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SOCIO SOCIO-ECONOMIC ECONOMIC RES RESEAR EARCH CH CENT CENTRE RE Quar Quarter terly Eco Econo nomy my Trac acker er (J (Jan an-Mar Mar 2017 2017) How’s the economy doing?

4 Apr pril il 2017 2017

Socio-Economic Research Centre 1

• Global economic activity picks up pace
• Malaysia economy – how resilient?
• What will derail the growth track?
• Here’s are the five key risks facing Malaysia
• Conclusion

Ag Agenda

Socio-Economic Research Centre 2

Global growth is picking up, but risks remain Policy risks and financial vulnerabilities could temper the momentum

• Hopes fading if outcomes fall short of expectations
• Potential disruptions --- trade protectionism, Brexit’s negotiation & political risks
• Continued volatility induced by interest rates and exchange rate movements
• Unsustainable asset prices, credit growth and debt

Malaysia faces challenges in a position of strength

• The Malaysian economy is gaining ground but growth remains vulnerable
• Step-up structural policy actions to boost growth and productivity
• Address as well as contain vulnerabilities to build economic resilience
• Global growth supported by expected fiscal initiatives (Trumponomics)
• Confidence rising but consumption and investment still subpar
• Policy reforms to raise the growth potential; declining productivity growth

Key me messa ssages

Socio-Economic Research Centre 3

• Global growth will pick up pace (3.4% in 2017 and 3.6% in 2018) against estimated

3.1% in 2016. But, the growth estimate remains below 4.2% pa in 1998-2007

• The US economy is gaining traction (2.3% in 2017 vs. 1.6% in 2016); a modest

recovery in Eurozone and Japan

• China’s growth reassuring (6.5% in 2017 vs. 6.7% in 2016) amid growing worries

about high debt risk

The glob lobal economy my is is on

• n a cruising

ising sp speed…

Socio-Economic Research Centre 4

• The year is off to a good start, buoyed by increasing optimism about global growth
• Markets are more focused on the prospects of the Trump’s reflationary policies and

less on the risk of trade wars or other undesirable political outcomes

• OECD Composite leading indicators and PMIs suggest an upswing in global

economic growth

OECD Composite leading indicators suggest gaining traction Global PMI for manufacturing and services on uptrend

Source: OECD; Markit

97 98 99 100 101 102 2010 Jan Jul 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan Total OECD CLI US CLI Euro Area CLI Japan CLI

Consumer and business confidence rises

45 50 55 60 2010 Jan Jul 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan Global Manufacturing PMI Global Services PMI 97 98 99 100 101 102 2010 Jan Jul 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan OECD-CCI OECD-BCI

Glob Global ind indica icato tors point int to to bette tter growth wth ahead ahead

Socio-Economic Research Centre 5

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25% 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan Exports (yoy) Industrial Production (yoy)

• 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

• 100

100 200 300 400 500 600 700 800 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan (‘000) Nonfarm Employment (mom net change) (LHS) CPI (urban consumers) (yoy) (RHS)

• US: a delicate policy adjustment is needed to temper an inflation run-up
• Euro area: gaining ground but risks remain
• Japan: exports drive moderate economic recovery

US: Jobs hiring continues; inflation rises Euro Area: Moderate recovery

Source: US BLS; Markit; Eurostat; METI, Japan; MOF, Japan

Japan: An exports-led recovery

• 2%
• 1%

0% 1% 2% 3% 4% 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan 42 46 50 54 58 62 66 Eurozone Manufacturing PMI (LHS) Eurozone Services PMI (LHS) Eurozone Inflation (yoy) (RHS)

Here’s are how the the US, US, Eur Euro Ar Area and and Japan doing ing

Socio-Economic Research Centre 6

• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 50% 60% 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan Singapore (yoy) Indonesia (yoy) Thailand (yoy) Philippines (yoy)

• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan Industrial Production (yoy)

• China: Continues its new normal growth trajectory; lingering debt risk
• India: Still looking good despite demonetisation shock
• ASEAN-4 (Indonesia, Philippines, Singapore and Thailand): Exports recovery taking

shape

China: Sustained economic activities India: Industrial output rises

Source: NBS, China; MOSPI, India; DOS, Malaysia; DOS, Singapore; Statistics Indonesia; BOT; PSA

ASEAN-4: Synchronized exports upturn

0% 5% 10% 15% 20% 25% 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan Retail Sales (yoy) Industrial Production (yoy)

Here’s are how China China, In India ia and and ASEAN ASEAN-4 doing ing

Socio-Economic Research Centre 7

• The Fed is clearly at the vanguard and setting a vital lead for others to follow suit fairly

soon

• Deflation risks are dead and buried, headline inflation is on the rise and is gradually

building momentum

• The ECB is ready to tweak interest rate once French and German elections are out
• f the way and its quantitative easing program expires in October
• 0.6
• 0.4
• 0.2

0.0 0.2 0.4 0.6 0.8 1.0 1.2 2011 2012 2013 2014 2015 2016 2017 Feb/Mar % Federal Funds Rate ECB's Desposit Facility BoJ Policy Rate

• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan % US 10-Yr Treasury Yield Curve Rates Japan 10-Yr Govt Bond Interest Rates Germany 10-Yr Govt Bond Interest Rate

The Fed’s rate hike cycle continues; Is BoJ and ECB ready to act?

Source: Federal Reserve; ECB; BoJ; U.S. BLS; Eurostat; Statistics Bureau, Japan; U.S. Department of the Treasury; MOF, Japan

Bond yields on fire as market anticipates more inflation

The era of

• f glob

lobal cheap mo money is is coming ming to to an an end end

• 2%
• 1%

0% 1% 2% 3% 4% 5% 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan United States (yoy) Japan (yoy) Euro Area (yoy)

Rising inflation

Socio-Economic Research Centre 8

Unsustainable

• Unsustainable asset prices, excessive credit growth
• Bloated debt in some emerging economies

Fading

• Disconnects between financial markets vs. real

economy

• Fading hopes on the delivery of promised policy

reforms

Disruptions

• Trade protectionist mindset
• Unresolved issues related to Brexit’s negotiation
• A plethora of policy and political uncertainties

Volatility

• Faster pace of the Fed’s rate hikes
• Strong US dollar-induced exchange rate volatility
• Financial distress on high foreign borrowing and

currency mismatch

Risks Risks and and fina financial ial vu vulne lnerabil ilities ities in in persp spectiv tives

Socio-Economic Research Centre 9

• Cautiously
• ptimistic
• utlook.

Bank Negara Malaysia (BNM) expects this year’s GDP growth to grow by 4.3-4.8% (4.2% in 2016), in line with the Ministry of Finance’s forecast made in October (SERC: 4.3% in 2017).

• Still

decent domestic demand. Consumer spending (54.0% of GDP) will grow by 5.7% in 2017 (6.1% in 2016) while private investment growth paces slower (4.5% in 2017 vs. 4.4% in 2016).

• Exports

recovering. Exports are estimated to grow by 5.0% in 2017 (1.1% in 2016), riding on higher demand for electronics and electrical products, improved crude

• il

and commodity prices.

• Higher

inflation trajectory. Headline inflation is projected to rise by 3.0-4.0% in 2017 (2.1% in 2016), induced by the pass-through impact of the increase in global oil prices on domestic retail fuel

• prices. Weak ringgit also plays a part.

Key indicators 2015 2016 2017f (BNM) 2017f (SERC)

Real GDP growth (%)^ 5.0 4.2 4.3-4.8 4.3 Private consumption growth (%)^ 6.0 6.1 6.0 5.7 Private investment growth (%)^ 6.4 4.4 4.1 4.5 Income per capita (RM) 36,078 37,738 39,656 39,858 Unemployment (%) 3.1 3.5 3.6-3.8 3.6 Inflation (%) 2.1 2.1 3.0-4.0 3.0-4.0 Export Growth (%) 1.6 1.1 5.5 5.0 Current account surplus RM billion % of GDP 34.7 3.0 25.2 1.3 17.4 1.3 18.4 1.4 Budget deficit RM billion % of GDP 37.2 3.2 38.4 3.1 40.3 3.0 39.3 3.0 Federal government debt RM billion % of GDP 630.5 54.5 648.5 52.7

• Source: Bank Negara Malaysia; SERC

^ Constant 2010 prices

Here’s how th the Malaysia Malaysia economy my is is doing ing

Socio-Economic Research Centre 10

• Domestic demand will continue to be the main driver of growth, underpinned primarily

by private sector, aided by stronger exports.

• All economic sectors are expected to register positive growth.

(% change, 2010=100) % of GDP in 2017* 2014 2015 2016 2017f (BNM) 2017f (SERC)

GDP by demand component

Private consumption 54.0 7.0 6.0 6.1 6.0 5.7 Private investment 16.8 11.1 6.4 4.4 4.1 4.5 Public consumption 12.5 4.3 4.4 1.0

• 0.2
• 0.5

Public investment 8.3

• 4.7
• 1.0
• 0.5

1.5 2.0 Exports of goods and services 68.4 5.0 0.6 0.1 2.2 2.7 Imports of goods and services 60.3 4.0 1.2 0.4 1.8 2.2

GDP by economic sector

Agriculture 8.0 2.1 1.2

• 5.1

4.0 1.5 Mining & quarrying 8.7 3.5 4.7 2.7 2.7 2.3 Manufacturing 22.9 6.2 4.9 4.4 4.3 4.2 Construction 4.7 11.7 8.2 7.4 8.0 8.5 Services 54.4 6.6 5.1 5.6 4.9 4.9

Overall GDP

100.0 6.0 5.0 4.2 4.3-4.8 4.3

Source: Bank Negara Malaysia; SERC * % Share to GDP of 2017 from BNM

Sou Sources of

• f growth

wth: Mo Moving ving on

• n tw

two engine ines

Socio-Economic Research Centre 11

Industrial production grew steadily Recovering exports Manufacturing sales continue to expand

Source: Bank Negara Malaysia; Department of Statistics, Malaysia: SERC

Still positive economic growth trajectory

5.3 5.5 4.7 6.0 5.0 4.2 4.3-4.8 4.3 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Real GDP Growth (%)

• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% 2011 Jan Apr Jul Oct 2012 Jan Apr Jul Oct 2013 Jan Apr Jul Oct 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Industrial Production (yoy)

• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 2 4 6 8 10 12 14 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan RM billion Trade Balance (LHS) Exports (yoy) (RHS) Imports (yoy) (RHS)

• 10%
• 5%

0% 5% 10% 15% 20% 2011 Jan Apr Jul Oct 2012 Jan Apr Jul Oct 2013 Jan Apr Jul Oct 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Manufacturing Sales (yoy)

Real economic mic indica indicator tors sh show continu tinued growing wing

Socio-Economic Research Centre 12

Business and household loans growth eases Loan applications surged in Feb after seven consecutive declines due to low base effect Loan approvals also jumped in Feb on construction and utilities Loan disbursements remained moderate

Source: Bank Negara Malaysia

0% 2% 4% 6% 8% 10% 12% 14% 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Household Sector (yoy) Business Sector (yoy)

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25% 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Loan Application (yoy)

• 30%
• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Loan Approval (yoy)

• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25% 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Loan Disbursement (yoy)

Mod Moderate ted house seholds lds and and busine siness ss loa loan growth wth

Socio-Economic Research Centre 13

Approval rate households for the purchase of residential property Approval rate to businesses

Source: Bank Negara Malaysia

Ho Home me buyers and and busine sinesse sses still still gettin tting fina financing ing

Socio-Economic Research Centre 14

60 70 80 90 100 110 120 130 2011Q1 Q3 2012Q1 Q3 2013Q1 Q3 2014Q1 Q3 2015Q1 Q3 2016Q1 Q3 MIER's Consumer Sentiments Index (CSI)

14

• Households still grappling with rising cost of living though the cash handouts

provided some relief to the low-and middle-income households

• Consumer sentiment remains cautious and weak, weighed down by rising inflation

pressures and continued worries about job prospects

• BNM expects unemployment rate to edge higher (3.6% – 3.8%; 2016: 3.5%); expected

wage increment to average 5.4% in 2017 (5.5% in 2016)

Private consumption growth trend Consumer sentiments remain very weak

Source: Bank Negara Malaysia; Department of Statistics, Malaysia; Malaysian Institute of Economic Research (MIER); SERC

6.9 8.3 7.2 7.0 6.0 6.1 6.0 5.7 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Real Private Consumption Growth (%)

Passenger car sales rebound with new models

• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan Passenger Car Sales (yoy)

What’s th the tr true health lth of

• f th

the consu sume mer? r?

Socio-Economic Research Centre 15

• Moderating private investment growth, if not reversed, could eventually jeopardize

potential output growth and productivity

• Companies are expected to remain cautious amidst continued uncertainty in the

economic environment

• High cost of doing business, including unresolved issues associated with foreign

workers and regulatory practices, the impact of weakening ringgit as well as lingering uncertainty about the General Election 14 (GE14) may temper investors’ sentiment

Source: Bank Negara Malaysia; Department of Statistics, Malaysia; Malaysian Institute of Economic Research (MIER); SERC

70 80 90 100 110 120 2011Q1 Q3 2012Q1 Q3 2013Q1 Q3 2014Q1 Q3 2015Q1 Q3 2016Q1 Q3 MIER's Business Conditions Index (BCI)

Private investment growth had slowed for four successive years since 2013 Business sentiments remain sluggish

9.5 21.4 12.8 11.1 6.4 4.4 4.1 4.5 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Real Private Investment Growth (%)

Capital investment by type

• 20%
• 10%

0% 10% 20% 30% 40% 50% 2011Q1 Q3 2012Q1 Q3 2013Q1 Q3 2014Q1 Q3 2015Q1 Q3 2016Q1 Q3 Structure (yoy) Machinery and equipment (yoy) Other Asset (yoy) 9.5 21.4 12.8 11.1 6.4 4.4 4.1 4.5 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Real Private Investment Growth (%)

Sl Slipp ipping ing priva rivate te in investm stment growth wth is is a worry

Socio-Economic Research Centre

10 20 30 40 50 60 2010 2011 2012 2013 2014 2015 2016 RM billion Foreign Direct Investment (FDI) Direct Investment Abroad (DIA)

16

Source: Bank Negara Malaysia; MIDA

24.4% 14.9% 10.1% 7.6% 1.9% 2011 2012 2013 2014 2015 2016 Singapore Japan Netherlands United States China

FDI stock in Malaysia: Diversified investors Higher approved total investment in 2016 Higher approved foreign investment in manufacturing and services FDI exceeded Malaysia’s direct investment abroad

Manufacturing, 27.4 Services, 28.3 5 10 15 20 25 30 35 40 45 2011 2012 2013 2014 2015 2016 RM billion Manufacturing Services 2013 2014 2015 2016 Services 141.2 Manufacturing 58.5 Primary 8.2 RM billion

207.9 193.0

RM545.6 bn RM504.9 bn

Do Does FDI DI still still favor Mala Malaysia ysia?

Socio-Economic Research Centre 17

• Exports have staged a recovery since mid-2016 (estimated 5.0% in 2017 vs. 1.1% in 2016)
• Three fundamental drivers: improved global demand, tech demand and higher commodity
• prices. Base and weak exchange rate effects have inevitably played some part
• Risks to global trade environment threatened by policy uncertainties associated with

Trump’s strong assertive of a free and fair trade policy, targeting at those countries running huge trade surpluses with the US

Source: Bank Negara Malaysia; Semiconductor Industry Association (SIA)

• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25% 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Exports (yoy) Imports (yoy)

Exports recovering Malaysia’s exports of E&E products Global semiconductor sales rise for six consecutive months

• 10%
• 5%

0% 5% 10% 15% 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Global Semiconductor Sales (yoy)

• 10%
• 5%

0% 5% 10% 15% 20% 25% 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Exports of E&E products (yoy)

Mor More export upside side but but beware of

• f risk

risks

Socio-Economic Research Centre 18

Source: US Census; Bank Negara Malaysia; Department of Statistics, Malaysia

Where does Malaysia stand? US is Malaysia’s third largest trading partner Major export and import products 16 countries having trade imbalances with the US

Major exports Major imports

• Electrical and

Electronics

• Machinery
• Medical instruments
• Rubber gloves
• Furniture
• Electrical and

electronics

• Machinery
• Medical instruments
• Aircraft and parts
• Plastic products

10.2% 8.0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports Share Imports Share

Trump’s tr trade agenda: A fair ir and and fr free tr trade

18.3 24.6

• 30%
• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 10 20 30 40 50 60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 RM billion Trade Balance (LHS) Exports (yoy) (RHS) Imports (yoy) (RHS) 50 100 150 200 250 300 350 400 China Japan Germany Mexico Ireland Vietnam Italy South Korea Malaysia India Thailand France Switzerland Taiwan Indonesia Canada Trade Deficit in 2016 (US$ billion)

Share (%) Exp Imp Share (%) Exp Imp China 5.2 17.1 Malaysia 0.5 1.4 Japan 2.9 4.9 India 1.0 1.7 Germany 2.2 4.2 Thailand 0.5 1.1 Mexico 10.5 10.8 France 1.4 1.7 Ireland 0.4 1.7 Switzerland 1.0 1.3 Vietnam 0.5 1.6 Taiwan 1.2 1.4 Italy 0.8 1.7 Indonesia 0.3 0.7 South Korea 1.9 2.6 Canada 12.1 10.3

Socio-Economic Research Centre 19

• The services sector is estimated to grow at a moderate pace (4.9% in 2017 vs. 5.6% in

2016), driven by the wholesale and retail trade, food and beverages and accommodation, information and communication as well as transportation

• Set a target of 31.8 million tourist arrivals this year (26.8 million in 2016) with targeted

foreign exchange earnings of RM118 billion

• Major events are expected to boost tourists arrival and spending: Visiting ASEAN@50th

anniversary; play host for the 29th South-east Asia (SEA) Games (19-31 August) and the 9th Para ASEAN Games

Source: Bank Negara Malaysia; Tourism Malaysia; SERC

Output growth of services sector

7.0 6.5 5.9 6.6 5.1 5.6 4.9 4.9 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Services Sector Growth (%)

Performance of services subsectors

0% 2% 4% 6% 8% 10% 12% 2011Q1 Q2 Q3 Q4 2012Q1 Q2 Q3 Q4 2013Q1 Q2 Q3 Q4 2014Q1 Q2 Q3 Q4 2015Q1 Q2 Q3 Q4 2016Q1 Q2 Q3 Q4 Retail Trade (yoy) Wholesale Trade (yoy) Information & Communication (yoy) Transport & Storage (yoy)

Ser Service vices: Do Domina minant driv river of

• f GDP

GDP growth wth

26.8 24.8 2.1 (7.9% of total) RM69.1 bn (6.0% of GDP) 50 55 60 65 70 75 5 10 15 20 25 30 2011 2012 2013 2014 2015 2016 RM billion million person Total Tourist Arrivals (LHS) Asia Tourist Arrivals (LHS) China Tourist Arrivals (LHS) Total Tourist Receipts (RHS)

China tourists increased by 11.2% p.a. since 2011

Socio-Economic Research Centre 20

Man Manufactu turing ring: Sti Still ll growing wing albe lbeit it mo moderate tely

• The manufacturing sector will sustain at 4.3% growth in 2017 (4.4% in 2016), underpinned

by the export-oriented industries (electronics and chemical-related products)

• Growth in the domestic-oriented industries -- production of food and construction-related

products

• Challenging global and domestic economic environment, high cost of doing business,

lingering issues about foreign workers and the weak ringgit could dampen the sector’s growth via costlier imported inputs

Output growth of manufacturing sector Performance of key industries

Source: Bank Negara Malaysia; SERC

5.4 4.4 3.4 6.2 4.9 4.4 4.3 4.2 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Manufacturing Sector Growth (%)

• 40%
• 20%

0% 20% 40% 60% 80% 2011 Jan Apr Jul Oct 2012 Jan Apr Jul Oct 2013 Jan Apr Jul Oct 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Electronic and Electrical Cluster (yoy) Chemicals and Chemical Products (yoy) Construction-related Cluster (yoy) Transport Equipment (yoy)

Socio-Economic Research Centre 21

Output growth of construction sector Indicators of construction sector

Source: Bank Negara Malaysia; SERC

• Growth in the construction sector is projected to expand at a faster pace in 2017 (8.0% vs.

7.4% in 2016), driven mainly by new and existing civil engineering projects in the utilities, transportation and petrochemical segments

• Public spending on transportation projects (MRT, LRT, rail, HSR), highways (Pan Borneo

Highway), ports and the public-driven affordable housing development

• An estimated RM212 billion value of construction jobs covering on-going and new ones over

the next five years. Positive spillovers and multiplier effects on more than 140 sub- sectors

4.6 18.1 10.6 11.7 8.2 7.4 8.0 8.5 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Construction Sector Growth (%)

• 100%
• 50%

0% 50% 100% 150% 2011 Jan Apr Jul Oct 2012 Jan Apr Jul Oct 2013 Jan Apr Jul Oct 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Outstanding Loans to Construction Sector (yoy) Loan Approved for Construction Sector (yoy)

Co Constr struction tion: Pr : Promising mising outloo tlook

Socio-Economic Research Centre 22

Output growth of mining sector Crude oil and natural gas output

Source: Bank Negara Malaysia; Department of Statistics, Malaysia; SERC

• The mining sector growth is estimated to pace slower at 2.3% (2.7% in 2016), supported by

acceleration of natural gas production from the LNG Train 9 and PETRONAS’ FLNG Satu facilities as well as production from the new Malikai oil field

• PETRONAS’s voluntary 20,000 barrels per day crude oil supply cut to dampen the sector’s

performance in 1H2017

• SERC estimates crude oil price of US$55-60 per barrel in 2017 vs. BNM’s US$50-55 per

barrel in 2017 (US$43.67 in 2016); Liquefied natural gas (LNG)’s price is assumed at RM1,350 per tonne (RM1,267 in 2016)

• 4.9

1.6 1.2 3.5 4.7 2.7 2.7 2.3 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Mining Sector Growth (%)

• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 2011 Jan Apr Jul Oct 2012 Jan Apr Jul Oct 2013 Jan Apr Jul Oct 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Extraction of Crude Petroleum Oils & Condensates (yoy) Production of Crude Gaseous Hydrocarbon (Natural Gas) (yoy)

Mining Mining: Sust Sustaine ined recovery

Socio-Economic Research Centre 23

Output growth of agriculture sector Subsectors of agriculture

Source: Bank Negara Malaysia; Department of Statistics, Malaysia; SERC

• The agriculture sector is expected to rebound to 1.5% in 2017 from a decline of 4.7% in

2016, mainly attributable to the recovery of crude palm oil yields from the adverse impact of El Niño

• SERC’s assumption of palm oil price is RM2,700 per tonne for 2017, which is the same level

as BNM’s (RM2,647 in 2016)

6.8 1.0 2.0 2.1 1.2

• 5.1

4.0 1.5 2011 2012 2013 2014 2015 2016 2017f BNM 2017f SERC Agriculture Sector Growth (%)

• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25% 2011Q1 Q2 Q3 Q4 2012Q1 Q2 Q3 Q4 2013Q1 Q2 Q3 Q4 2014Q1 Q2 Q3 Q4 2015Q1 Q2 Q3 Q4 2016Q1 Q2 Q3 Q4 Oil Palm (yoy) Livestock (yoy) Other Agriculture (yoy) Marine Fishing (yoy)

Ag Agricu ricultur lture: : From co m contr traction tion to to e expansion sion

Socio-Economic Research Centre 24

Fuel price and exchange rate changes on inflation Food, transportation and services prices higher

Source: Bank Negara Malaysia; Department of Statistics, Malaysia; SERC

• High fuel prices-inflicted cost price pressures along with other indirect costs such as the

spillover effect of the weakening ringgit would fuel higher consumer price inflation this year

• We estimate inflation to increase by 3.0-4.0% in 2017, with an average increase of 4.0-

4.2% in 1H before moderating to 3.0-3.5% in 2H

• Inflation outlook will be subjected three risks: 1) Higher than expected oil prices; 2)

prolonged exchange rate depreciation may change businesses price-setting behavior; and 3) imported inflation from Malaysia’s trading partners

• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 2011 Jan Apr Jul Oct 2012 Jan Apr Jul Oct 2013 Jan Apr Jul Oct 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan Food & Non-Alcoholic Beverages (yoy) Housing, Water, Electricity, Gas & Other Fuels (yoy) Transport (yoy) Services (yoy) 2017f: 3.0-4.0% End-Mar 17: RON95 = RM2.13 End-Mar 17: RM/US$: 4.4230

• 20%
• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Inflation Rate RON 95 Petrol Price (end-period, % change) RM/USD (end-period, % change)

In Infla flation tion come mes r s roaring ring ba back

Socio-Economic Research Centre 25

BNM will face a tough yet decisive balancing act if the Fed takes more aggressive run of rate increases ahead Policy environment Growth, inflation and financial imbalances

• Economic growth not too strong not too soft
• Domestic demand faces headwinds (high cost of living and weak sentiment)
• Cost-induced inflation outweighs demand pressure
• Household debt to GDP eased to 88.4% at end-2016 (89.1% at end-2015)
• Continue to monitor the risk of financial imbalances
• Lingering uncertainties in global economic and financial environment
• Higher US interest rates
• Volatile capital flows and exchange rate

OPR GDP Inflation 3.50% 2007 6.5% 2.0% 3.25%  2008 4.7%  5.4%  2.00%  2009

• 1.7% 

0.6%  2.75%  2010 7.4%  1.6%  3.00%  2016 4.2%  2.1% = 3.00% = 2017f 4.3%  3.0-4.0%  3.25-3.50%  2018f 4.6%  3.0-3.5% 

Ca Can BNM BNM afford to to inc increase se inte interest st rate tes? s?

Socio-Economic Research Centre

Annually Net Portfolio Investment

• 100
• 80
• 60
• 40
• 20

20 40 60 80 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2008 2009 2010 2011 2012 2013 2014 2015 2016 RM billion Quarterly Net Portfolio Investment

26

Ca Capital ital outflo tflows ws se seen su subsidin siding?

Source: Bank Negara Malaysia; Bursa Malaysia

• 6
• 4
• 2

2 4 6 8 2016 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2017 Jan Feb Mar RM billion

Renewed foreign interest in equities Foreign share of equities and bonds Foreign reserves seen stabilizing Capital outflows accelerated in 4Q16 on Trump’s effect & negative sentiments on BNM’s NDF

29.7 22.3 20 22 24 26 28 30 32 34 36 38 2011 Jan Apr Jul Oct 2012 Jan Apr Jul Oct 2013 Jan Apr Jul Oct 2014 Jan Apr Jul Oct 2015 Jan Apr Jul Oct 2016 Jan Apr Jul Oct 2017 Jan % Share of Bonds % Share of Equities 15 Mar 94.9 20 40 60 80 100 120 140 160

• 15
• 10
• 5

5 10 15 20 25 2008 Jan Jul 2009 Jan Jul 2010 Jan Jul 2011 Jan Jul 2012 Jan Jul 2013 Jan Jul 2014 Jan Jul 2015 Jan Jul 2016 Jan Jul 2017 Jan RM billion RM billion Changes in Foreign Reserves (LHS) Foreign Reserves (RHS)

Socio-Economic Research Centre 27

The ringgit recorded mixed performances in 1Q2017 The ringgit followed two distinct phases in 2016, with most of the depreciation occurring after the US election

• 4.3%
• 0.6%

15.5%

• 6.9%
• 2.0%
• 4.8%

1.2%

• 6.6%
• 2.1%

2.4% 1.4%

• 0.2%

0.1%

• 3.1%
• 2.0%
• 2.6%

2.7% 0.3%

• 5.7%

0.6% USD EUR GBP JPY SGD THB PHP IDR KRW CNY 31 Mar 2017 2016

1 Regional currencies: Chinese renminbi, Indonesian rupiah, Korean

won, Philippine peso, Singapore dollar, New Taiwan dollar and Thai

• baht. Each currency carries equal weight.

Source: Bank Negara Malaysia

Ring Ringgit it appears sta stabil ilising ising but but headwind winds rema main in

Socio-Economic Research Centre 28

Source: Bank Negara Malaysia

Bid-ask spread narrowed 5Y CDS spread narrowed FX conversion increased post- measures Daily turnover remained stable Offshore-onshore gap narrowed Ringgit volatility declined

4.6 5.2 Nov-16 Feb-17 Average Daily Turnover of MYR Currency Pair (USD billion) 219 53 Nov-16 Feb-17 Average Volatility of MYR/USD (points) 504 275 Nov-16 Feb-17 Average Daily MYR/USD Offshore- Onshore Gap (points) 65 40 Nov-16 Feb-17 Average MYR/USD Bid-Ask Spread (points)

• 0.5

2.0 Nov-16 Feb-17 Net Foreign Exchange Conversion from Exports (Cumulative) (USD billion) 150.6 117.4 Nov-16 Feb-17 Average Daily 5-year CDS spread (Basis points)

BNM’s me measu sures sh show so some me positiv sitive outc tcome me

Socio-Economic Research Centre 29

Addressing affordable housing High youth unemployment High inflationary environment Persistent narrower current account surplus Overdependence on foreign workers He Here are fiv five key issu issues facing ing th the economy my

Socio-Economic Research Centre 30

Structural policy actions to boost growth & productivity Address as well as contain vulnerabilities to build economic resilience

• Re-orientate operating expenditure to free up limited fiscal space for productive public

investment

• Improve labour market, skills, competition, trade policies
• Sequencing of mixed development projects to contain the oversupply of commercial,
• ffice and retail space
• Increase the supply of affordable housing
• Mitigate increasing cost of doing business, ease regulatory burden
• Create a conducive ecosystem to harness a digital and connected economy
• Leverage on technology and innovation to increase knowledge-based capital

investment and raise productivity

• High value creation manufacturing and services

Reduce vu vulne lnerabil ilities ities; buil ild fu futu ture resili silience

Socio-Economic Research Centre 31

1) The global economy continues to stay on positive track, buoyed by expectations that the Trump administration’s reflationary policies 2) But, downside risks to global growth still prevalent. These include the potential disruptions from the Trump administration’s shaping of trade and economic policies, aggressive hikes of US interest rates, disruptive UK’s Brexit negotiations as well as the political uncertainties 3) The Malaysian economy will perform better this year. SERC estimates real GDP growth of 4.3 in 2017 vs. BNM’s 4.3%-4.8% (4.2% in 2016), supported by continued expansion of domestic demand as well as improved export growth. 4) What risks lie ahead? The growth estimate is premised on the strength of consumer spending, which may face hurdles from higher cost of living, cost-driven inflation pressures and weak sentiments. Exports too could falter if there is trade flow disruption from the trade protectionism mindset as well as financial markets volatility 5) Inflationary pressures are developing in recent months, reflecting the combined impact

• f fuel prices adjustment, the spillover effect of the ringgit’s depreciation on imported

goods and services and other cost-related pressures. SERC’s headline inflation estimate

• f 3.0-4.0% in 2017, is in line with BNM’s estimation

Co Conclusio lusion

Socio-Economic Research Centre 32

6) Bank Negara Malaysia is expected to weigh on supporting growth amid facing the threat of cost-driven inflation pressure. BNM’s benchmark policy rate is expected to hold steady at 3.00%. If the cost-induced inflation spills over to a broadening of consumer inflation caused by higher wages and strong demand, BNM may force to act to damp inflation expectations 7) Rebuilding policy space, addressing vulnerabilities, and enhancing international competitiveness by promoting investment, services, high-end manufacturing and FDI would also boost economic resilience and improve growth prospects 8) Reaping digital dividends requires the right policy mix and investments such as hardware investment, soft skills and the ecosystem to harness digitalization and reap productivity increase. The government and businesses must be prepared to cope as well as mitigate the disruptive effects yet value creation of new technologies, including put in place a well-designed framework to facilitate the reallocation of workers towards higher productivity jobs

Co Conclusio lusion

社会经济研究中心

SOCIO SOCIO-ECONOMIC ECONOMIC RES RESEAR EARCH CH CENT CENTRE RE

谢 谢

THANK YOU

SERC Sdn. Bhd.

Address : 6th Floor, Wisma Chinese Chamber, 258, Jalan Ampang, 50450 Kuala Lumpur, Malaysia. Tel : 603 - 4260 3116 / 3119 Fax : 603 - 4260 3118 Email : serc@acccimserc.com Website : http://www.acccimserc.com