12 March 2015
2015 economic outlook hinges on domestic demand Economic Update
BNM maintained official real GDP growth target at 4.5-5.5% for 2015
The assessment made by Bank Negara Malaysia (BNM) on the country’s
macroeconomic indicators and prospects for 2015 was in line with the
Government's earlier revised GDP growth and budget deficit targets.
Taking the computations at mid-point, calculated based on GDP forecast
at constant price, BNM expects the country’s underlying real GDP growth
to be at 5%, which is at the mid-point of the official forecast of 4.5-5.5%,
and in line with our long held forecast of 5% (6% in 2014).
MalaysiaBNM Annual
Report 2014
Domestic demand remains the engine of GDP growth
We concur with BNM that the strength of the country’s domestic demand
will remain largely intact in 2015, where growth will be led by the private
sector activity, especially from both private consumption and private
investment. BNM expects strong domestic demand of 6% projected for
2015, the same growth rate as in 2014, which will likely compensate for
the slowdown in exports.
Budget deficit forecast unchanged at -3.2% of GDP for 2015
BNM has also maintained the Government’s earlier revised budget deficit
target of 3.2% of GDP projected for 2015, slightly lower from 3% under
Budget 2015, but still better than -3.5% of GDP in 2014. With the
implementation of the GST to support the diversification of the sources of
revenue, the Government will remain committed to fiscal consolidation to
meet the Eleventh Malaysia Plan (11MP) target of a balance budget by
2020.
Inflation forecast revised lower to 2.0-3.0% in 2015, from 2.5-3.5%
While most of the revised macroeconomic forecasts remained unchanged
from earlier Government projections, the only change was the inflation rate
forecast, where BNM revised downward the target to 2.0-3.0% in 2015,
lower than the earlier forecast of 2.5-3.5%. This was largely in line with our
expectations, but we believe inflation rate is likely to be at the upper end of
the range of around 3.0% in 2015. BNM attributed the lower inflation to the
decline in global energy and commodity prices, lower domestic fuel prices
and moderate demand conditions to offset partially the impact from GST.
Underlying fundamentals of the Malaysian economy remain sound
While no emerging market, including Malaysia, can escape fully the
downside risks to the global growth, especially with greater volatility in
global financial markets and capital flows, BNM expects the country’s
underlying fundamentals to likely act as a buffer to mitigate against
potential vulnerabilities arising from the external front.
Healthy but narrow balance of payments surplus in current account
The country’s current account surplus is projected to narrow significantly to
RM21.4bn (2-3% of GNI) in 2015, a decline of -57% from RM49.5bn (4.8%
of GNI) in 2014, due to sharp decline in commodity prices. However, this
will be offset partially by lower deficit in the services account, partly
attributed the expected recovery in tourist arrivals.
Stance of monetary policy to remain accommodative
The monetary policy decision and statement, which is forward-looking and
consistent with its dual mandate, will focus on stability of economic growth
in view of the contained inflationary pressures. We expect BNM to leave its
OPR unchanged at 3.25% throughout 2015 to support economic growth.
BNM is also monitoring the ongoing concerns about the potential risk of a
further build-up in financial imbalances.
Economic Research
(603) 2145 8210
alan.tan@affinhwang.com
shazeya.razzaad@affinhwang.com
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 1 of 13
12 March 2015
BNM Annual Report – Economic Outlook 2015
The assessment made by Bank Negara Malaysia (BNM) on the country’s
macroeconomic indicators and prospects for 2015 was in line with the
Government's earlier revised GDP growth and budget deficit targets
announced on 20 January this year. Despite the uncertainty emanating
from the external environemnt and volatile oil prices, BNM maintained the
Malaysia’s official annual GDP growth forecast at 4.5-5.5% for 2015,
following a strong growth of 6% in 2014 (4.7% in 2013), supported mainly
by sustained expansion in domestic demand. Taking the computations at
mid-point, calculated based on GDP forecast at constant price, BNM
expects the country’s underlying real GDP growth to be at 5%, which is at
the mid-point of the official forecast of 4.5-5.5%, and in line with our long
held forecast of 5%.
Fig 1: Revised macroeconomic indicators
2014
Real GDP growth (%yoy)
Fiscal deficit (% of GDP)
Current account (% of GNI)
Inflation rate (%)
Exchange rate (RM/US$)*
Average Brent price (US$/barrel)
6.0
-3.5
4.8
3.2
3.50
99.5
MOF
2015F
2015F
(Budget)
(Revised)
5.0-6.0
4.5-5.5
-3.0
-3.2
4.3
2.0-3.0
4.0-5.0
2.5-3.5
3.24
3.55
100.0
55.0
BNM
Affin
2015F
2015F
4.5-5.5
-3.2
2.0-3.0
2.0-3.0
55.0
Source: Ministry of Finance (MOF), Bank Negara Malaysia (BNM), Affin Hwang’s estimates
5.0
-3.3
3.0
3.0
3.50
55.0
* end-period
Domestic demand remains the engine of GDP growth
We concur with BNM that the strength of the country’s domestic demand
will remain largely intact in 2015, where growth will be led by the private
sector activity, especially from both private consumption and private
investment. BNM expects strong domestic demand of 6% projected for
2015, the same growth rate as in 2014, which will likely compensate for
the slowdown in exports, see Fig 2.
Fig 2: Real GDP growth projections
2012
Private consumption
Public consumption
Private investment
Public investment
Domestic demand
Exports of goods and services
Imports of goods and services
GDP
Agriculture
Mining and Quarrying
Manufacturing
Construction
Services
GDP
8.2
5.0
22.8
14.6
10.7
-1.8
2.5
5.6
1.3
1.0
4.8
18.6
6.4
5.6
2013
Annual change (%)
BNM
2014
7.2
6.3
13.1
2.2
7.4
0.6
2.0
4.7
2.1
0.7
3.5
10.9
5.9
4.7
7.1
4.4
11.0
-4.9
6.0
5.1
3.9
6.0
2.6
3.1
6.2
11.6
6.3
6.0
2015F
6.0
2.7
9.0
5.1
6.0
3.0
4.0
4.5-5.5
0.3
3.0
4.9
10.3
5.6
4.5-5.5
Affin
5.5
2.5
10.0
2.0
5.6
4.0
5.0
5.0
1.6
0.9
4.7
9.5
5.4
5.0
Source: BNM and Affin Hwang’s estimates
Budget deficit forecast unchanged at -3.2% of GDP for 2015
BNM has also maintained the Government’s earlier revised budget deficit
target of 3.2% of GDP projected for 2015, slightly lower from 3% under
Budget 2015, but still better than -3.5% of GDP in 2014. BNM is basing its
assumption on the official Brent oil price of an average of US$55 per barrel
projected for 2015, unchanged from earlier forecast, which was revised
lower from US$100 per barrel announced in the Budget 2015 on 10
October 2014. The brent oil prices traded at around US$55.3 per barrel on
an average basis from 1 January to 10 March 2015.
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 2 of 13
12 March 2015
Going forward, BNM noted that as the reliance on oil-related revenue has
declined from 41% in 2009 to 30% in 2014, as well as the implementation
of the GST to support the diversification of the sources of revenue, the
Government will remain committed to fiscal consolidation to meet the
Eleventh Malaysia Plan (11MP) target of a balance budget by 2020.
Apart from the earlier fuel subsidy reforms, we believe the Government will
also be looking at ways to cut discretionary spending and moderate the
growth in operating expenditure to safeguard the country’s operating
surplus position since 1987, see Fig 4.
Fig 3: Budget deficit (RMbn and % of GDP)
Fig 4: Operating surplus since 1987
Source: BNM, MOF
Source: BNM, MOF
Inflation forecast revised lower to 2- 3% in 2015
While most of the revised macroeconomic forecasts remained unchanged
from earlier Government projections, the only change was the inflation rate
forecast, where BNM revised downward the target to 2.0-3.0% in 2015,
lower than the earlier forecast of 2.5-3.5%. This was largely in line with our
expectations, but we believe inflation rate is likely to be at the upper end of
the range of around 3.0% in 2015. BNM attributed the lower inflation to the
decline in global energy and commodity prices, lower domestic fuel prices
and moderate demand conditions to offset partially the impact from GST.
However, we believe there are some potential upside risks to inflation, if
global oil prices unexpectedly trended higher, especially in 2H15. The
focus will likely be centred around the OPEC meeting in June 2015, should
OPEC members decide to cut oil production. Since late 2014, with the
announcement of fuel subsidy reforms to reduce subsidy burden of the
Government, the country’s retail petrol prices for RON97, RON95 and
diesel are allowed to fluctuate up and down on a monthly basis, based on
a managed float fuel pricing mechanism. This was based on the market
price development of the products' costs and currency exchange rates.
According to Domestic Trade, Cooperatives and Consumerism Minister,
the retail prices of grade petrol RON97 and RON95 has been raised by
between 12.5% to 14.7% from 1 March 2015, after three straight months
of declines since December 2014, following the recent recovery in global
oil prices. While the decline in global oil prices will lead to lower domestic
fuel prices in the country, but this will also lead to higher prices given
global oil price volatility into domestic prices.
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 3 of 13
12 March 2015
The inflationary pressure will also come from the implementation of GST
as well as higher imported inflation from Ringgit depreciation, which may
lead to higher prices for some goods and services.
Fig 5: Malaysia’s CPI vs global oil price (monthly)
Source: BNM, Bloomberg
Fig 6: CPI vs RM/US$
Source: BNM, Bloomberg
Underlying fundamentals of the Malaysian economy remain sound
While no emerging market, including Malaysia, can escape fully the
downside risks to the global growth, especially when monetary policies in
the major economies could potentially diverge, which may lead to sizable
shifts in global liquidity and contribute to greater volatility in global financial
markets and capital flows, BNM expects the country’s underlying
fundamentals to likely act as a buffer to mitigate against potential
vulnerabilities arising from the external front.
We believe Malaysia’s economic fundamentals continue to remain sound,
supported by sustained domestic demand and economic growth,
sustainable current account surpluses, healthy foreign exchange reserves
as well as manageable inflationary pressure. BNM also noted that “welldeveloped capital markets, strong financial intermediaries, and the
presence of large domestic institutional investors provide the financial
system with greater resilience.”
BNM also highlighted that as the US Federal Reserve (Fed) will likely start
to normalise its monetary policy, the volatility of capital flows, financial
markets and exchange rates will continue. However, despite the sharp
depreciation of Ringgit, BNM noted that conditions in the domestic
financial market and foreign exchange market have remained orderly, see
Fig 7.
Fig 7: Capital flows, reserves and Ringgit performance
(% change in RM/USD)
Source: BNM
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 4 of 13
12 March 2015
Private investment – the key to sustaining domestic demand
Since the introduction of the Economic Transformation Programs (ETP) in
October 2010, where the focus has been on the 12 National Key
Economic Areas (NKEAs), Malaysia’s private investment activity has
increased over the years, contributing steadily to domestic demand and
economic growth. According to BNM, private investment has grown at an
average annual rate of 15% since 2010 and it is now more broad-based
both across industries and geographically, but mainly driven by the
services and manufacturing sectors.
Investment realisation has been impressive
In nominal terms, Malaysia achieved RM181.5bn in realised private
investment in 2014, 13% higher than RM160.5bn in 2013 and had
exceeded the average annual target of RM148 billion under the Tenth
Malaysia Plan (10MP), for the second straight year despite challenging
uncertainties on the global economic environment. BNM expects private
sector investment to expand further by RM201bn in 2015, only slightly
lower than the previous official projection of RM202bn.
Fig 8: Private investment (nominal) vs % of nominal GDP
Source: BNM
The cumulative investment approved in the economy amounted to
RM777bn post ETP (2010-2014), with strong total committed investments
in the manufacturing, primary (mainly agriculture and mining) and services
sectors. This, together with the ongoing implementation of the (ETP)
projects and various economic corridors, we believe growth in private
investment will continue to be the key growth driver for the economy, see
Fig 9.
However, some quarters cautioned that some companies,
especially in the export-oriented sub-sector, may delay their investment
plans due to the increased uncertainty about global prospects.
Fig 9: Investment approved by sector
Source: MIDA
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 5 of 13
12 March 2015
However, BNM remains positive that private investment growth will be
supported by on-going projects and new investments in the manufacturing
and services sectors with firms benefitting from the continued global
recovery and expansion in domestic demand. BNM is projecting a
continued strong growth in private investment, which is likely to expand by
9% in 2015, against Affin Hwang’s 10%, albeit slower than 11% in 2014.
In the Annual Report, BNM also highlighted in an article titled “Debunking
Malaysia’s Investment Myths,” where BNM clear several misconceptions
about the strength of the country’s private investment, stating that i) the
strong performance in investment has not been driven by the Government
and Government-linked enterprises, but also by the private sectors ii) most
investment was not in the property sector, but also in the manufacturing
and services sectors iii) capital spending is not just concentrated in the oil
and gas industry, where the share of investment in the oil and gas sector
is expected to decline, but other sectors will support investment and iv)
private investment in Malaysia is not only undertaken mainly by foreign
entities, but the bulk of private investment continues to be undertaken by
Malaysian companies and funded domestically via the banking system.
Public investment is expected to expand steadily in 2015
Without any cutback in public investment, as the allocation for
development expenditure of RM48.5bn will be maintained, BNM guided
that implementation of key infrastructure projects, particularly in the utility
and transportation sub-sectors will likely offset the lower but still-sizable
capital spending in the oil and gas sector. Projects from allocation under
development expenditure will be channeled mainly towards improving
access and connectivity of urban public transport and rural infrastructure,
which will support higher growth of 5.1% projected for 2015, a sharp
turnaround from -4.9% in 2014.
Fig 10: Higher development expenditure in 2015
Source: MOF
Key also lies in private consumption after the implementation of GST
BNM expects real private consumption to expand by 6% projected for
2015, albeit slower than 7.1% in 2014. Growth will also be lower than the
long run average growth of 6.7% from 1990-2014 for the first time since
2009, partly reflecting the implementation of the GST in April this year, as
well as lower earnings in the commodity-related sectors. BNM also noted
that “while monetary conditions remain accommodative and access to
credit is still available, taking into account financing from both banks and
non-banks, the growth in outstanding loans to households continued to
moderate as intended following measures to curb pockets of excesses.”
However, BNM is optimistic that private consumption will remain
supportive of economic growth, driven by higher household disposable
incomes from lower fuel prices, the favourable labour market conditions
and the Government measures to assist low- and middle-income
households.
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 6 of 13
12 March 2015
Fig 11: Private consumption vs loans to households & businesses
Source: BNM
Export growth expected to be lower on slower external demand
On external demand, BNM expects real exports of goods and services to
expand by a slower rate of 3% in 2015 (5.1% in 2014). We believe this is
to take into account the less certain external environment, where US
monetary tightening and China economic slowdown, may moderate global
growth. However, we are slightly more optimistic and expect Malaysia’s
export growth to expand by 4% in 2015 on expectations of a stronger
upturn in the US economy as well as the global demand for electronics.
Fig 12: Malaysia’s exports of E&E and global semiconductor sales
Source: Department of Statistics (DoS), SIA
Nevertheless, the drag from contribution to the real GDP from net exports
is projected to weaken to -0.6 percentage points in 2015, after registering
a positive growth of 1.4 percentage points in 2014, due to lower exports of
agriculture and mining commodities, but this will be offset by higher
exports of electronics and electrical (E&E) products, supported by higher
global semiconductor sales.
Strength of Malaysia’s economy hinges on global growth
Early this year, the International Monetary Fund (IMF) expects
improvement in the global economy, with global GDP growth rising by
3.5% in 2015, higher than 3.3% in 2014, supported by the US economy,
see Fig 13. However, BNM cautioned that “there remain downside risks to
the global growth outlook. The prolonged weakness in domestic demand
and persistence of disinflation or even deflation in several major advanced
economies, together with adverse geopolitical developments, could have
spillovers on global trade activity. Uncertainty over commodity price
movements could also affect the growth prospects of the commodityproducing emerging economies.” The recovery in the global economy, if
sustained, suggest that Malaysia’s export growth will improve given its
open economy that is dependent on external environment.
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 7 of 13
12 March 2015
Fig 13: Global growth forecast
Year over Year
Projections
*Crude oil price (US$)
World Output (%)
Advanced Economies
United States
Euro Area
Germany
France
Italy
Spain
Japan
United Kingdom
Canada
Other Advanced Economies
Emerging and Developing
Economies
Developing Asia
China
India
ASEAN-5
2014
-7.5
3.3
1.8
2.4
0.8
1.5
0.4
-0.4
1.4
0.1
2.6
2.4
2.8
2015
-41.1
3.5
2.4
3.6
1.2
1.3
0.9
0.4
2.0
0.6
2.7
2.3
3.0
2016
12.6
3.7
2.4
3.3
1.4
1.5
1.3
0.8
1.8
0.8
2.4
2.1
3.2
4.4
6.5
7.4
5.8
4.5
4.3
6.4
6.8
6.3
5.2
4.7
6.2
6.3
6.5
5.3
Q4 over Q4
Difference from Oct 2014
WEO projections
2015
2016
-37.8
14.6
-0.3
-0.3
0.1
0.0
0.5
0.3
-0.2
-0.3
-0.2
-0.3
-0.1
-0.2
-0.5
-0.5
0.3
0.0
-0.2
-0.1
0.0
-0.1
-0.1
-0.3
-0.2
-0.1
-0.6
-0.2
-0.3
-0.1
-0.2
Estimates
-0.5
-0.3
-0.5
0.0
-0.1
Projections
2014
-28.6
3.1
1.7
2.6
0.7
1.0
0.3
-0.5
1.9
-0.3
2.7
2.4
2.3
2015
-19.5
3.4
2.7
3.4
1.4
1.7
1.2
0.9
1.8
1.6
2.7
2.1
…
2016
9.6
3.9
2.3
3.2
1.4
1.3
1.3
0.8
1.7
0.2
2.2
2.1
…
4.5
6.4
7.4
5.6
4.6
4.1
6.3
6.7
6.5
5.1
5.4
6.2
6.3
6.6
5.5
*The average price of oil in US dollars a barrel was US$96.26 in 2014; the assumed price based on futures markets is US$56.73 in 2015 and US$63.88 in 2016.
Source: International Monetary Fund (IMF)
Services sectors continued to lead economic growth
On the supply side, barring any unforeseen circumstances in the global
economy, Malaysia’s GDP growth is expected to be broad-based,
especially the services sectors. Growth in the services sector is projected
to be sustained at a decent growth rate of 5.6% for 2015 (6.3% in 2014),
supported by retail trade, accommodation and restaurants. Higher tourist
arrivals will also support growth in 2015. According to BNM, the
communication sub-sector will be driven by strong demand for data
services amidst higher usage of mobile devices, particularly smartphones.
The continued expansion in trade-related activity will support growth in
production-related services such as wholesale, transport and storage.
On the manufacturing front, as the uncertain global outlook is expected to
weigh on industries directly exposed to external demand, growth in the
manufacturing sector is projected to grow modestly by 4.9% in 2015 (6.2%
in 2014), supported by expansion in the domestic oriented industries.
Fig 14: Malaysia’s GDP by Expenditure and sector
2013
Consumption
Private consumption
Public consumption
Investment
Private Investment
Public Investment
Domestic demand
Net exports of goods and services
Exports of goods and services
Imports of goods and services
GDP at purchasers' value
Agriculture
Mining and Quarrying
Manufacturing
Construction
Services
GDP at Purchasers' Value
7.0
7.2
6.3
8.5
13.1
2.2
7.4
-12.6
0.6
2.0
4.7
2.1
0.7
3.5
10.9
5.9
4.7
2014
% yoy
6.5
7.1
4.4
4.7
11.0
-4.9
6.0
19.7
5.1
3.9
6.0
2.6
3.1
6.2
11.6
6.3
6.0
2015f
5.3
6.0
2.7
7.6
9.0
5.1
6.0
-7.8
3.0
4.0
4.5-5.5
0.3
3.0
4.9
10.3
5.6
4.5-5.5
2013
65.4
52.0
13.4
27.7
16.7
10.9
93.1
7.1
89.5
82.5
100.0
7.1
8.1
24.5
3.8
55.2
100.0
2014
% share
65.7
52.5
13.2
27.3
17.5
9.8
93.1
8.0
88.8
80.8
100.0
6.9
7.9
24.6
3.9
55.3
100.0
2015f
65.9
53.0
12.9
28.0
18.2
9.8
93.9
7.0
87.0
80.0
100.0
6.6
7.7
24.5
4.1
55.6
100.0
2013
2014
2015f
% contribution points to GDP
4.5
4.3
3.5
3.6
3.7
3.2
0.8
0.6
0.4
2.3
1.3
2.1
2.0
1.8
1.6
0.2
-0.5
0.5
6.8
5.6
5.6
-1.1
1.4
-0.6
0.6
4.6
2.6
1.7
3.2
3.2
4.7
6.0
4.5-5.5
0.2
0.2
0.0
0.1
0.3
0.2
0.9
1.5
1.2
0.4
0.4
0.4
3.2
3.5
3.1
4.7
6.0
4.5-5.5
Source: BNM
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 8 of 13
12 March 2015
Growth in the construction sector is projected to increase by 10.3% for
2015, albeit slower than 11.6% in 2014, supported by non-residential subsector as well as higher construction activity for industrial and commercial
buildings. New and existing multi-year civil engineering projects,
particularly in the transport and utility segments, will continue to provide
additional support to the sector.
Lower growth expected in the agriculture sector
In the agriculture sector, growth is expected to slow by 0.3% for 2015 (2.6%
in 2014), due to lower commodity prices, as well as lower production of
palm oil. However, growth in the mining sector is expected to expand by 3%
in 2015 (3.1% in 2014), supported by oil production from the new Gumusut
Kakap field offshore Sabah.
Healthy but narrow balance of payments surplus in current account
The country’s current account surplus is projected to narrow significantly to
RM21.4bn (2-3% of GNI) in 2015, a decline of -57% from RM49.5bn (4.8%
of GNI) in 2014, due to sharp decline in commodity prices. However, this
will be offset partially by lower deficit in the services account, partly
attributed the expected recovery in tourist arrivals. We believe the
moderation in the goods surplus is also attributed to healthy import growth,
following the sustained domestic demand.
Fig 15: Balance of Payments
Goods
Exports (% annual change)
Imports (% annual change)
Services
Balance on goods and services
Primary income
Secondary income
Balance on current account
% of GNI
Capital account
Financial account
Balance on capital and financial
accounts
Error and omissions
of which:
Foreign exchange revaluation loss
Overall balance
2012
125.2
0.7
5.8
-16.2
109.0
-36.0
-18.5
54.5
6.0
0.2
-23.0
RMbn
2013
2014p
108.2
125.1
2.5
6.4
6.9
5.3
-16.7
-20.5
91.5
104.5
-34.1
-37.4
-17.5
-17.6
39.9
49.5
4.2
4.8
0.0
0.3
-15.8
-76.5
2015f
94.2
-16.4
77.8
-38.0
-18.5
21.4
2.0-3.0
-
-22.8
-27.8
-15.8
-9.4
-76.2
-9.8
-
-7.7
3.9
18.6
14.6
7.6
-36.5
-
p Preliminary
f Forecast
Note: Numbers may not necessarily add up due to rounding
Source: BNM
However, with volatility in global financial markets contributing to some
portfolio outflows, which will also impact on trade activities, we believe the
overall balance in the country’s balance of payments will remain in deficit
in 2015 (-RM36.5bn in 2014). Going forward, further drop in international
reserves, which fell from US$115.9bn as at end-2014 to US$110.5 as at
end-February, will likely be determined by the directions of net capital
outflows, which will offset the current account surplus. At the current level
of international reserves, this will provide some buffer to prevent excessive
fluctuations in the exchange rate.
Ringgit is likely to trade at around RM3.50-3.55/US$ by end 2015
While healthy macroeconomic fundamentals will support Ringgit, we
believe the performance of the ringgit going forward will be influenced by
the global and domestic developments amid periods of heightened
volatility in the global financial markets. The recent depreciation of the
ringgit and regional currencies was attributed mainly to the US$ strength.
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 9 of 13
12 March 2015
According to BNM, “the adjustments in the ringgit also absorbed some of
the shocks emanating from the turbulent international financial markets.
Thus, greater exchange rate flexibility, deeper financial markets, a strong
banking system, adequate international reserves buffer and the availability
of more policy instruments have strengthened Malaysia’s resilience to
sharp movements in capital flows and ensured that the real economy is
not affected by this volatility.”
Going forward, while the risks associated with capital flows will remain,
with Malaysia's relatively steady macroeconomic fundamentals, we believe
Ringgit will likely strengthen gradually and trade at around RM3.503.55/US$ by end 2015 (RM3.70/US$ currently). Given that Malaysia is a
highly open economy, we believe BNM will continue to monitor the recent
excessive exchange rate swings to avoid significant disruptions in the
market and economy that could result in dislocations in the real sector.
Stance of monetary policy to remain accommodative
In the March’s Monetary Policy Committee (MPC) meeting, Bank Negara
Malaysia (BNM) kept its Overnight Policy Rate (OPR) unchanged at
3.25%, after holding the rate unchanged for four straight MPC meetings
since July 2014 (25bps hike from 3%). Consistent with the view in the
BNM Annual Report, the monetary policy decision and statement, which is
forward-looking and consistent with its dual mandate, focuses on stability
of economic growth in view of the contained inflationary pressures. BNM
reckoned that the introduction of the GST and the lower earnings in the
commodity sector are expected to have some impact on Malaysia’s private
consumption. However, this will likely be offset partially by steady increase
in income and employment. We believe BNM will likely maintain its
current accommodative policy stance to support domestic demand in the
near term, which is expected to sustain at 6% in 2015.
Going forward, we believe BNM is unlikely to follow other central banks in
cutting its policy rate in 2015. With BNM maintaining the positive interest
rate differential with the US, we believe any potential outflow of portfolio
funds from sovereign rating adjustment will likely be manageable,
supported by the country’s steady current account surplus, healthy
reserves position and a well-capitalised banking system. As domestic
demand remains strong, we believe BNM will wait and maintain its
monetary policy ammunition (if a need to cut its OPR), should the
country’s economic growth falter sharply due to uncertainty in the external
environement. We expect BNM to leave its OPR unchanged at 3.25%
throughout 2015 to support economic growth. BNM is also monitoring the
ongoing concerns about the potential risk of a further build-up in financial
imbalances.
Fig 16: Malaysia OPR against Fed Funds rate
Source: BNM, US Federal Reserve
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 10 of 13
12 March 2015
Appendix I: Malaysia – Key Economic and Financial indicators
2012
Population (million persons)
Labour force (million persons)
Employment (million persons)
Unemployment (as % of labour force)
Per Capita Income (RM)
(USD)
National Product (% change)
1
Real GDP at 2005 prices
(RMbn)
Agriculture, forestry and fishery
Mining and quarrying
Manufacturing
Construction
Services
Nominal GNI
(RMbn)
Real GNI
(RMbn)
Real aggregate domestic demand2
Private expenditure
Consumption
Investment
Public expenditure
Consumption
Investment
Gross national savings (as % of GNI)
Balance of Payments (RMbn)
Goods balance
Exports
Imports
Services balance
(as % of GNI)
Primary Income, net
(as % of GNI)
Secondary income, net
Current account balance
(as % of GNI)
Bank Negara Malaysia international reserves,net3
(in months of retained imports)
Prices (% change)
CPI (2010=100)4
PPI (2005=100)5
Real wage per employee in the manufacturing sector
2013
2014p
2015f
29.5
13.1
12.7
3.0
30,698
9,938
29.9
13.6
13.2
3.1
31,844
10,106
30.3
14.0
13.6
2.9
34,123
10,426
30.6
14.4
14.0
3.0
35,572
6
9,914
5.6
751.9
1.3
1.0
4.8
18.6
6.4
4.9
905.9
3.9
693.6
10.7
11.3
8.2
22.8
9.2
5.0
14.6
33.0
4.7
787.6
2.1
0.7
3.5
10.9
5.9
5.2
952.6
5.3
730.5
7.4
8.6
7.2
13.1
4.4
6.3
2.2
31.2
6.0
835.0
2.6
3.1
6.2
11.6
6.3
8.4
1,032.6
6.0
774.6
6.0
8.0
7.1
11.0
0.2
4.4
-4.9
30.9
4.5-5.5
877.2
0.3
3.0
4.9
10.3
5.6
5.5
1,089.4
5.2
814.9
6.0
6.7
6.0
9.0
3.7
2.7
5.1
29.8
125.2
686.0
560.9
-16.2
-1.8
-36.1
-4.0
-18.5
54.5
6.0
427.2
9.5
108.2
679.1
570.9
-16.7
-1.8
-34.1
-3.6
-17.5
39.9
4.2
441.9
9.5
125.1
726.0
601.0
-20.5
-2.0
-37.4
-3.6
-17.6
49.5
4.8
405.3
8.3
94.2
723.9
629.7
-16.4
-1.5
-38.0
-3.5
-18.5
21.4
2.0-3.0
-
1.6
0.1
4.7
2.1
-1.7
5.8
3.2
1.4
4.4
2.0-3.0
-
Note: Figures may not necessarily add up due to rounding.
1
Beginning 2012, real GDP has been rebased to 2005 prices, from 2000 prices previously
2
Exclude stocks
3
All assets and liabilities in foreign currencies have been revalued into ringgit at rates of exchange ruling on the balance sheet date and the gain/loss has been reflected
accordingly in the Bank’s account
4
Effective from 2011, the Consumer Price Index has been revised to the new base year 2010=100, from 2005=100 previously
5
Effective from 2015, the Producer Price Index has been revised to the new base year 2010=100, from 2005=100 previously
Based on average USD exchange rate for the period of January-February 2015
p
Preliminary
f
Forecast
Source: BNM
6
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 11 of 13
12 March 2015
Appendix II: Malaysia – Key Economic and Financial indicators (continued)
Federal Government Finance (RMbn)
Revenue
Operating Expenditure
Net development expenditure
Overall balance
Overall balance (% of GDP)
Public sector net development expenditure
Public sector overall balance (% of GDP)
1
External Debt
Total debt (RMbn)
Medium- and long-term debt
Short-term debt
Debt service ratio2 (% of exports of goods and services)
Total debt (RMbn)
Medium- and long-term debt
Money and Banking
Money Supply
M1
M3
Banking system deposits
Banking system loans3
Loan-deposit ratio (end of year)4
Financing-deposit ratio4,5
Interest Rates (Average % as at end-year)
Overnight Policy Rate (OPR)
Interbank rates (1-month)
Commercial banks
Fixed deposit 3-month
12-month
Savings deposit
Base lending rate (BLR)
Treasury bill (3-month)
Government securities (1-year)6
Government securities (5-year)6
Exchange rates
Movement of Ringgit (end-period)
Change against SDR (%)
Change against USD7 (%)
2012
2013
2014p
207.9
205.5
44.3
-42.0
-4.5
138.4
-5.0
213.4
211.3
40.7
-38.6
-3.9
133.3
-3.9
220.6
219.6
38.4
-37.4
-3.5
155.3
-7.0
602.1
318.6
283.5
696.6
357.8
338.8
744.7
383.9
360.8
17.4
17.3
Change in 2012
RMbn
%
17.6
17.5
Change in 2013
RMbn
%
18.2
18.1
Change in 2014
RMbn
%
30.8
111.2
109.4
104.5
37.8
107.5
116.9
117.7
18.8
101.5
116.4
114.1
11.9
9.0
8.4
10.4
13.0
7.9
8.3
10.6
5.7
7.0
7.6
9.3
82.1%
88.7%
84.8%
91.3%
86.7%
93.3%
3.00
3.06
3.00
3.20
3.25
3.38
2.97
3.15
1.03
6.53
3.04
3.01
3.24
2.97
3.15
0.99
6.53
3.00
3.03
3.66
3.13
3.31
1.07
6.79
3.42
3.48
3.84
3.9
3.9
-7.3
-6.8
-0.7
-6.1
1
As redefined effective from the 1Q14
Includes prepayment of medium- and long-term debt
Includes loans sold to Cagamas
4
Deposits exclude deposits accepted from banking institutions. Loans exclude loans sold to Cagamas andloans extended to banking institutions
5
Financing comprises loans and banking institutions' holidngs of private debt securities (PDS)
6
Refers to data from FAST, Bank Negara Malaysia
p
Preliminary
Source: BNM
2
3
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 12 of 13
12 March 2015
Equity Rating Structure and Definitions
BUY
Total return is expected to exceed +10% over a 12-month period
HOLD
Total return is expected to be between -5% and +10% over a 12-month period
SELL
Total return is expected to be below -5% over a 12-month period
NOT RATED
Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a
recommendation
The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.
OVERWEIGHT
Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months
NEUTRAL
Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months
UNDERWEIGHT
Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months
This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank
Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does
not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or
rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing
view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the
Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its
associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss
of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the
Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any
securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or
take proprietary positions that are inconsistent with the recommendations or views in this report.
Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial
status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to
seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment
strategies or transactions discussed in this report.
Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability
for any damages of any kind relating to such data.
The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company.
The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation.
This report is printed and published by:
Affin Hwang Investment Bank Berhad (14389-U)
(formerly known as HwangDBS Investment Bank Berhad)
A Participating Organisation of Bursa Malaysia Securities Bhd
Chulan Tower Branch,
3rd Floor, Chulan Tower,
No 3, Jalan Conlay,
50450 Kuala Lumpur.
www.affinhwang.com
Email : affin.research@affinhwang.com
Tel : + 603 2143 8668
Fax : + 603 2145 3005
Affin Hwang Investment Bank Bhd (14389-U)
(Formerly known as HwangDBS Investment Bank Bhd)
Page 13 of 13