Malaysia - BNM Annual Report

Transcription

1 Malaysia - BNM Annual Report Exports and private sector to lead economic growth BNM sets a real GDP growth target of % for 2014 Despite the recovery in export growth since 3Q13, in presenting its assessment on the economic prospects for the country, Bank Negara Malaysia (BNM) is taking a cautiously optimistic stance on the economic outlook for BNM widened the country s real GDP growth target to be between 4.5% and 5.5% for 2014, against the government's earlier projection of between 5.0% to 5.5% announced in September 2013, reflecting BNM s cautious view of the global economy as well as the country s domestic demand. BNM expects underlying real GDP growth of 5.3% in 2014 However, taking the midpoint of the computations, calculated based on the GDP forecast at a constant price, BNM expects underlying real GDP growth of 5.3% for 2014, close to the high end of the % range. Our GDP forecast of % for 2014 sits at the higher end of BNM s forecast range, with the main difference the lower growth forecast in real exports by BNM, which is projected to expand gradually by 2.1% in 2014 (-0.3% in 2013), against Affin s 5% growth (-0.3% in 2013). BNM cautions that there are still significant downside risks However, BNM has cautioned that the global and domestic economies are facing downside risks to growth. These risks include uncertainties associated with the strength of the global recovery as well as Malaysia s fiscal consolidation and subsidy rationalisation affecting the country s domestic demand. Underlying fundamentals of Malaysian economy remain strong In view of the heightened volatility in global financial markets and capital flow reversals, this year s BNM Annual Report also highlights the country s sound macroeconomic fundamentals. BNM is confident that Malaysia has the potential to sustain its underlying trend of steady economic growth, supported by continuing access to financing in an environment of ample liquidity and a resilient financial sector. Strength of domestic demand should remain largely intact in 2014 We concur with BNM that the strength of domestic demand should remain largely intact in 2014, with growth predominantly led by the private sector. On external demand, BNM expects the global economic outlook to improve in 2014, where export growth should rise by 2.1% in 2014 (-0.3% in 2013), the first increase in more than two years, but still lower than our forecast of a 5% rise. Government s budget deficit to improve to 3.5% of GDP in 2014 The Federal Government s budget deficit is projected to improve from 3.9% of GDP in 2013 to 3.5% of GDP for The current account surplus is projected to narrow to RM30.8bn in 2014, a decline of 17% from RM37.3bn in However, the overall balance of payments should remain strong, as the current account surplus should more than offset the net outflows in the financial account. Inflationary pressure to rise, with subsidy rationalisation continuing According to BNM, inflation is expected to average % in 2014, from 2.1% in This is largely in line with our expectation, as we see inflation averaging around 3.0% in A further fall in subsidies should raise domestic fuel prices and some cost-push inflation may put upward pressure on domestic prices. Alan Tan Economist (603) alantan@affininvestmentbank.com.my Stance of monetary policy to remain accommodative There are indications from the recent MPC meetings, especially with the downside risk to economic growth, that BNM will likely maintain its overnight policy rate (OPR) at 3% at the upcoming scheduled MPC meetings in 1H14. However, with some concern about an increase in inflationary expectations, following the decision by the government to raise fuel prices and electricity tariffs where there is some evidence of second-round inflation effects, we believe BNM could raise its OPR by 25 basis points to 3.25% in 2H14. Important disclosures at the end of report Page 1

2 Exports and private sector to lead economic growth in 2014 Despite the recovery in exports growth since 3Q13, in presenting its assessment on the economic prospects for the country, Bank Negara Malaysia (BNM) is taking a cautiously optimistic stance on the economic outlook in BNM widened the country s real GDP growth target to be in the range of between 4.5% to 5.5% for 2014, against the government's earlier projection of between 5.0% to 5.5% announced in September 2013, reflecting BNM s cautious view of the global economy as well as the country s domestic demand. However, taking the computations at mid-point, calculated based on GDP forecast at constant price, BNM expects the country s underlying real GDP growth to grow at 5.3% projected for 2014, nearer to the higher end of its range of between 4.5% to 5.5%. Our GDP forecast of 5.5% for 2014 sits at the higher end of BNM s forecast range, where the main difference lies in the lower growth forecast on real exports by BNM, which is projected to expand gradually by +2.1% in 2014, against Affin s +5% (-0.3% in 2013). Early this year, the International Monetary Fund (IMF) expects improvement in the global economy, with global GDP growth rising by 3.7% in 2014, higher than 3.0% in 2013 (+3.1% in 2012). IMF has also maintained its forecast for the advanced economies for 2014, projecting to grow from 1.3% in 2013 to 2.2%, supported by the recovery in the US economy. 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. However, BNM cautioned that the global and domestic economy is facing downside risks to the growth outlook. These risks include uncertainties associated with the strength of the global recovery as well as Malaysia s fiscal consolidation and subsidy rationalisation affecting the country s domestic demand. Fig 1: Real GDP growth projections Annual Change (%) MOF BNM Affin F 2014F 2014F 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 Source: MOF, BNM and Affin According to BNM, unemployment rates remain elevated relative to pre-crisis levels in many advanced economies while spare capacity continues to be sizeable in several economies, reducing the prospect of higher investment growth. BNM also cautioned that heightened volatility in global portfolio flows, concerns over domestic factors in the emerging economies could exacerbate negative investor sentiments and lead to a disorderly reversal of capital flows. This, in turn, raises the risk of disruptions to credit intermediation and disproportionate corrections in asset prices. In Asia, BNM cited that the financial risks arise from the rapid growth in shadow banking activity in China, a growing source of financing for property and infrastructure investments. If China s economy continues to slow faster than our current expectation, due to financial risks and Renminbi weakness, we expect the Malaysian economy to expand at a slower rate of between 4.5 to 5% in 2014, instead of 5.0 to 5.5%, but still higher than 4.7% in However, we expect China's economy to avoid a hard landing (ie, where GDP growth will still be between 7.0 to 7.5% in 2014, vs +7.7% in 2013). Important disclosures at the end of report Page 2

3 Underlying fundamentals of the Malaysian economy remain strong While no emerging market, including Malaysia, can escape fully financial market volatility and global sentiment towards risk, we believe Malaysia s economic fundamentals continue to remain sound, supported by improving economic outlook, sustainable current account surpluses, healthy foreign exchange reserves as well as manageable inflationary pressure. In view of the heightened volatility in the global financial markets and capital flow reversals, this year s BNM Annual Report also highlights the country s sound macroeconomic fundamentals, where BNM is confident that Malaysia has the potential to sustain its underlying trend of steady economic growth, supported by continuing access to financing in an environment of ample liquidity and a resilient financial sector. BNM stressed that underlying fundamentals of the Malaysian economy remain strong. Growth will be driven by the private sector across a diversified range of economic activities. Of importance, employment remains strong and incomes are rising. The financial system is resilient, with financial intermediation expected to provide continued support to investment and consumption activity. In addition, the strength of Malaysia s external position remains intact, with international reserves at healthy levels and external debt within prudent limits. In concluding its 2013 Article IV consultation with Malaysia recently, the IMF also cited that country s underlying fundamentals remain robust, creating resilience against potential vulnerabilities. The strong external position accords policy flexibility to absorb external shocks. Greater regional cooperation and policy coordination through collaborative surveillance efforts, bilateral swap agreements between regional central banks, and the Chiang Mai Initiative Multilateralisation liquidity support arrangement also provides Malaysia with buffers against potential shocks. Fig 2: Positive current account balances Fig 3: Healthy reserves Source: MOF, BNM Source: MOF, BNM Strength of domestic demand will remain largely intact in 2014 We concur with BNM that the strength of domestic demand will remain largely intact in 2014, where growth will be predominantly led by the private sector. Since the introduction of the economic transformation programs (ETP and GTP) in October 2010, where the focus has been on the 12 National Key Economic Areas (NKEAs), especially on projects relating to Greater Kuala Lumpur and oil, gas & energy sectors, Malaysia s investment and construction activities have increased over the years, contributing steadily to domestic demand and economic growth. Investment targets exceeded expectations for the third straight year in 2013 In nominal terms, Malaysia achieved RM161.1bn in realised private investment in 2013, 8.9% higher than the earlier target of RM148.4bn and also exceeded the annual average target of RM148 billion under the 10th Malaysia Plan, despite challenging uncertainties on the global economic environment over the years, supported by projects in various corridors as well as rising approved investments in the manufacturing and services sectors. BNM expects private sector investment to expand further by RM185.2bn in 2014, only slightly lower than the previous official projection of RM189bn by Pemandu. Important disclosures at the end of report Page 3

4 Fig 4: Investment targets exceeded Source: MOF, Pemandu Fig 5: Investment target for f f at current prices (RMbn) Annual change (%) Total Investment Private Investment Public Investment Source: MOF, BNM BNM expects real private investment to record a healthy growth of 12.6% in 2014, albeit slower than 13.6% in 2013, but higher than the average growth of 8.8%, supported by the ongoing implementation of projects with long gestation periods, such as projects under the ETP) and development of regional economic corridors. We also believe that growth in private investment, which is highly correlated with external and domestic conditions, to be sustained on the back of favourable export development and higher investment capacity building to support domestic demand. Fig 6: 73% of GNI attributed by ETP projects Fig 7: ETP projects contributed to rising employments Source: Pemandu Fig 8: Strong realisation of ETP investments Source: Pemandu Fig 9: Approved ETP investments Source: Pemandu Source: Pemandu Important disclosures at the end of report Page 4

5 Public investment is expected to moderate in 2014 On public investment, in view of the effect of the low base in 2013, BNM expects a higher growth of 2.9% projected for 2014, from 0.7% in 2013, underpinned by public enterprises (PEs) investment and Federal Government development expenditure. Investments by PEs reflect the continued implementation of key infrastructure projects, particularly in the oil and gas, utility and transportation sub-sectors. With the Government s fiscal consolidation efforts, as reflected in significant moderation in expenditure on supplies and services in 2013, BNM expects public consumption to slow from 6.3% in 2013 to 3% projected for 2014, reflecting more moderate expenditure on supplies and services and emoluments. Private consumption slowing down as subsidy rationalisation continues BNM expects real private consumption to expand by +6.9% projected for 2014, albeit slightly slower than +7.6% in 2013, supported by sustained income growth and positive labour market conditions. According to BNM, despite the rationalisation of subsidies and targeted measures to reduce the risks from vulnerabilities in the household sector, the other factors supporting private consumption are the implementation of the minimum wage policy as well as targeted Government transfers to low- and middle-income households (BR1M), which are expected to partially mitigate the impact of higher prices on household spending. We expect private consumption to remain an important source of domestic demand and driver of economic growth going forward. Fig 10: GDP by Expenditure and sector Annual change (%) Contribution to real GDP growth (%-point) f f GDP by Expenditure Components Private sector expenditure Consumption Investment Public sector expenditure Consumption Investment Exports Imports Domestic demand GDP (2005 real prices) GDP by Kind of Economic Activity GDP (2005 real prices) Agriculture Mining and Quarrying Manufacturing Construction Services Plus: Import Duties Will high household debt levels slow private consumption? There are some concerns that the household debt as a percent of GDP is rising (87% as at end-2013), which may have some negative implications on consumer spending (see Fig 11). However, BNM alleviates the concern by noting that the overall household balance sheet in the country has remained sound. In particular, liquid financial assets of households are 1.6 times outstanding debt, sufficient to cover their liabilities in the event of income shocks. In addition, 52% of the household debt is utilised for property purchases, and hence, is backed by physical assets. Similarly, BNM also noted that household assets continue to exceed debt by 3.7 times. This trend is mainly attributable to rising household income, which facilitates asset accumulation through an increase in savings and borrowings. Going forward, we believe private consumption growth is unlikely to be affected by the household indebtedness, due to the country s strong financial system and steady economic growth. Important disclosures at the end of report Page 5

6 Fig 11: Composition of household debt Export growth expected to be higher on favourable external demand On external demand, BNM expects the global economic outlook to improve in 2014, where export growth will expand by 2.1% in 2014 (-0.3% in 2013), the first positive increase in more than two years, but still lower than our forecast of 5%. However, the drag from contribution to the real GDP from net exports is projected to improve to percentage points in 2014, after declining by a sharp percentage points in 2013, attributed to higher exports of electronics and electrical (E&E) products. This was in tandem with higher global semiconductor sales and the global economy. While BNM cautioned that Malaysia is not insulated from the risks emanating from the external environment, recent economic data (such as OECD CLIs and global composite PMIs) are pointing to continued improvement in consumer demand and business activity in the manufacturing and services sectors in the OECD economies. Services sectors continued to lead economic growth On the supply side, barring any unforeseen circumstances in the global economy, 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 6.2% projected for 2014 (5.9% in 2013), supported by production-related activities such as wholesale, transport and storage amid a pick-up in external trade activity. BNM also noted that consumption-related activities including retail trade, and accommodation and restaurants will be supported by household spending, albeit at a more moderate rate. Growth will also be supported by higher tourist arrivals and receipts following the launch of Visit Malaysia Year (VMY) Growth in the construction sector is projected to increase by 10% for 2014, albeit slower than 10.9% in 2013, due to the completion of several large civil engineering projects, but supported by the progress in existing projects in the transport, utility, and oil and gas sectors. According to BNM, although several highway and power plant projects are expected to commence in 2014, these projects are not expected to provide significant support to overall growth in the construction sector this year. Fig 12: List of Selected Key Civil Engineering Projects Sector Projects Transport MRT (Sungai Buloh-Kajang) LRT extension Utilities Janamanjung Pow er Plant Tanjung Bin Pow er Plant Oil & Gas Sabah-Saraw ak Gas Pipeline Sabah Oil and Gas Terminal Location Klang Valley Klang Valley Perak Johor Sabah & Saraw ak Sabah Important disclosures at the end of report Page 6

7 Higher growth expected in the agriculture and mining sectors In the agriculture sector, growth is expected to rise by 3.8% for 2014 (2.1% in 2013), on account of higher production of palm oil as both yields and the number of matured palm trees increase. Growth should also be supported by food commodities, especially livestock and fisheries. Growth in the mining sector is expected to expand by 1.6% in 2014 (0.5% in 2013), on higher production of crude oil and natural gas production from deepwater and marginal fields and enhanced oil recovery. Government s budget deficit to improve to 3.5% of GDP in 2014 The Federal Government s budget deficit is projected to improve from -3.9% of GDP in 2013 to 3.5% of GDP estimated for BNM guided that the improvement is underpinned by sustained revenue expansion and more efficient spending. Moving forward, as part of the Government s Strategic Reform initiatives (SRIs), the Government s aim to reduce its fiscal deficit to 3.0% in 2015, and achieving a balanced budget by 2020 (see Fig 13). However, BNM highlighted that as the Government proceeds with its ongoing plans to contain the fiscal deficit and the level of public sector indebtedness, the challenge is to achieve these fiscal sustainability efforts while remaining supportive of growth. Fig 13: Federal Government Financial Position 2013p 2014B 2013p 2014B RMbn % change Revenue Total expenditure Operating expenditure Gross development expenditure Loan recoveries Overall balance % of GDP Sources of financing: Net domestic borrow ing Net external borrow ing Realisable assets¹ and adjustment A negative (-) sign indicates a build-up in assets p Preliminary B Budget Note: Numbers may not add up due to rounding Healthy balance of payments surplus in current account The economy will continue to record healthy, albeit smaller, current account surpluses, with healthy foreign reserves and high savings. The current account surplus is projected to narrow to RM30.8bn in 2014, a decline of -17% from RM37.3bn in 2013, where as reflected by the savings-investment (S-I), the surplus has been narrowing in recent years due mainly to the stronger expansion in investment activity. Fig 14: Balance of Payments RMbn f Goods Exports (% annual change) Imports (% annual change) Services Balance on goods and services Income Current transfers Balance on current account % of GNI Capital account Financial account Balance on capital and financial accounts Error and omissions of w hich Foreign exchange revaluation loss Overall balance p Preliminary f Forecast Note: Numbers may not necessarily add up due to rounding Important disclosures at the end of report Page 7

8 Going forward, the overall balance of payments remained strong, as the current account surplus more than offset the net outflows in the financial account. The surplus in the goods account together with a smaller deficit in the services side will continue to provide domestic liquidity in Malaysia. Ringgit is likely to trade at around RM /US$ by end 2014 Similar to 2013, the performance of the ringgit will be influenced mainly by twoway portfolio and trade flows, reflecting both international and domestic developments in BNM noted that most emerging market currencies, including the ringgit, will be affected by developments relating to the possible scale-back in the asset purchase programme in the US. Even though Malaysia has been the largest beneficiary of the US Fed s QE programme in the region, benefitting from around US$82bn in capital flow, nearly as much as the US$89bn received by Thailand, Indonesia and the Philippines combined (based on 3Q13 data), the risk of capital flows will be manageable. BNM guided that results of updated and multi-year stress tests by the Bank continue to indicate sufficient earnings and capital buffers of banks and insurers to withstand severe scenarios of adverse portfolio flows and contraction in the domestic economy. With Malaysia's favourable interest rate differentials and relatively steady macroeconomic fundamentals, we believe the policy stance of Bank Negara Malaysia (BNM) is one that favour a slow and gradual appreciation of the Ringgit, which we believe will appreciate and trade at around RM /US$ by end 2014 (RM3.27/US$ currently). Inflationary pressure rising with subsidy rationalisation continuing According to BNM, inflation is expected to average at % in 2014, from 2.1% in This is largely in line with our expectations as we see inflation averaging around 3.0% in Last year, the Government announced the resumption of subsidy rationalisation by raising the country s domestic fuel prices. The price of RON95 grade petrol was raised by 20 sen from RM1.90 per litre to RM2.10 per litre, while the price of diesel from RM1.80 to RM2.00 per litre. Apart from raising the price of RON95 grade petrol, the Government had also abolished the subsidy on sugar, saving the Government a total of RM3.8bn in subsidy. However, as reflected in Budget 2014, the subsidy bill is estimated to drop significantly by 15.6% or RM7.3bn from RM46.7bn in 2013 to RM39.4bn in 2014, signalling that Government may withdraw subsidies for petrol prices further in 1H2014. As such, the price of RON95 grade petrol may be raised by another sen from RM2.10 per litre to RM per litre, while the price of diesel by sen from RM2.00 to RM per litre. However, the price of RON 97, which is determined by the automatic pricing mechanism (APM) and no longer subsidised by the Government, will be based on market rates. A further reduction in subsidies should raise domestic fuel prices and some cost push inflation will put upward pressure on domestic prices. Fig 15: Malaysia s CPI and OPR %yoy 10.0 Inflation rate (LHS) Bank Negara OPR (RHS) % Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Important disclosures at the end of report Page 8

9 BNM guided that the domestic economy is entering a period of higher prices. Inflation in 2014 and 2015 is projected to be above its historical average, and to be between 3-4%. The revisions to a number of administered prices, higher domestic cost factors and the implementation of the Goods and Services Tax (GST) in 2015, are taking place at a time of modest global commodity prices, moderate domestic demand pressures and anchored inflationary expectations. Stance of monetary policy to remain accommodative Bank Negara Malaysia (BNM) has kept its Overnight Policy Rate (OPR) unchanged for the 17th straight meeting at 3.0% since May There are also indications from the recent MPC meetings, especially with downside risk to economic growth, that BNM will likely maintain its Overnight Policy Rate (OPR) unchanged at 3% in the upcoming scheduled MPC meetings in 1H2014. In the Annual Report, BNM noted that the monetary policy in 2014 will aim to support the sustainable growth of the Malaysian economy while mitigating any potential vulnerabilities arising from inflation and the buildup of financial imbalances. While BNM will likely maintain its current accommodative policy stance to support domestic demand in the near term, reflecting the view of inflation risks going forward, and if domestic economic conditions improve further (especially from exports), we believe this may lead to a possible normalization of monetary policy. With some concern on the potential increase in inflationary expectations, following the decision by the Government to hike fuel prices and electricity tariffs, where there is some evidence of second round inflation effects, we believe BNM could raise its OPR by 25 basis points to 3.25 in 2H2014. Important disclosures at the end of report Page 9

10 Appendix I: Malaysia Key Economic and Financial indicators p 2014f Population (million persons) Labour force (million persons) Employment (million persons) Unemployment (as % of labour force) Per Capita Income (RM) 29,683 30,667 31,698 34,175 (USD) 9,700 9,928 10,060 10,337 6 National Product (% change) Real GDP at 2005 prices (RM billion) Agriculture, forestry and fishery Mining and quarrying Manufacturing Construction Services Nominal GNI (RM billion) ,038.8 Real GNI (RM billion) Real aggregate demand Private expenditure Consumption Investment Public expenditure Consumption Investment Gross national savings (as % of GNI) Balance of Paym ents (RM billion) Goods balance Exports (f.o.b) Imports (f.o.b.) Services balance (as % of GNI) Income, net (as % of GNI) Current transfers, net Current account balance (as % of GNI) Bank Negara Malaysia international reserves,net (in months of retained imports) Prices (% change) CPI (2010=100) PPI (2005=100) Real w age per employee in the manufacturing sector 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 p f 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 Effective from 2011, the Consumer Price Index has been revised to the new base year 2010=100, from 2010=100 previously Effective from 2010, the Producer Price Index has been revised to the new base year 2005=100, from 2000=100 previously Based on average USD exchange rate for the period of January-February 2014 Preliminary Forecast Important disclosures at the end of report Page 10

11 Appendix II: Malaysia Key Economic and Financial indicators 2011 Federal Government Finance (RM billion) Revenue Operating Expenditure Net development expenditure 45.3 Overall balance Overall balance (% of GDP) -4.8 Public sector net development expenditure Public sector overall balance (% of GDP) p External Debt Total debt (RM billion) Medium- and long-term debt Short-term debt 1 Debt service ratio 2 (% of exports of goods and services) Total debt (RM billion) Medium- and long-term debt Change in 2011 Change in 2012 Change in 2013p RMbn % RMbn % RMbn % Money and Banking Money Supply M M Banking system deposits Banking system loans Loan-deposit ratio (end of year) 4 Financing-deposit ratio 4,5 80.9% 86.2% % 88.7% % 91.2% 2013p % % % Interest Rates (Average Rates 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) Exchange rates Movement of Ringgit (end-period) Change against SDR Change against USD p Excludes currency and deposits held by non-residents with resident banking institutions Includes prepayment of medium- and long-term debt Includes loans sold to Cagamas Excludes financial institution transaction Refers to the ratio of loans and holdings of PDS by the banking system to deposits of the banking system Refers to data from FAST, Bank Negara M alaysia Ringgit was pegged at RM 3.80=USD1 on 2 September 1998 and shifted to a managed float against a basket of currencies on 21 July 2005 Preliminary Important disclosures at the end of report Page 11

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