BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2013(031743)

28 May 2012

Economics

ECONOMICS

Limited Economic Softening in 1Q2012 But No Sharp Rebound in Sight

Relatively stronger-than-expected GDP outturn on surprise buoyancy of domestic demand. Malaysias Gross Domestic Gross Product (GDP) growth of 4.7% YoY in the 1Q2012 beat our initial estimate and market consensus of 4.5% albeit confirming signs of moderation from 5.2% YoY in the 4Q2011. The overshoot compared with the consensus forecast could be largely explained by the higher-than-anticipated surge of 15.5% YoY in construction activities (4Q2011: +7.5% YoY); the sharper-thanusual 16.1% YoY spike in capital spending (4Q2011: +8.4% YoY), spearheaded by both public (+10.3% YoY) and private (+19.8% YoY) investments as part of implementation of projects under the Economic Transformation Plan (ETP) and the th 10 Malaysia Plan (10MP) and the turnaround of the mining sector with its positive growth of 0.3% YoY since the 2Q2010. Still, Malaysias two largest sectors, namely the services and manufacturing sectors remained the major growth catalysts in the 1Q2012 while broad-based positive growth across all sectors was observed for the first time since the 2Q2010. There are 5 key takeaways that can be drawn from the 1Q2012 GDP report card: First, weaker export growth which decelerated to 2.8% YoY (4Q2011: +5.5% YoY) was the major drag on the Malaysian economy in the 1Q2012 as a result of sluggish global demand, reflecting a slump in advanced economies and a slowdown in many emerging countries due to a multitude of external headwinds in particular the protracted Euro zone sovereign debt crisis, Chinas soft landing and patchy US recovery. Consequently, growth of the manufacturing sector moderated to 4.2% YoY (4Q2011: +5.2% YoY), reflecting lacklustre performance of export-oriented industries which are vulnerable to fluctuations in overseas demand. Second, much stronger-than-expected domestic demand in the 1Q2012, which expanded by 9.6% YoY (4Q2011: +10.4% YoY), led by both the public and private sectors, provided an effective buffer to cushion flagging external demand. The most heartening domestic demand data for the 1Q2012 were the 16.1% YoY surge in gross fixed capital formation (GFCF), almost double the pace in the previous quarter and the continued resilience in consumer spending. Such robust domestic demand may have been a major contributing factor to the relatively high import growth of 6.8% YoY in the 1Q2012. Signs of massive frontloading of fiscal spending were rather apparent in the 1Q2012 as both public sector consumption and investment sustained robust expansion rates of 5.9% YoY and 10.3% YoY respectively. The chunk of public consumption growth in the 1Q2012 was driven by spending on emoluments and supplies & services. Trade & industry and public utilities were the major beneficiaries of the Federal Governments development expenditure in the 1Q2012 while non-financial public enterprises (NFPEs) concentrated their capital spending on transportation and mining projects.

The Research Team research@bimbsec.com.my 03-26918887 ext 111

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In the 1Q2012, household spending remained firm, expanding by 7.4% YoY (4Q2011: +7.3% YoY) on the back of commendable wage growth, favourable labour market conditions, stable consumer confidence, solid rural income on steady commodity prices, supportive monetary policy and generous Government initiated cash handouts as part of the income support programme. Implementation of projects under the ETP and 10MP in particular in the oil & gas industry accelerated the private investment growth further to 19.8% YoY in the 1Q2012 from 18.8% YoY in the previous quarter.

Surprisingly, notwithstanding vigorous domestic demand, growth of the services sector trended down somewhat to just 5% YoY in the 1Q2012 (4Q2011: +6.6% YoY), driven by the communication (+9.4% YoY) and wholesale & retail trade sub-sectors (+6.4% YoY). Third, the construction sector was obviously the unexpected star performer in the 1Q2012 with growth doubling to 15.5% YoY from 7.5% YoY in the previous quarter as the residential, civil engineering, non-residential and special trade sub-sectors all expanded strongly. In particular, owing to extremely robust implementation of highend residential projects, the residential sub-sector surged 24.1% YoY in the 1Q2012. Fourth, while the mining sector reversed its 6 consecutive quarters of decline with a very decent 0.3% YoY gain (4Q2011: -3.8% YoY), the agriculture sector slowed sharply in the 1Q2012 to a 2.1% YoY pace (4Q2011: 6.9% YoY). Dips in rubber and fishing output and slower production of oil palm (+3.5% YoY) dragged down the value-add growth for the agriculture sector despite rather strong expansion rates for production of livestock (+11% YoY) and forestry (+5.4% YoY). On the other hand, rebound in crude oil output (+1.3% YoY) proved adequate to offset declines in production of natural gas (-0.2% YoY) and condensates (-4.2% YoY). Fifth, GDP data from the 1Q2005 to 4Q2011 have been revised accordingly to reflect the rebasing or the change in the base year to 2005 from 2000 previously as the economic census for 2005 provides more comprehensive data. Regular rebasing to a new base year that ends with 0 or 5 as per the United Nations Statistical Offices (UNSO) recommendation is vital for any country: to adopt latest international standards, guidelines, best practices and methodologies to accurately reflect changes in economic structure to keep up with the evolution of prices in the economy

Fragile global recovery and weak global economic conditions especially of advanced economies make trade-dependent emerging economies including Malaysia vulnerable to an abundance of growing uncertainties and re-emerging downside risks given renewed concerns over the global economy: the possibility of chaotic sovereign debt default in Europe and growing fears of a Greek exit from the Euro zone as a result of Greeces inability to form a new government following inconclusive legislative elections which risk to further deepen the Euro zone crisis with possible ripple contagion effects through trade and financial channels la Lehman Brothers collapse

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Economics
in 2008 or even the 1998 Asian financial crisis global financial market instability and possibly a prolonged situation of heightened financial volatility, liquidity crunch and global financial meltdown; recessionary impact particularly on advanced economies and export-dependent Asian nations, etc with Europe as the epicentre of potential risks contractionary impact from the high unemployment, on-going deleveraging process and austerity measures affecting both the private and public sectors especially in advanced economies to bolster balance sheets and improve finances a number of European nations and the UK already plunged into recession challenges associated with the apparent slowdown in China uneven and at best, mixed improvement in the US economy

Escalation of the Euro zone sovereign debt crisis is a clear and present danger. The deepening Euro zone crisis is the major threat to the global and Malaysian economic outlook which is weighing on consumer and business confidence worldwide, potentially causing a deferment in real spending. Notwithstanding limited Malaysias exposure to Europe, exporters are likely to be in tough times in the nearto-medium term given recent deterioration in the global economic outlook and limited visibility of global export orders. Looking ahead, we dont rule out the possibility of a pullback in Malaysias economic momentum for the next few quarters starting from the 2Q2012 before gradually gaining strength in 2013. As such, assuming no collapse of the Euro zone, we retain our GDP growth forecasts for 2012 at the lower-end of the 4%-5% range, down from 5.1% in 2011. No pre-emptive rate-cut is warranted despite subdued inflation and modest economic prospects. Averaging at 2.3% YoY in the 1Q2012, the headline Consumer Price Index (CPI) eased further in April 2012 to 1.9% YoY, the slowest pace since September 2010. Given our forecasts of headline inflation rate staying below the 2%-threshold at least until the 4Q2012, inflationary pressures are clearly receding, strengthening the case for maintaining an accommodative monetary policy to buttress domestic demand in response to the cloudy global economic outlook. While we do not foresee pre-emptive monetary loosening in the absence of forecasts of a downturn la 2009 for Malaysia, the scope for rate-cuts is certainly wide open should the global outlook worsen since inflation is not a key risk factor for policymakers this year. In view of pretty resilient domestic demand prospects, apart from other potential sources of inflation such as faster-than-anticipated recovery, introduction of minimum wage, salary increments for civil servants and resumption of an uptrend in global commodity prices especially related to energy, food and building materials due to supply disruptions and other shocks, holding the OPR at around the current levels seems the most appropriate course of action at this juncture to ensure supportive monetary policy without igniting price pressures when the economy ramps up speed. Based on our baseline scenario, we pencil in a resumption of monetary tightening only towards end-1H2013 or early 2H2013.

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Breakdown of GDP Growth: Demand and Supply Sides
GROWTH (%) 1Q2012 GDP (constant prices, 2000=100) 4.7 Demand Side Final Consumption Expenditure 7.1 * Private Consumption 7.4 * Public Consumption 5.9 Gross Fixed Capital Formation (GFCF) 16.1 * Private Investment 19.8 * Public Investment 10.3 Domestic Demand 9.6 Exports 2.8 Imports 6.8 Supply Side Agriculture, Fishing & Forestry 2.1 Mining & Quarrying 0.3 Manufacturing 4.2 Construction 15.5 Services 5.0 4Q2011
5.2 11.1 7.3 22.9 8.4 18.8 1.9 10.4 5.5 7.8 6.9 -3.8 5.2 7.5 6.6

Quarterly Growth Rates of Malaysias GDP and 5 Sectors (% YoY)

20.0

1Q2011
5.1 7.7 6.9 11.1 9.8 24.9 -8.2 8.2 1.9 9.3 -0.2 -3.9 5.7 5.1 7.1

2011
5.1 8.9 6.9 16.8 6.0 14.4 -2.4 8.2 3.7 5.4 5.6 -5.7 4.5 3.5 6.8

2012 BI 2012 BNM

4.2 5.9 5.9 6.1 5.2 4.1 7.3 5.9 3.5 4.4 2.0 3.9 3.5 4.1 5.3 4.0-5.0

15.0

N/A 6.2 0.2 N/A 8.3 16.2 6.6 1.4 1.6

-10.0 -5.0 0.0
1Q2001 3Q2001 1Q2002 3Q2002 1Q2003 3Q2003 1Q2004 3Q2004 1Q2005 3Q2005 1Q2006 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010 1Q2011 3Q2011 1Q2012

10.0

5.0

3.8 0.6 3.9 6.6 5.1

-15.0

-20.0
Overall GDP Agriculture Mining & Quarrying Manufacturing Construction Services

Source: BNM, Statistics Department, BIMB Securities

Source: BNM, Statistics Department, BIMB Securities

GDP Performance of Selected Asian Countries

Actual & Forecast Real Short-Term Interest Rates

8.0

China Japan India South Korea Taiwan Hong Kong Singapore Indonesia Philippines Vietnam Malaysia

1Q2012 8.10% 2.70% N/A 2.80% 0.36% 0.40% 1.60% 6.31% N/A 4.00% 4.70%

4Q2011 8.90% -0.50% 6.10% 3.30% 1.89% 3.00% 3.60% 6.49% 3.70% 5.90% 5.20%

3Q2011 9.10% -0.40% 6.90% 3.60% 3.45% 4.40% 6.00% 6.46% 3.60% 5.80% 5.70%

6.0

4.0

2.0

0.0
Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13

-2.0

-4.0

-6.0
CPI OPR Real OPR

Source: Bloomberg, National Authorities, BIMB Securities

Source: Statistics Department, BIMB Securities

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Economics
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BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

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