Economic outlook for 2H2015

Transcription

1 Mohd Afzanizam Abdul Rashid Chief Economist Economic outlook for 2H2015 Economic prospect in 2H 2015 The extent of the economic uncertainty has become increasingly elevated. Market participants continue to second guess the timing for the first rate hike in US as the economy is clearly gaining momentum in the 2Q This has led to the rise in the 10-year US Treasury yield to as high as 2.48% on June 10 from 1.64% in early February this year (see chart 1). Despite that, the IMF and the World Bank have been calling the Fed to maintain the prevailing policy rate of 0.00% % until 2016 to allow wages to grow higher. The latest employment report in June also suggests that the Fed would incline to keep policy rate unchanged in the near term. The nonfarm payroll (NFP) - a gauge for monthly job creation rose 223,000 in June (May: 254,000). However, the result was lower against 233,000 estimated by the median forecasters. More importantly, the labour force participation rate (LFPR) continues to slide to 62.6% in June (see chart 2). This indicates that 37.4% of US labour force or 93,626 people is out of the labour markets. As such, the state of US labour is still fragile even the unemployment rate has trended down to 5.3% from as high as 10.0% as of October Therefore, rate hike is a closed call. Chart 1: 10-year US Treasury yield Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Chart 2: US labour force participation rate % 62.0 Jun-80 Apr-86 Feb-92 Dec-97 Oct-03 Aug-09 Jun-15 In the same vein, situation in Greece remain unresolved and the government has effectively missed the 1.5 billion euros owed to the IMF on June 30. In addition, the 61% of No votes during July 5 referendum indicates that the risks of Greece exiting from the European Union (EU) is obviously rising. At this juncture, the uncertainty remains but the appointment of new finance ministers, Euclid Tsakalotos, would instill hope that creditors would make some concession in order to unlock the financial aid and subsequently avoid further default by the Greek government. Despite that, the yield spread between the 10-year Greek bonds and German bund shot up to 17.3% as of June 6, higher compared to 9.2% at the end of last year, signaling default risks are very much prevalent (see chart 3). Page 1

2 Chart 3: Yield spread between 10-yr Greek bond vs. 10-yr German bund In China, while the economy is slowing, rising impairment ratio for the banking assets amidst sharp fall in the property prices suggests that the country could be heading for a hard landing. Nonperforming loan ratio increased to 1.39% as of 2015 (see chart 5). Nonetheless, the authority was very responsive when the central bank cut the reserve requirement ratio (RRR) by 150 basis points between January and May this year (see chart 4). Since then, the economy have stabilised with industrial production (IP) rose 6.1% y-o-y in May after slowing to 5.6% in March (December: 7.9%). Chart 4: Reserve Requirement Ratio Chart 5: Nonperforming loan ratio Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun Q Q Q Q Q Q On the domestic front, market confidence was severely affected by heightening concern on issues surrounding the governance of one of the government investment arm. The depreciation of Malaysian ringgit was apparent as a result, surpassing the psychological level of RM3.80 during July (see chart 6). In addition, the possible rating cut announcement by Fitch Ratings also gravitate the sentiment. This has led the FBMKLCI losing points in a single day on June 29. Nonetheless, Malaysian equity market rebounded forcefully on the following day as the rating agency decided to uplift its outlook from negative to stable while keeping the A minus rating unchanged. Page 2

3 Chart 6: Malaysian ringgit against US dollar since Jan-90 Apr-94 Jul-98 Oct-02 Jan-07 Apr-11 Jul-15 Amidst confluence of factors, the underlying economy is still fairly resilient. The international reserve asset, which currently stands at USD105.3 billion as of June 15, is still sufficient to finance 8.1 months of retained imports. Such level is deemed to be higher than the minimum threshold of 3 months, suggesting that the BNM has the financial muscle to provide stability in the currency market (see chart 7). Apart from that, the Overnight Policy Rate (OPR) has been normalised by 125 basis points between 2010 and This indicates that the central bank has the flexibility to reduce the policy rate should growth becomes markedly slower than initially anticipated. Additionally, the banking system is well capitalised with excess capital of the minimum 8% capital ratio is estimated at around RM105 billion as of May this year. Given that, Malaysian banks are resilient to face economic challenges with loan loss coverage ratio is currently at 100.6% in May. Chart 7: Reserve-to-retained import ratio (months) Buffers Minimum threshold = 3 months of retained imports - Jan-97 Nov-98 Sep-00 Jul-02 May-04 Mar-06 Jan-08 Nov-09 Sep-11 Jul-13 May-15 Page 3

4 Going forward, the global economy is anticipated to perform favourably in the second half of the year. This is premised on the monetary easing engaged by the key economies such as the Euro zone, Japan, China, India as well as the ASEAN member countries. This would likely translate into higher export growth for Malaysia as commodity prices such crude oil and crude palm oil are anticipated to rise albeit gradually following improvement in global demand. Additionally, the announcement of 11 th Malaysia Plan (11MP) in May is expected to have positive ripple effect to the economy. Higher allocation for development expenditure from RM230 billion to RM260 billion for the next five years ( ) is envisaged to benefit key sectors such as construction, manufacturing of building materials as well as professional services. We maintain our 2015 GDP growth forecast at 5.3% in view of better growth prospect in the 2H2015 following monetary easing enacted by the major central banks. However, we made significant change to our CPI forecast from 4.8% to 3.0% given that the inflation rate for the first five months stand at 1.2%. Meanwhile, we expect BNM to keep OPR unchanged at 3.25% in order to promote savings among Malaysian amidst higher levels of indebtedness. Despite that, we reckon that the BNM has the flexibility to reduce the policy rate in the event of weaker growth becomes more protracted. As for currency, the MYR/USD is expected to remain weak between RM3.55 and RM3.85 per US dollar in light of concern on the US interest rate outlook as well as governance issues surrounding the 1MDB debt. Table 1: Macro forecast Macro variable Old forecast (Dec-14) New forecast (Jul-15) Bias GDP 5.3% 5.3% Maintain/Down CPI 4.8% 3.0% Up OPR 3.25% % 3.25% Maintain/Down MYR/USD RM3.33 RM3.56 RM3.55 RM3.85 Down Source: Strategic Management, Bank Islam Page 4

5 Sectoral view Positive Construction Catalyst would come from the implementation of 11MP projects. The government indicated that the development expenditure allocation has been raised from RM230 billion (10MP) to RM260 billion under the 11MP. Infrastructure related projects such as rail-lines, roads and highways will the key driver for the sector. In addition, residential construction should continue albeit at slower pace in view of moderation in new property launches. Nonetheless, the pace of projects implementation will be carefully planned and likely it will be on a staggered basis. This is to ensure high import content projects such as rail-lines will not risks the Malaysian economy to experience current account deficits. Table 2: 11 th Malaysian Plan projects Rail-lines 1. KVMRT Line 2 RM28.0b 2. LRT 3 RM9.0b 3. Gemas-JB Double Track RM KL-Singapore High Speed Rail RM40.0b Roads and Highways 1. 1,663-km Pan-Borneo Highway RM27.0b km West Coast Expressway RM5.0b 3. Kota Bharu-Kuala Krai Highway N.A. 4. Central Spine Road N.A. 5. Lebuh Raya Pantai Timur N.A. 6. 3,000 kilometres of paved roads N.A. Source: MIDF Research Healthcare Aging population, rising number of healthcare travelers and better households income are the key catalyst for the sector. In addition, the weakening of ringgit would make the healthcare services becomes more competitive as medical practices in Malaysia are at par with the some of the best in the world, incorporating both sophistication as well as international expertise. The latest quarterly result also showed that earnings of some of the key players remain fairly resilient. For instance, KPJ healthcare recorded 12% y-o-y growth in profit after tax and minority interest (PATAMI) for the FY15 to register RM33.9 million. Similalrly, IHH healthcare net profit rose 32% to RM227.8 million for the FY15. Page 5

6 Chart 8: Number of foreign patients seek treatment in Malaysia 840, , , , , , , , , , , , , , ,000 Y10 Y11 Y12 Y13 Y14 Source: Economic Report Manufacturing electrical & electronics (E&E) Exports of E&E related products are likely to remain healthy this year as overseas demand is expected to be resilient. This is premised on the book-to-bill (B-T-B) ratio which continues to hover above parity level (1.04 times as of April) for four consecutive months. Meanwhile, the weakening of ringgit should translate into competitive pricing, resulting better demand from abroad. The latest forecast by The World Semiconductor Trade Statistics (WSTS) indicates that global semiconductor sales growth would be sustained at 3.4% in 2015 and 2016 with sales value of USD347 million and USD359 million for 2015 and 2016 respectively. Table 3: WSTS Forecast Summary Amount in USD million Y-o-Y growth % Americas 69,324 71,884 73,332 74, Europe 37,459 36,113 36,998 37, Japan 34,830 31,508 32,148 32, Asia Pacific 194, , , , Total World 335, , , , Source: WSTS Spring Forecast 2015 Neutral Automotive Rising costs of living coupled with uncertainty on the economic prospects have resulted households to be more cautious in their spending plans. This has direct implication to the sectors performance when the total industry volume (TIV) in the first five months fell by 3.6% to 264,747 units. Page 6

7 Nonetheless, upon further scrutiny, sales of non-malaysian brands such as Honda, Mazda and Nissan have recorded strong sales growth of 27.3%, 19.5% and 9.8% respectively. Similarly, highend cars such as Porsche, Mercedez Benz and Mini also posted commendable sales growth of 179.0%, 44.3% and 12.6% respectively. This suggests that middle income households as well as affluent customers have a better world view which translated more spending into big ticket items. Chart 9: Market share of national car vs. non-national car 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% 57.4% 42.6% 56.4% 43.6% 58.6% 41.4% 57.1% 56.4% 42.9% 43.6% National Non-national 52.6% 53.3% 51.1% 50.2% 48.9% 47.4% 46.7% 49.8% 30.0% Y07 Y08 Y09 Y10 Y11 Y12 Y13 Y14 5M2015 Source: CEIC Banking System loan growth is anticipated to moderate this year to around 7% to 8% from 9.3% in Higher level of household indebtedness which hovers at 87% of GDP last year coupled with weak consumer sentiment would result in lower demand for consumer related credit. In addition, tightened lending standard, lingering uncertainty on the economic prospects as well as increasing regulatory cost suggests that the industry players are likely to be more cautious. Concerns over banking system exposure to 1MDB were highlighted by the press. Nonetheless, the banking system is in good position to withstand such challenges given that excess capital of more than 8% stands at RM104 billion. There were incidence of rising impairment for banking assets but the level of provisioning of 101.8% as of April imply that impairment is well provided by the banks. Page 7

8 Table 4: Banking statistics Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Total loans growth 9.3% 8.6% 8.8% 9.2% 8.8% 8.9% Loans by sector Primary Agriculture -0.5% -3.8% -4.5% 1.3% 0.8% 7.3% Mining & Quarrying 19.6% 37.1% 27.9% 37.8% 43.3% 48.1% Manufacturing 4.4% 4.6% 3.8% 3.3% 1.7% 2.0% Electricity, Gas & Water Supply 33.2% -7.8% -20.5% -23.1% -26.1% -22.7% Wholesale, Retail Trade, Hotels & Restaurant 7.5% 7.4% 8.6% 9.3% 9.3% 8.0% Construction 16.5% 12.3% 13.2% 12.6% 13.2% 13.8% Real Estate 22.0% 21.2% 21.1% 20.9% 19.2% 18.2% Transport, Storage & Communication 14.3% 12.4% 16.1% 14.4% 11.9% 13.7% Finance, Insurance & Business Activities 6.7% 6.0% 10.1% 8.7% 11.6% 14.6% Education, Health & Others -11.2% -4.0% -8.2% -0.1% -0.4% -2.4% Household Sector 9.9% 9.7% 9.7% 9.8% 9.4% 9.0% Other Sector nec 2.8% -5.3% -3.2% 2.9% -6.6% -5.7% Loans by purpose Purchase of Securities 11.5% 8.2% 7.0% 7.2% 5.3% 4.5% Purchase of Transport Vehicles 1.5% 1.6% 1.9% 2.3% 2.1% 1.9% Purchase of Transport Vehicles: ow Passenger Cars 2.3% 2.3% 2.7% 3.0% 2.6% 2.3% Purchase of Residential Property 13.3% 12.9% 13.0% 13.1% 13.0% 12.8% Purchase of Non Residential Property 14.9% 15.3% 14.6% 16.3% 15.9% 15.2% Purchase of Fixed Assets excl Land & Bldg 8.6% 9.7% 7.8% 8.1% 6.9% 1.8% Personal Use 3.9% 3.9% 4.0% 3.0% 4.0% 5.1% Credit Card 1.2% 1.4% 3.6% 5.0% 2.1% 1.5% Purchase of Consumer Durables 179.8% 167.9% 154.7% 142.8% 133.4% -59.1% Construction 17.6% 16.4% 17.5% 12.6% 16.0% 15.0% Working Capital 9.3% 8.2% 10.4% 10.8% 9.8% 11.1% Other Purpose -3.2% -5.9% -12.5% -9.6% -10.8% -8.8% Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Total Deposits growth 7.6% 7.9% 8.3% 9.0% 8.3% 8.0% -CASA 4.0% 4.0% 4.6% 7.2% 5.4% 5.5% -Fixed Deposits -2.9% -2.8% -2.2% -6.0% -5.9% -4.9% -Repurchase Agreements (RA) -6.5% -30.6% -42.6% 141.8% 185.4% 65.5% -Negotiable Instruments of Deposit (NID) 27.6% 33.6% 34.4% 33.2% 39.2% 19.5% -Foreign Currency Deposits (FCD) 23.4% 25.4% 22.8% 32.1% 34.8% 26.6% -Other Deposits Accepted 28.1% 27.9% 27.6% 33.1% 30.6% 29.3% Ratios Assets quality Gross impaired loan ratios (%) Impaired loans ratio (%) Impairment provisiont to total impairment (%) Capital CET1 ratio (%) Tier 1 ratio (%) Total capital ratio (%) Excess capital (RM bn) Liquidity Loan-to-deposit ratio (%) Financing-to-deposit ratio (%) Margins Average lending rate (%) Month FD rate Spread Base Lending Rate (Maybank) Base Rate na Source: CEIC Page 8

9 Plantation Crude Palm Oil (CPO) prices were remain in range trade of RM2,100 to RM2,300 per MT between January and June this year. This was lower compared to last year s average price of RM2,413.6 per MT. Inventory buildup was quite apparent with the latest stock stands at 2.25 million tones in May. Weaker export especially in the first four months was the main reasons of the stocks buildup as production remain on the up cycle. Furthermore, the premium between Soyoil and CPO remained narrow, resulting in a subsitutional effect to seeps in. Expect narrow range CPO prices of between RM2,200 and RM2,300 for the next six months. Table 5: Crude palm oil (CPO) statistics 000 metric tonne Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Opening stocks 2,053 2,091 2,166 2,281 2,016 1,770 1,743 1,866 2,194 Production 1,897 1,893 1,751 1,365 1,161 1,122 1,495 1,693 1,811 Y-o-Y -0.8% -4.0% -5.9% -18.2% -23.1% -12.1% -0.1% 8.8% 9.3% M-o-M -6.6% -0.2% -7.5% -22.0% -15.0% -3.4% 33.3% 13.3% 6.9% Exports 1,628 1,611 1,513 1,520 1, ,182 1,175 1,614 Y-o-Y 1.4% -3.2% -1.0% 0.8% -12.9% -28.0% -5.1% -7.4% 14.7% M-o-M 13.3% -1.0% -6.1% 0.4% -21.6% -18.4% 21.5% -0.6% 37.3% Imports Y-o-Y 97.6% 268.7% 565.9% 267.7% 469.7% 669.0% 174.6% 39.8% 99.4% M-o-M 119.0% 115.6% 19.2% -8.7% -0.5% -29.4% -34.5% 44.8% 67.9% Consumption Y-o-Y 28.2% 7.8% 3.4% 13.1% 46.2% 13.4% -1.5% -0.8% 9.9% M-o-M 10.9% 7.0% -23.1% -9.8% 52.2% -21.6% -3.0% 7.9% -0.9% Closing stocks 2,091 2,166 2,281 2,016 1,770 1,743 1,866 2,194 2,245 Y-o-Y 17.2% 17.4% 15.3% 1.4% -8.5% 5.2% 10.5% 24.2% 21.9% M-o-M 1.8% 3.6% 5.3% -11.6% -12.2% -1.5% 7.0% 17.6% 2.3% Stock-to-usage Sources: CEIC & MPOB Chart 10: Crude palm oil (CPO) prices RM per MT 3, , , , , , ,900.0 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Page 9

10 Oil & Gas We have changed our sector call from positive to neutral as the effect of lower oil prices have become protracted. The most affected business units would be the upstream players as contract with the oil majors have been revised downward, reflecting lack of bargaining power of the service providers. Nonetheless, the mid and downstream should remain stable as crude oil production continue at a healthy pace as the new oil fields have started to be operational in Crude oil prices are expected to increase gradually as supply glut was contributed by both the OPEC as well as non-opec members. The recent OPEC meeting in Vienna on June 5 indicates that the cartel is maintaining its production quota of 30 million barrels per day in a bid to ensure their market share will not dwindle. Chart 11: OPEC crude oil production ( 000 barrels per day) 32,500 32, mbpd quota ,500 31,000 30,500 30,000 29,500 Chart 12: Crude oil prices (US dollar per barrel) WTI Brent 40 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Page 10

11 Property The sector is softening with the new launches continue to dwindle. Some of the property companies have delayed their product launches due to uncertainty over demand. Key players such as Mah Sing and Eco World have indicated that their sales target for FY15 appears to be difficult to achieve. Mah Sing, for instance, has a sales target of RM3.4 billion for FY15 but managed to record RM761 million between January and April. This represents 22.3% of their sales target, suggesting that they have been performing below target. Similarly, Eco World sales for 7MFY15 are about RM1.2 billion versus RM3.0 billion target which means they have only fulfilled 40% of their sales target in the past seven months during the FY15. Based on the House Price Index (HPI), the pace of price appreciation has slowed to 4.1% y-o-y in the 2015 versus 8.0% in the preceding quarter. In the same vein, total property transaction for the 2015 appears flattish with 0.9% growth over the year. Chart 13: Property transaction - residential 75,000 73,000 71,000 69,000 67,000 65,000 63,000 61,000 59,626 59,000 57,000 55, Chart 14: House price index (y-o-y%) 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 12.0% 11.9% 12.2% 12.2% 11.2% 11.3% 10.7% 9.6%9.6% 8.4% 7.9%8.0% 4.1% 3.0% 12 4Q Q Power The power sector looks fairly resilient given the potential cost reduction (lower coal prices). In addition, government s commitment to implement Imbalance Cost Pass Through (ICPT) suggests that profitability of the players will be intact. This was reflected in the recent announcement by the government on Jun 25 that the ICPT rebate of 2.25 kwh will be maintained. Despite that, our concern is on the economic growth and its association with the electricity sales which tend to correlate in the same direction. As it is, economic growth is projected to moderate at 5.3% in 2015 from 6.0% growth in the preceding year. Page 11

12 Chart 15: Electricity consumption vs. GDP growth y-o-y% Electricity consumption GDP growth Source: CEIC Telecommunication Demand for telecommunication services are expected to remain steady as Malaysians ownership of ICT devices increase. The latest report on Household Income Survey and Basic Amenities (HISBA) 2014 showed that percentage of ownership to ICT equipment and services for households increased in 2014 compared to The most significant improvement is the ownership of the tablet which rose from 15.3% in 2012 to 34.1% in Similarly, subscriptions of internet at home for households also increased to 44.3% in 2014 from 38.7% in Nonetheless, the industry competition is very stiff. For instance, Singapore mobile players, MyRepublic, were reported to have plans to expand their businesses in Malaysia. The company plans to offer 100Mbps services at between RM60-70 per month. Comparatively, TM s Streamyx 1Mbps bundled with voice is at RM per month while UniFi VIP5 triple-play plan is at RM Chart 16: Penetration rate Cell phone Broad band Source: CEIC Page 12

13 Avoid Trading/Retail Concerns over rising cost of living are likely to be main issues for the sector. Despite recorded a strong retail sales growth of 11.3% y-o-y in the 2015 (4Q2014: 11.0%), it is likely such stellar performance may not be repeated going forward. Consumers are seen to be front-loading their spending ahead of the GST implementation on 1 st April. Therefore, the strong rise in retail sales during the 2015 may just be a blip. Already, measure of Consumer Sentiment Index (CSI) of 72.6 points is at six year low in the 2015, suggesting that households are expected to be more cautious in their spending plan. Steel In the absence of anti-dumping actions by the government, the sector is likely to suffer from oversupply situation and depressed Average Selling Price (ASP). Steel players are seen may not be benefitting from the robust construction activities given that businesses appears to have leeway to source steel related products from abroad. This was reflected in the importation of iron and steel bars which posted 30.1% growth in 2014 from 15.0% in the preceding year. Key players such as Ann Joo and Lion Industries recorded a decline in net profit after tax by 57.5% (FY15) and 571.7% (FY15) respectively. Textile Textile exports rose 8.0% y-o-y to RM2.9 billion in the Such performance came after the sector posted 13.5% of export growth for the full year Weaker ringgit since August last year appears to have supported the industry s overseas shipment. We incline to maintain the sector call as avoid pending further findings on the latest industry development. This is especially important when the implementation of Asian Economic Committee (AEC) by end of 2015 could potentially be a game changer for the sector. Under the AEC, one of the main pillars is greater market access which can be beneficial for the textile players since ASEAN markets forms 24.2% of Malaysia s textile export as of Page 13

14 Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any purpose without Bank Islam s prior written permission Page 14