Malaysian Economy Easing Pressure Points Chief Economist Suhaimi - PowerPoint PPT Presentation

Malaysian Economy Easing Pressure Points… Chief Economist Suhaimi Ilias | +603 2297 8682 | suhaimi_ilias@maybank-ib.com MALAYSIA RESEARCH TEAM Strictly Private & Confidential

In summary… Growth picking up after two years of slowdown with potential upside • surprise to growth via external demand from current synchronised global economic pick up, firmer commodity prices, rebound in exports MYR and external reserves stabilised after measures by BNM in early-Dec • 2016 to ban offshore MYR NDF trade & repatriate 75% of export earnings Firmer ASPs of key commodity exports ease concerns about current • account and fiscal balances; fiscal consolidation achieved/delivered despite challenges Expected earnings recovery after three years of stagnancy is positive for • portfolio flows into equity & corporate capex Remaining pressure point is foreign holdings of Malaysian bonds, • although offset by domestic liquidity amid sign of foreign selling bottoming Page 1 Strictly Private & Confidential

Malaysia - Real GDP Growth % chg % Share ACTUAL MAYBANK KE OFFICIAL of GDP 2014 2015 2016 2017E 2018E 2017E 2017E BNM MOF (Mar 2017) (Oct 2016) Real GDP 100.0 6.0 5.0 4.2 4.4 4.5 4.3-4.8 4.0-5.0 4.3 4.1 Manufacturing 23.3 6.2 4.9 4.4 4.5 4.3 4.9 5.7 Services 55.0 6.6 5.1 5.6 5.6 5.7 4.0 1.5 Agriculture 8.2 2.1 1.2 (5.1) 1.5 1.8 2.7 1.4 Mining 8.9 3.5 4.7 2.7 2.0 1.8 8.0 8.3 Construction 4.6 11.7 8.2 7.4 7.8 7.5 4.4 4.9 Domestic Demand 91.9 5.9 5.1 4.4 4.9 5.0 6.0 6.3 Private Consumption 53.4 7.0 6.0 6.1 5.9 5.8 (0.2) 0.4 Public Consumption 13.1 4.3 4.4 1.0 2.9 2.5 3.3 4.2 Gross Fixed Capital Formation 25.4 4.8 3.7 2.7 3.9 4.5 4.1 5.8 Private Investment 16.9 11.1 6.4 4.4 4.8 5.0 1.5 1.1 Public Investment 8.5 (4.7) (1.0) (0.5) 2.3 3.5 5.3 1.9 Net External Demand 8.1 13.2 (3.8) (1.8) (0.7) (0.9) 2.2 2.5 Exports of Goods & Services 70.1 5.0 0.6 0.1 1.3 3.0 1.8 2.6 Imports of Goods & Services 62.0 4.0 1.2 0.4 1.5 3.5 Source: Dept. of Statistics, MoF (Economic Report 2016/2017), MKE Economics Research Page 2 Strictly Private & Confidential

Malaysia - Other Key Economic Indicators ACTUAL MAYBANK KE OFFICIAL 2014 2015 2016 2017 YTD 2017E 2018E 2017E 2017E BNM MOF (Mar 2017) (Oct 2016) Gross Exports (% chg) 6.3 1.6 1.1 19.8 8.5 4.0 5.5 2.7 Gross Imports (% chg) 5.3 0.4 1.9 21.5 9.8 7.4 6.4 3.4 Trade Balance (RMb) 82.5 91.6 87.3 13.5 85.5 83.0 86.4 88.3 Current Account Balance (RMb) 47.3 34.7 25.2 - 24.7 23.9 17.4 14.8 Current Account Balance (% of GDP) 4.3 3.0 2.0 - 1.9 1.8 1.4 1.1 Fiscal Balance (% of GDP) (3.4) (3.2) (3.1) - (3.0) (2.8) (3.0) (3.0) Inflation Rate (CPI, %) 3.1 2.1 2.1 4.3 3.5-4.0 2.0-2.5 3.0-4.0 2.0-3.0 Overnight Policy Rate (% p.a., end-period) 3.25 3.25 3.00 3.00 3.00 3.25 - - Exchange Rate (RM/USD, end-period) 3.50 4.29 4.49 4.40 4.40 4.25 - - Exchange Rate (RM/USD, average) 3.27 3.91 4.14 4.44 4.41 4.35 4.30-4.40 - Unemployment Rate (%) 2.9 3.2 3.5 3.5 3.4 3.3 3.6-3.8 3.2 Crude Oil (USD/bbl, Brent average) 98.9 52.3 44.1 53.9 55 55 50-55 45 Crude Palm Oil (RM/tonne, average) 2,415 2,168 2,652 3,065 2,400 2,500 2,700 2,500 Source: Dept. of Statistics, Bloomberg, MoF (Economic Report 2016/2017), MKE Economics Research, Maybank FX Research Page 3 Strictly Private & Confidential

Consumers spending growth despite weak consumer sentiment: Tapping onto savings amid slowing income growth & de-leveraging Consumer sentiment vs consumer spending indicators Slowing income growth amid pick in inflation 7.0 130 11 120 6.0 10 110 5.0 8 100 4.0 7 90 3.0 5 80 2.0 4 70 1.0 60 2 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 0.0 2004 2006 2008 2010 2012 2014 2016 Avg Nominal Private Sector Salary Growth MIER: Consumer Sentiment Index Inflation (CPI) Retail Trade Index (% YoY, RHS) Avg Real Private Sector Salary Growth Real Private Consumption (% YoY, RHS) Gross national savings down, EPF withdrawals up Household Debt 95% 18 39 13,000 % of GDP % chg 12,000 90% 16 37 11,000 85% 14 35 10,000 80% 12 33 9,000 75% 10 31 8,000 70% 8 86% 87% 89% 88% 29 7,000 65% 81% 6 72% 72% 76% 27 6,000 60% 4 63% 66% 67% 66% 66% 64% 60% 25 5,000 55% 2 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 4Q 2012 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016 4Q 2016 50% 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Gross National Savings Rate (% of GDP) Withdrawals from EPF (MYRm) Source: BNM, DoS, EPF, MEF Page 4 Strictly Private & Confidential

Consumers spending growth despite weak consumer sentiment: Disposable income-boosting measures & higher commodity prices negate rising inflation • Up +25.9% in Budget 2017 to MYR6.8b (2016: +1.5% to BR1M MYR5.4b). Without BR1M, real private consumption expenditure growth would be 0.4ppt lower in 2012-2016 Lower Workers’ Contribution • Option for 8% vs 11% for period Mar 2016 – Dec 2017 to EPF • 50% workers opted, boosting disposable income by MYR4b Minimum Wage Increase; Civil Service Salary & • Minimum Wage: +11% in Peninsula Malaysia to MYR1,000/month & +15% in East Malaysia to Pension Revisions MYR920/month; benefit 27% of workers (both w.e.f. 1 July 2016) Firmer ASPs of Agriculture • CPO, Rubber Commodity Prices • Positive for rural household income Source: Budget 2016 & 2017, EPF, MKE Economics Research Page 5 Strictly Private & Confidential

Consumers spending growth despite weak consumer sentiment: Tourism adds to measures to boost disposable income & higher commodity prices Tourist arrivals xxx 2.9 25 Tourist Arrival (m) % YoY (RHS) 20 2.7 15 2.5 10 5 2.3 0 2.1 (5) (10) 1.9 (15) 1.7 (20) 1.5 (25) Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Spending in Malaysia by local & foreign credit card holders (% YoY) xxx… 30 25 20 15 10 5 0 -5 -10 -15 -20 Inbound Tourism Expenditure, 2015: MYR74.1b -25 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 • 12% of consumer spending; 6% of GDP Domestic Tourism Expenditure, 2015: MYR61b Credit Cards: Purchases: Domestic: Local Cardholders (% YoY) Credit Cards: Purchases: Domestic: Foreign Cardholders (% YoY) • 10% of consumer spending, 5% of GDP Source: Tourism Malaysia, BNM Page 6 Strictly Private & Confidential

Consumers spending growth despite weak consumer sentiment: Tourism adds to measures to boost disposable income & higher commodity prices Based on travel CNTA bans Chinese Popular bookings between travel agencies destinations for 16 March – 31 Aug from selling tour Chinese travellers 2017 (spring & packages to South in 2017 summer seasons) Korea Source: ForwardKeys Page 7 Strictly Private & Confidential

Better outlook for investment: Earnings recovery Earnings recovery positive for capex 22 20 18 16 14 12 10 8 6 4 2 0 2011 2012 2013 2014 2015 2016 2017E 2018E (2) (4) Maybank Equity Research Universe Earnings (% YoY) Real Private Investment (% YoY) Source: DoS, MKE Equity Research Page 8 Strictly Private & Confidential

Better outlook for investment: Surge in infrastructure activities Construction Jobs Awarded – Record High for Infrastructure in 2016 (MYRb) 200 172 180 8 160 135 131 140 128 125 6 10 7 82 7 120 99 93 54 31 91 100 41 7 84 52 12 9 74 80 19 36 29 26 15 32 33 60 47 24 50 38 23 17 25 40 23 17 14 58 46 20 38 35 32 31 27 26 25 22 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Infrastructure Residential Non-Residential Social amenities Total Source: CIDB Page 9 Strictly Private & Confidential

BNM’s measures in early -Dec 2016 to ban offshore NDF & repatriate export earnings have stabilised MYR & external reserves USDMYR: Exchange Rate & Volatility USDMYR USDMYR Volatility (Implied 1-month) Source: Bloomberg Page 10 Strictly Private & Confidential