of Customs, China and RAM Economics
China's 2011 export value: USD1.9 trillion
Economics Research
1 Global conditions
Outline
Domestic growth expectations2
3 Assessment of key risks and potential impact
9
Economics Research
Economy expanded by 4.7% in 1Q 2012 Supported by robust private sector growth Substantial improvements in gross fixed investment growth However, weak external conditions had slowed growth
Domestic growth expectations
10
GDP
-10
-5
0
5
10
15
Private sector Public sector Net exports GDPPerc
enta
ge p
oint
con
trib
ution
to G
DP
(%)
Source: DOS and RAM Economics
-10
-5
0
5
10
15
Consumption Investment Net ExportsPerc
enta
ge p
oint
con
trib
ution
to G
DP
(%)
Source: DOS and RAM Economics
Economics Research
Domestic growth expectations
11
GDP (cont.)
Annual change (%) 2Q 2011 3Q 2011 4Q 2011 1Q 2012
ConsumptionPrivate 6.6 7.6 7.3 7.4
Public 6.0 21.1 22.9 5.9
InvestmentsPrivate 7.6 2.9 18.8 19.8
Public -5.4 9.4 1.9 10.3
External sector
Exports 4.6 4.8 5.5 2.8
Imports 4.0 3.9 7.8 6.8
Near-term growth outlook supported by private investments Domestic demand conditions still remain adequately stable Weak external sector may slow certain sectors of the economy, but is mitigated by
China’s robust growth
Annual change (%) 2Q 2011 3Q 2011 4Q 2011 1Q 2012
Agriculture 7.7 8.8 6.9 2.1
Mining -9.3 -5.9 -3.8 0.3
Manufacturing 2.6 5.4 5.2 4.2
Construction 1.8 4.0 7.5 15.5
Services 7.1 7.1 6.6 5.0
Substantial growth in private investments and construction activity
Economics Research
Consumption supported by healthy employment levels and policy measures Relatively steady employment generation had enabled the robust growth in private
consumption The increases in public sector wages and enactment of minimum wage will boost
domestic consumption
Domestic growth expectations
12
Consumption
39142 -1033m/yy
yy
39234 -1033m/yy
yy
39326 -1033m/yy
yy
39417 -1033m/yy
yy
39508 -1033m/yy
yy
39600 -1033m/yy
yy
39692 -1033m/yy
yy
39783 -1033m/yy
yy
39873 -1033m/yy
yy
39965 -1033m/yy
yy
40057 -1033m/yy
yy
40148 -1033m/yy
yy
40238 -1033m/yy
yy
40330 -1033m/yy
yy
40422 -1033m/yy
yy
40513 -1033m/yy
yy
40603 -1033m/yy
yy
40695 -1033m/yy
yy
40787 -1033m/yy
yy
40878 -1033m/yy
yy0
50
100
150
200
250
300
2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
4.1
3.0%
Employment Unemployment rate (RHS)
Chan
ge fr
om p
revi
ous q
uart
er (t
hous
ands
)
Perc
ent o
f lab
our f
orce
(%)
Source: Department of Statistics and RAM Economics
Significant employment generation in 2011
Economics Research
Domestic private sector investment activities had picked up Spurred on by Government initiatives to boost investments An accommodative interest rate environment had supported capital formation Lower investor risk aversion had supported financing capability through domestic
banks and the bond markets
Domestic growth expectations
13
Investments
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
-
10,000
20,000
30,000
40,000
50,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
PDS issuedEquity issuedBank loans to non-financial, non-household sectors (RHS)
Source: Bank Negara Malaysia and RAM Economics
Mar-10
Jun-10Sep
-10Dec-
10
Mar-11
Jun-11Sep
-11Dec-
11
Mar-12
020406080
100120140160180200
300320340360380400420440460480500
AAA AA1 A1 (RHS)
Basis
poi
nt sp
read
aga
inst
MGS
Basis
poi
nt sp
read
aga
inst
MGS
Lower and more stable market risk aversion
Economics Research
Pre-election expenditure and development programmes will ensure public sector growth in the near-term Commitments to various ETP projects and supporting infrastructure will likely cause
Government development expenditure to increase Boost to public sector wages has already affected the growth in operating
expenditure in 2011, and is likely to continue this year
Domestic growth expectations
14
Public sector
1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012-40
-20
0
20
40
60
80
Operating expenditure Development expenditure
Annu
al ch
ange
(%)
Source: Ministry of Finance, Bank Negara Malaysia and RAM Economics
Economics Research
As commodity prices stabilize, export earnings have decelerated The uneven growth conditions in Malaysia’s major export destinations had caused
some volatility in export earnings Speculation of weaker global demand had slowed the growth of commodity prices
and had suppressed export earnings as well
Domestic growth expectations
15
External sector
EU
China
USA
South East Asia
Japan
-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0
15.9
20.7
14.5
45.4
22.3
Annual change of exports in 1Q 2012 (%)
Value of exports in 1Q 2012
Source: DOS and RAM Economics
-60
-40
-20
0
20
40
60
Commodities Manufactures
Annu
al ch
ange
(%)
Source: DOS and RAM Economics
Deceleration of commodity export earnings growth
Economics Research
Slight rebound in export-oriented manufacturing in 1Q 2012 However a more sustainable growth would require external conditions to normalize Domestic-oriented industries benefit from robust domestic demand growth and
Government initiatives to promote private investments
Domestic growth expectations
16
Key industrial indicators
-30
-20
-10
0
10
20
30
Manufacturing IPI Export-oriented IPI Domestic-oriented IPI
Annu
al ch
ange
(%)
Source: Bank Negara and RAM Economics
-6
-5
-4
-3
-2
-1
0
1
Export Oriented Domestic Oriented
Capa
city
utiliz
ation
, num
ber o
f sta
ndar
d de
viati
ons f
rom
mea
n
Source: Bank Negara and RAM Eco-nomics
Currently, industries are only operating slightly above their long-term capacity rates
Economics Research
Construction activity grew significantly in 1Q 2012 Supported by robust domestic demand and various Government initiatives A relatively accommodative interest rate environment had also allowed sufficient
demand for construction activity, especially with regard to residential and non-residential construction
Domestic growth expectations
17
Construction activities
RM millionValue of construction work done
Total Residential Non-residential Infrastructure Special Trade
1Q 2011 15,519 3,491 6,578 4,363 1,087
2Q 2011 15,040 3,775 6,513 3,530 1,222
3Q 2011 16,037 4,180 6,166 4,355 1,335
4Q 2011 17,661 4,610 5,958 6,057 1,036
1Q 2012 17,726 4,885 6,807 5,119 915
Significant residential and non-residential construction activitySource: DOS
Economics Research
Sustained growth in the services sector Robust domestic demand through rising wages and employment continues to
support the services sector However, recent BNM responsible lending guidelines may have slowed domestic
consumption activity in 1Q 2012. This effect is expected to normalize over time as banks adopt more sustainable lending practices.
Domestic growth expectations
18
Services activities
3Q 2011 4Q 2011 1Q 20120.02.04.06.08.0
10.012.014.016.018.0
10.39.3
5.2
Total distributive trade index Wholesale indexRetail trade index Motor vehicles index
Annu
al c
hang
e (%
)
Economics Research
With the subsidy scheme intact, domestic price pressures are driven by improving demand conditions Price pressures from food and transport components of the CPI have been minimal
as subsidies remain intact However, demand pressures had accelerated other components of the CPI
Domestic growth expectations
19
Inflation
39448 -1033m/yy
yy
39600 -1033m/yy
yy
39753 -1033m/yy
yy
39904 -1033m/yy
yy
40057 -1033m/yy
yy
40210 -1033m/yy
yy
40360 -1033m/yy
yy
40513 -1033m/yy
yy
40664 -1033m/yy
yy
40817 -1033m/yy
yy
40969 -1033m/yy
yy-6.0-4.0-2.00.02.04.06.08.0
10.0
Food Transport Other
Perc
enta
ge p
oint
con
trib
ution
to C
PI
grow
th
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Food at home Food away from home
Annu
al c
hang
e (%
)
Clear and sustained divergence in growth rates in recent months
Economics Research
BNM has held the OPR at 3.00% since April 2011 The benign pace of inflation has pushed the adjusted OPR to near pre-crisis levels In-house calculation suggests that Malaysia currently operating at its potential
output BNM not seen to adjust interest rates as it has to balance the risk of domestic
growth from the European debt crisis against the recent acceleration in household loans
Domestic growth expectations
20
Interest rates
39083 -1033m/yy
yy
39173 -1033m/yy
yy
39264 -1033m/yy
yy
39356 -1033m/yy
yy
39448 -1033m/yy
yy
39539 -1033m/yy
yy
39630 -1033m/yy
yy
39722 -1033m/yy
yy
39814 -1033m/yy
yy
39904 -1033m/yy
yy
39995 -1033m/yy
yy
40087 -1033m/yy
yy
40179 -1033m/yy
yy
40269 -1033m/yy
yy
40360 -1033m/yy
yy
40452 -1033m/yy
yy
40544 -1033m/yy
yy
40634 -1033m/yy
yy
40725 -1033m/yy
yy
40817 -1033m/yy
yy
40909 -1033m/yy
yy
41000 -1033m/yy
yy-6.00-4.00-2.000.002.004.006.00
OPR OPR adjusted for prevailing inflation rate
Perc
ent (
%)
Economics Research
High global risk aversion to growth suppressed the appreciation of the ringgit Heightened risk aversion in recent months had caused the demand for safe haven
assets such as the US Treasury to increase; thereby depreciating the ringgit There have been some exchange rate effects on Malaysia’s trade balance since mid-
2010
Domestic growth expectations
21
Exchange rate
Dec-11
Dec-11
Dec-11Jan-12
Jan-12Fe
b-12Fe
b-12
Mar-12
Mar-12
Mar-12Apr-1
2Apr-1
2
May-12
May-12
1.5
1.7
1.9
2.1
2.3
2.5
2.7 2.85
2.90
2.95
3.00
3.05
3.10
3.15
3.20
3.25
US Treasury yield USDMYR (RHS, reverse order)
Yiel
d (%
)
2007 2008 2009 2010 2011 20128,000.0
8,500.0
9,000.0
9,500.0
10,000.0
10,500.0
11,000.0
11,500.0
12,000.0
12,500.0
88
90
92
94
96
98
100
102
104
Trade balance REER
2005
= 1
00,
high
er v
alue
= re
al a
ppre
ciatio
n
Inverse relationship between REER and trade balance
Economics Research
Banking system remains stable Well positioned to meet Basel III requirements Non-performing loans ratio remains low at 2.5% but is unevenly distributed across
sectors Relatively rapid growth in loans is a potential risk, but mitigated by BNM’s
responsible lending guidelines
Domestic growth expectations
22
Banking sector
Electricity, Gas & Water Supply
Manufacturing
Mining & Quarrying
Primary Agriculture
Finance, Insurance & Business Act (FI)
Total
0.0 2.0 4.0 6.0 8.0 10.0
Non-performing loan ratioAs a % of total corresponding loans
Banking sector indicator As at March 2012
Loans growth 12.1%
Loans-to-deposit ratio 76.7%
Risk-weighted CAR 14.7%
Core capital ratio 13.0%
Impaired loan ratio 1.7%
Annualized return on assets 1.7%
Annualized return on equity 19.1%
Economics Research
Bond market experienced healthy growth Increased risk appetite for longer-tenured Malaysian Government Securities Increased participation in the PDS market in 2011 with RM69.6 billion issued
(33.6% increase from the previous year). Large issuances in 1Q 2012 suggest that bond markets will continue to be a stable funding source for the private sector
Improving domestic demand conditions coupled with Government initiatives are likely to spur the bond market this year
Domestic growth expectations
23
Bond market
2008 2009 2010 2011 20120
50
100
150
200
250
Basi
s poi
nt s
prea
d 10
Y-2Y
MGS
Foreign holdings of domestic bonds
Bank Negara MGS PDS
Value (RM billion)
Jan-11 38.3 76.7 14.2
Mar-12 64.7 111.3 15.2
% of corresponding
Jan-11 39.7% 21.7% 5.6%
Mar-12 45.5% 27.3% 5.3%
Increased in foreign participation in the MGS market
Economics Research
Pre-election spending and government initiatives to spur growth prevent substantial fiscal consolidation Commitments to ETP projects and the continuation of the subsidy programmes
limit Government’s efforts to reduce the fiscal deficit despite efforts to improve the delivery system
However, domestic financing conditions remain sufficiently healthy for medium-term deficit financing
Domestic growth expectations
24
Fiscal conditions
2010 2011 2012fRM billion
Government revenue 159.7 185.4 186.9
Operating expenditure 151.6 182.6 181.6
Development expenditure (net) 51.3 45.3 48.3
Fiscal balance -43.3 -42.5 -43.0
Government debt 347.0 468.8
% of GDPFiscal balance -5.4 -4.8 -4.5
Government debt 51.8 53.2
Economics Research
BNM responsible lending guidelines Will have a short-term adverse impact on consumption and lending activity Unlikely to cause a significant structural setback
Various ETP & GTP announcements Will enhance investor confidence Spur domestic demand activity through multiplier effects of the investments
Budget 2012/13 Growth-oriented budget is likely to be announced However, much needed structural reforms are needed to sustained ETP-target
growth rates
Minimum wage Unlikely to have significant labour market impact in urban areas May heighten inflationary expectations going forward
Domestic growth expectations
25
Key domestic policy announcements
Economics Research
No Eurozone breakup, but weak global conditions Quite likely a ‘kick-the-can-down-the-road’ scenario will occur until sufficient
structural adjustments are made in Europe As a result global demand conditions are expected to remain weak
Stable commodity prices Due to the reduced risk of supply shocks and slower China growth Assumes that global manufacturing activity will not be adversely affected by it
Growth-oriented domestic public policy The Government is likely to step in and provide sufficient support to domestic
growth prior to the elections. Further stimulus – monetary and fiscal – will be warranted should external conditions deteriorate
Domestic growth expectations
26
Key assumptions for growth projections
Economics Research
Domestic growth expectations
27
Key estimates
GDP growth (%) 2012 2013US 2.1 -EU-17 -0.7 -Japan 1.8 -China 8.0 -Malaysia 4.6 5.2
Growth by GDP components, 2012 (%)By expenditurePrivate consumption 5.9Public consumption 4.8Private investments 8.9Public investments 4.5Exports 3.2Imports 3.0By industryAgriculture 5.1Mining -3.8Manufacturing 3.9Construction 4.5Services 6.4
Other key forecasts/assumptions
Inflation rate: 2.6%
Exchange rate: RM2.90-95
Interest rate (end-year): 3.00%
Oil price (end-year): USD100-105
MGS issuance: RM90-95 bn
PDS issuance: RM85-90 bn
Fiscal balance: -4.7% of GDP
Economics Research
1 Global conditions
Outline
Domestic growth expectations2
3 Assessment of key risks and potential impact
28
Economics Research
Eurozone breakup A possibility – the degree of impact depends on the ability of policy makers to
ensure an orderly breakup and limit contagion risk Regardless, will adversely affect investor confidence and may cause an appreciation
in safe haven assets
Further fiscal drag in America Will further slow consumption in the world’s single largest economy affecting global
demand Political brinkmanship will delay much needed fiscal assistance during this
weakened period
Commodity price shock While commodity price shocks in the short-term benefit Malaysian (a net
commodity exporter), over the long-term it can suppress industrial activity and may thus affect global demand
Assessments of key risks and potential impact
29
External risks
Economics Research
Unwarranted spikes in inflation Heightened inflationary expectations – due to minimum wage and robust domestic
demand – may cause domestic prices to remain on the upward trend Will have significant implications on public finances which maintain domestic
subsidies
Policy mis-steps Mistiming or underestimating the severity of a possible external demand shock can
reduce the potential output of the economy The relatively accommodative monetary policy stance may have to be reviewed
should the domestic economy grow faster than anticipated
Assessments of key risks and potential impact
30
Domestic risks
RAM Economics ResearchLevel 19, The Gardens South Tower
Mid Valley City, Lingkaran Syed Putra59200 Kuala Lumpur
Tel: (603) 7628 1000 www.ram.com.my
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