The Malaysian Economy –Prospects and critical issues in 2011 2012Prospects and critical issues in 2011-2012Presentation for ISIS PRAXIS SeminarNor Zahidi AliasChief Economist

March 3rd 2011March 3 d, 2011

In a nutshell

US economy is emitting more positive signs, judging by leading indicators inthe financial market (yield gaps and corporate-bond spread).Unemployment dropped the most in two months since 1958 in January, butlabour market remains the key concern among policymakerslabour market remains the key concern among policymakers.

European countries are still struggling with the sovereign debt crisis.Capacity utilisation remains below the long-term average.

Asian economies remain strong, fueled by the twin engines of China andIndia. World growth was revised upwards by the IMF. Most notableimprovement was the outlook of the US economy.

Malaysia’s growth momentum is decelerating as the base effect wanes andthe external sector is affected by slowing global demand.

Among the important issues for the Malaysian economy are: (1) effect ofhigher prices on consumers (2) effect of possible monetary tighteningmeasures, if policymakers react (3) effect of a possible sudden reversal incapital flows, and (4) effect of surging oil prices on government finances.

2

US – light at the end of the tunnel? Yi ld f 2 10 US T i (UST) j d t 290 b i i t (b ) iYield gap of 2-10 US Treasuries (UST) jumped to 290 basis points (bps) inFebruary 2011, the most since Feb 2010; 30-year yield at 4.74%, thehighest since April 2010. Average gap between 2009-10 was 240 bps,higher than the average between 2003-04 prior to the boom.higher than the average between 2003 04 prior to the boom.

Corporate bond spread shrank, suggesting that perception of risk hasdeclined for both high- and low-rated corporate bonds.

2-10 yield gap of UST Corporate bond spreadCorporate bond spread

2

2.5

3

5.00

6.00

7.00Aaa

BaaLehman Crisis

0

0.5

1

1.5

Ave: 210 bps Ave: 240 bps2 00

3.00

4.00

‐1

‐0.5

0

b‐99

g‐99

b‐00

g‐00

b‐01

g‐01

b‐02

g‐02

b‐03

g‐03

b‐04

g‐04

b‐05

g‐05

b‐06

g‐06

b‐07

g‐07

b‐08

g‐08

b‐09

g‐09

b‐10

g‐10

0.00

1.00

2.00

Jan‐08 Jan‐09 Jan‐10 Jan‐11

3Source: Bloomberg

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

Feb

Aug

2‐10 UST 2‐yr average

G3 economies – European problems

Astronomical levels of budget deficits and sovereign debts in Europeancountries prevent a smooth recovery of advanced economies.

Capacity utilisation (CAPU) rates remained well below historical average,i h k l b k ill i i hsuggesting that weak labour market will persist in the near term.

Government debt-to-GDP ratio (%) CAPU rates (%)

120

140 US IrelandGreece PortugalSpain UK

85

90

E

Average for eurozone : 81%

Government debt-to-GDP ratio (%) CAPU rates (%)

60

80

100

75

80

0

20

40

65

70

75

US

Average for US : 77%

4Sources: IMF & Bloomberg

0

Y81 Y85 Y89 Y93 Y97 Y01 Y05 Y09

65

1Q 00 3Q 01 1Q 03 3Q 04 1Q 06 3Q 07 1Q 09 3Q 10

Global economic outlook by the IMF

Overall growth forecast was revised upward in January 2011, with the UShaving been upgraded the most among G3 economies (+0.7 percentagepoints).

Prospects of Asian economies remain encouraging as the twin growthengines of China and India continue to be strong.

GDP forecasts by the IMF

5Source: IMF

Back home – growth is also moderating

Following a sharp recovery in 2010, Malaysian economic growth moderatedin the last three quarters as weaker global demand weighed on its externalsector.

Leading indicators are pointing to softer growth in the next few quarters.

Malaysia’s quarterly GDP growth KLCI (4-mth lead) and GDP growth (yoy%)

6

8

10

12

30.0

40.0

50.0

60.0

6

8

10

12 GDP yoy %Recessions

‐2

0

2

4

‐20 0

‐10.0

0.0

10.0

20.0

‐2

0

2

4

6

‐8

‐6

‐4

‐50.0

‐40.0

‐30.0

20.0

‐8

‐6

‐4

n‐00

c‐00

n‐01

c‐01

n‐02

c‐02

n‐03

c‐03

n‐04

c‐04

n‐05

c‐05

n‐06

c‐06

n‐07

c‐07

n‐08

c‐08

n‐09

c‐09

n‐10

c‐10

KLCI yoy %

6Source: CEIC

KLCI yoy (%) GDP yoy (%)

Jun

Dec

Jun

Dec

Jun

Dec

Jun

Dec

Jun

Dec

Jun

Dec

Jun

Dec

Jun

Dec

Jun

Dec

Jun

Dec

Jun

Dec

GDP yoy (%)

Back home – growth is also moderating

Major reason for the expected slower growth in 2011 is the weaker externaltrade (smaller net exports) due to waning global demand particularly forE&E products.

Global chip sales are expected to grow by 6.0% and 3.4% in 2011 and2012, down from the estimated 32.8% in 2010.

Global chip sales and Malaysia’s E&E exports IPI and OECD composite leading indicators

4.0%

5.0%

6.0%

10 0%

15.0%

20.0%

Global chip sales and Malaysia s E&E exports IPI and OECD composite leading indicators

1.20

1.40

60%

80% Global chip sales growth (y‐o‐y%)E&E exports growth (y‐o‐y%)BTB ratio (RHS)

‐1.0%

0.0%

1.0%

2.0%

3.0%

‐5.0%

0.0%

5.0%

10.0%

0.60

0.80

1.00

0%

20%

40%

‐5.0%

‐4.0%

‐3.0%

‐2.0%

‐20.0%

‐15.0%

‐10.0%

0.20

0.40

0.60

‐40%

‐20%

0%

7Source: SIA & CEIC

IPI yoy% OECD‐total yoy%

0.00‐60%

Jan‐01 Jun‐02 Nov‐03 Apr‐05 Sep‐06 Feb‐08 Jul‐09 Dec‐10

Issue 1 – How do consumers react to higher prices?

Although the consumer price index (CPI) remained below 3%, higher pumpprices will dampen consumers’ spending habits, putting pressure on privateconsumption, as evidenced by the fall in the retail trade index (RTI).

Over the years, actual private consumption has had a strong correlationwith the consumer sentiment index (CSI), with a two-quarter lag.

Consumers’ reaction to hikes in pump prices CSI normally leads actual private spending by 2 quarters

140.00

160.00

15.0

20.0

110 00

120.00

130.00

80 00

100.00

120.00

5.0

10.0

80.00

90.00

100.00

110.00

40.00

60.00

80.00

CSI

RTI‐5.0

0.0

50.00

60.00

70.00

3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q

8Source: CEIC

1Q 03

3Q 03

1Q 04

3Q 04

1Q 05

3Q 05

1Q 06

3Q 06

1Q 07

3Q 07

1Q 08

3Q 08

1Q 09

3Q 09

1Q 10

3Q 10

3Q 03

1Q 04

3Q 04

1Q 05

3Q 05

1Q 06

3Q 06

1Q 07

3Q 07

1Q 08

3Q 08

1Q 09

3Q 09

1Q 10

3Q 10

1Q 11

CSI (index) ‐ 2Qtr lag Nom pvt consumption (%)

Issue 1 – How do consumers react to higher prices?

Food prices increased at exponential rates since 2005, and the Food andAgriculture Organisation of the United Nations (FAO) predicted thatconsumers will continue to pay more for food as price increases are notlikely to slow in the near future.likely to slow in the near future.

Malaysia’s trade deficit in foodstuff has risen over the years.

Global wheat, rice and F&B price indices (2005 = 100) Malaysia’s trade in foodstuff

250

300Wheat

Rice

F&BPrice Index1.5%

1.6%

1.7%

12.0

14.0 Trade deficit. (% of GDP) Trade deficit. (RM Bn) LHS

150

200F&B Price Index

1.2%

1.3%

1.4%

6.0

8.0

10.0

0

50

100

0.8%

0.9%

1.0%

1.1%

0.0

2.0

4.0

9Sources: UN and CEIC

0

Y80 Y82 Y84 Y86 Y88 Y90 Y92 Y94 Y96 Y98 Y00 Y02 Y04 Y06 Y08 Y10

0.8%0.0

Y95 Y96 Y97 Y98 Y99 Y00 Y01 Y02 Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10

Issue 2 – How’s monetary policy responding to higher prices?

Capacity utilisation (CAPU) in domestic and export-oriented industries havesurged beyond their long-term averages, suggesting higher risk of demand-pull factors emerging.

The overnight policy rate (OPR) normally reacts to rising CAPU to preventthe “second-round” effect.

CAPU – domestic and export-oriented industries (%) CAPU and OPR (%)

75 00

80.00

85.00

90.00

3.00

3.50

4.00

75

80

85

60.00

65.00

70.00

75.00

2.00

2.50

60

65

70

CAPU

OPR

50.00

55.00

Mar‐99

Oct‐99

May‐00

Dec‐00

Jul‐01

Feb‐02

Sep‐02

Apr‐03

Nov‐03

Jun‐04

Jan‐05

Aug‐05

Mar‐06

Oct‐06

May‐07

Dec‐07

Jul‐08

Feb‐09

Sep‐09

Apr‐10

Nov‐10

1.00

1.50

50

55

Apr‐04 Jun‐06 Aug‐08 Oct‐10

OPR

10Source: CEIC

M O M D F S A N J J A M O M D F S A N

CAPU (Export oriented) % CAPU (Dom. oriented) %

Issue 2 – How’s monetary policy responding to higher prices?

The growth in Malaysia’s house price index is currently above 1 standarddeviation (SD) from the historical mean, even though there is no realproperty bubble across the board.

Malaysia’s house price index Malaysia’s manufacturing payroll and employment (yoy%)

The growth in payroll and employment in the manufacturing sector hasslightly moderated after recording sharp increases in the past one year.

6.0%

7.0%

8.0%

+1 SD = 5.4%15.0%

20.0%

25.0%Payroll

Employment

(y y )

3.0%

4.0%

5.0%Ave = 3.6%

0.0%

5.0%

10.0%

0.0%

1.0%

2.0%

‐1 SD = 1.8%‐15.0%

‐10.0%

‐5.0%

11Source: CEIC

1Q 00 3Q 01 1Q 03 3Q 04 1Q 06 3Q 07 1Q 09 3Q 10 Jan‐08 Jun‐08 Nov‐08 Apr‐09 Sep‐09 Feb‐10 Jul‐10 Dec‐10

Issue 3 - inflows, inflows

Massive capital inflows are evidenced by the surge in the local stock andbond markets. Malaysia’s inflows have been largely characterised byportfolios investments.

Experience suggests that large amount of outflows can drastically affectboth the financial market and the real economy.

Portfolio flows (RM Million) Portfolio flows - historical experience

7.0%

2 9%

7.4%

5.0%

10.0% 

25.0%

30.0%

10 0

20.0

30.0 Net portfolio flows (LHS)

‐1.5%‐2.6%

‐0.7%‐1.7%

1.0%

‐2.7%

2.2% 2.9%

‐0.3%

‐5.0%

0.0%

15.0%

20.0%

‐20.0

‐10.0

0.0

10.0

MGS holdings by foreigners % of

‐11.1%

‐15.0%

‐10.0%

0.0%

5.0%

10.0%

‐60.0

‐50.0

‐40.0

‐30.0foreigners ‐% of outstanding

12Sources: CEIC & MARC Economic Research

Y99 Y00 Y01 Y02 Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10*1Q 05 4Q 06 3Q 08 2Q 10

Issue 3 - inflows, inflows

Amount of capital inflows into Asia (including Malaysia) is exerting upwardpressure on Asian currencies, including the ringgit.

Malaysia’s real effective exchange rate (REER) is currently above 1SD fromits mean. Any sudden reversal in flows will affect the ringgit’s performance.

Currency movement (Y-T-D%) Malaysia’s REER

SGD

TWD

THB

MYR

110 00

115.00

120.00

CNY

IDR

PHP

SGD

100.00

105.00

110.00

HKD

KRW

INR

90.00

95.00

Feb-98 Oct-99 Jun-01 Feb-03 Oct-04 Jun-06 Feb-08 Oct-09

13Source: Bloomberg

‐2 0 2 4 6 8 10 12Feb-98 Oct-99 Jun-01 Feb-03 Oct-04 Jun-06 Feb-08 Oct-09

REER Ave

Issue 4 – government finances

The fiscal and current-account (CA) deficit matrix indicates that Malaysia isin a less-favourable quadrant and is comparable to India and Pakistan.However, its CA position is more favourable than many Asian countries.

Fiscal position and CA balance matrixFiscal position and CA balance matrix

30.0

35.0

40.0Oman

QatarA% GDP Most favourable quadrant

15.0

20.0

25.0Qatar

Saudi Arabia

h

CA

Malaysia

2 00.0

5.0

10.0Bahrain

U.A.E KuwaitPhilippinesIndonesia

Thailand

India ‐2.0

‐15.0

‐10.0

‐5.0

Fiscal bal % GDP

India

Pakistan

Viet NamMost unfavourable quadrant

14Source: CEIC

‐10 ‐5 0 5 10 15 20 25 30 35

Issue 4 – government finances

Revenues are not a problem for Malaysia as the country’s tax-to-GDP ratio isone of the highest in the region.

However, operating expenditure (emoluments, subsidies, supply & services), p g p ( , , pp y )has expanded over the years.

Tax-to-GDP ratio (%)

 

Malaysia’s operating and development expenditureas a % of total expenditure

90 0%

Malaysia

Korea

Thailand

China

60.0%

70.0%

80.0%

90.0%Operating expenditure

Singapore

Hong Kong

Philippines

Malaysia

20 0%

30.0%

40.0%

50.0%

Developmentexpenditure

5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0

India

Indonesia

0.0%

10.0%

20.0%

Y70 Y73 Y76 Y79 Y82 Y85 Y88 Y91 Y94 Y97 Y00 Y03 Y06 Y09

15Source: CEIC

Issue 4 – government finances

The rise in oil prices will result in higher revenues, but at the same timewould increase the government’s fuel-subsidy program.

Obviously the government has to strike a balance between restoring theObviously, the government has to strike a balance between restoring thebudget balance and safekeeping the rakyat’s welfare.

Government revenue vs. prices of Tapis crudeTotal subsidy vs. prices of West Texas

Intermediate (WTI) crude( )

100.0 

120.0 

140 0

160.0 

180.0 

Government revenue (RM Bn) 100.0

120.0

35.0 

40.0 

WTI crude (USD per barrel)

Forecasts

60.0 

80.0 

80.0 

100.0 

120.0 

140.0 

60.0

80.0

25 0

30.0 

20.0 

40.0 

20.0 

40.0 

60.0 

Tapis crudeUSD per barrel (RHS)

0 0

20.0

40.0

15 0

20.0 

25.0 

Subsidy  in RM bn (LHS)

16Sources: IMF & CEIC

‐‐

Y98 Y99 Y00 Y01 Y02 Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10

0.015.0 

Y08 Y09 Y10 Y11F Y12F

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t ti i t t b li d i b tit ti f17

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