社会经济研究中心 SOCIO-ECONOMIC RESEARCH CENTRE. Half Empty or Half Full? -Uneven, Risks, Opportunities-

社会经济研究中心 SOCIO-ECONOMIC RESEARCH CENTRE Half Empty or Half Full? -Uneven, Risks, Opportunities- Lee Heng Guie Executive Director, SERC 26 November 2018

Key Messages GLOBAL GROWTH AT RISK OF GOING OFF TRACK UNEVEN GROWTH PROSPECTS RISING RISKS UNDERMINING THE GLOBAL OUTLOOK NEW MALAYSIA IN TRANSITION Socio-Economic Research Centre 1

Section 1 Global Activity Indicators Softening momentum Socio-Economic Research Centre 2

Global indicators show growth PEAKING and is slowing Composite Leading Index a gauge of economic outlook (Long-term average = 100) 101 100 99 Global PMI for manufacturing and services (50 = no change on prior month) 56 54 52 50 98 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 2016 2017 2018 OECD CLI US CLI EA19 CLI Japan CLI 48 Jan 2016 Apr Jul Oct Jan 2017 Manufacturing Apr Jul Oct Jan 2018 Services Apr Jul Oct 102 Global semiconductor sales (%, 3-month moving average YoY) 101 100 99 98 Jan 2016 Apr Jul Oct Jan 2017 Apr Jul Oct Jan 2018 Apr Jul 50 40 30 20 10 0-10 -20-30 Jan 2016 Apr Jul Oct Jan 2017 Apr Jul Oct Jan 2018 Apr Jul China CLI India CLI Worldwide USA China Source: OECD Socio-Economic Research Centre 3

Global TRADE still on positive trajectory, but World Trade Volume (%, YoY) 8 6 4 there are unintended consequences from tit-for-tat trade war. The repercussions are highly disruptive and damaging on global economic growth via trade and financial channels. 2 0 Trade channel -2 Jan 2016 Jul Jan 2017 Jul Jan 2018 Jul Curtail trade activity; Asian supply chains disruption and dampen global growth Exports Volume (%, YoY) 10 8 6 4 2 0-2 -4 Jan 2016 Jul Jan 2017 Source: CPB, Netherlands Jul Jan 2018 Advance Economies Emerging Economies Jul Financial channel Share prices of affected companies / industries will be rerated on earnings concern In Sep 2018, WTO revised trade growth projections lower to 3.9% (from 4.4%) in 2018 and 3.7% (from 4.0%) in 2019 Sustained trade tensions could slash Asia s economic growth by up to 0.9 percentage point in coming years Socio-Economic Research Centre 4

Crude oil price REVERSES the uptrend, CPO price DOWNTREND continues 140 120 100 80 60 40 20 0 2010 11 12 13 14 15 16 17 18 Brent WTI Crude palm oil prices (RM/metric tonne, monthly average) 4,000 3,500 3,000 2,500 2,000 1,500 2010 11 12 13 14 15 16 17 18 Source: EIA; MPOB Crude oil prices (US$/barrel, monthly average) Crude oil prices: Surpassed US$80/barrel in end-sep but dropped below US$70/barrel recently (US$65/bbl as at 13 Nov). Downside risks: Trade tensions, slower global economic growth, higher OPEC output, stronger than expected Canadian and US production. CPO prices: High palm oil inventory in Malaysia and Indonesia. Stocks are piling up since May. Soybean planting in South America. Higher import tariffs imposed by India. Proposed ban on the utilization of palm oil as biodiesel in Europe starting 2021. Socio-Economic Research Centre 5

Growth, inflation and interest rates RISING together Based on the Fed s guided rate path, the Fed funds rate will rise to 2.25-2.50% by end-2018 and 3.00-3.25% by end-2019 respectively. Source: DBS Socio-Economic Research Centre 6

Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Global equity markets: Dow Jones Industrial Average rallies while emerging markets slide The DJIA is hitting record highs emerging markets falling into bear territory The fear index indicates some uptick 30,000 Dow Jones Industrial Average (Index) 160 MSCI Index (Index, 100=1 Jan 2016) 40 CBOE VIX (Index) 25,000 20,000 140 120 100 MSCI EM Index MSCI World Index 35 30 25 20 15 10 15,000 80 5 Source: WSJ; MSCI; CBOE Socio-Economic Research Centre 7

Uneven EXPANSION in advanced and regional economies Real GDP growth (%, YoY) 10 Advanced economies Regional economies 1Q18 2Q18 3Q18 9 8 8.2 7.7 7.5 7 6 5 4 3 2 1 2.9 3.0 2.6 2.12.2 1.4 1.1 0.3 6.9 6.7 6.8 6.7 6.5 6.6 6.26.1 5.3 5.1 5.2 5.4 4.9 4.6 4.54.4 3.3 4.6 4.1 2.6 0 Source: Officials US Euro Area Japan India Vietnam China Philippines Indonesia Thailand Malaysia Singapore Socio-Economic Research Centre 8

GROWTH prospects for advanced and emerging economies Real GDP Growth (%) 8 7 Emerging Market and Developing Economies 6.9 6.6 6.2 6.7 7.3 7.4 5.3 5.3 5.2 6 5 4.4 4.7 4.7 4.7 17 18F 19F 17 18F 19F 17 18F 19F 4 3.3 3.7 3.7 3.7 China India* ASEAN-5** 3 Advanced Economies 2 1 1.7 2.3 2.4 2.1 2.2 2.9 2.5 2.4 2.0 1.9 1.7 1.1 0.9 0 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F World Advanced Economies Emerging Market and Developing Economies 17 18F 19F 17 18F 19F 17 18F 19F United States Euro Area Japan Source: Officials; IMF (WEO, October 2018) * Annual GDP for India is on fiscal year basis ** ASEAN-5: Malaysia, Indonesia, Philippines, Thailand, Vietnam Socio-Economic Research Centre 9

US GROWTH will decline once parts of its fiscal stimulus go into reverse 1991-2002 eleven years of expansion on record The current expansion has entered its tenth year Source: Bloomberg Socio-Economic Research Centre 10

Is INVERTED US yield curve is a harbinger of ECONOMIC TROUBLE? The rule of thumb is that AN INVERTED YIELD CURVE (short rates above long rates) indicates a recession in about a year, and yield curve inversions have PRECEDED EACH OF THE LAST SEVEN RECESSIONS. FLIGHT TO QUALITY AND SAFETY. The Fed and central banks around the world have been buying up government debt for years, effectively depressing long-term interest rates. Yield-Curve-Predicted GDP Growth Socio-Economic Research Centre 11

Section 2 Risks to Global Growth Growing downside risks Socio-Economic Research Centre 12

Global economy still GROWING but MULTIPLE RISKS ahead Global growth has MATURED and PASSED ITS PEAK. INCREASING DOWNSIDE RISKS to growth over next 18 months. UNEVEN EXPANSION and LESS SYNCHRONIZED in advanced economies and emerging Asia. FIVE RISKS increase global uncertainty: 1. TRADE WAR 4. INTENSIFIED RISKS IN EMERGING MARKETS 2. RISING US INTEREST RATES 3. FINANCIAL VOLATILITY 5. POLITICAL AND GEOPOLITICAL RISKS Socio-Economic Research Centre 13

TRADE WAR gets ugly; when will it end? First, SPILLOVER EFFECTS. Impact felt not only in the countries involved but across the value chains that span several countries; Second, ESCALATION. Trade flows would be impaired and global growth would be undermined; and Third, UNCERTAINTY. Dampen business confidence and unsettle financial markets. Further escalation in trade tensions have more significant impact on growth prospects Impact Estimates of Trade Protectionism Measures Annual ppt. impact Baseline Baseline + Future downside Global growth -0.3-0.8 Global trade -0.4-1.1 Malaysia GDP -0.3 to -0.5-1.3 to -1.5 However, there could be potential gains up to US$970m for Malaysia from trade substitution opportunities Source: BNM Socio-Economic Research Centre 14

INTENSIFIED trade tensions pose significant risks to the global economy Source: BNM Socio-Economic Research Centre 15

US-CHINA S TRADE NUMBERS at a glance Total Exports in 2017: US$1,546bn - To China: US$130bn (Share: 8.4%) Total Imports in 2017: US$2,342bn - From China: US$505bn (Share: 21.6%) Trade deficit with China: US$375bn Total Exports in 2017: US$2,264bn - To US: US$430bn (Share: 19.0%) Total Imports in 2017: US$1,841bn - From US: US$154bn (Share: 8.4%) Trade surplus with US: US$276bn Trade war timeline First Stage US imposed tariffs on US$50bn worth of China s imports and retaliated by China with same amount: (i) US$34bn effective on 6 July; and (ii) US$16bn effective on 23 Aug Second Stage US announced tariffs of 10% on additional US$200bn worth of China s products, effective 24 Sep (will up to 25% comes 2019) and retaliated by China at 5-10% tariffs on additional US$60bn worth of US s products. US's tariffs on US$250bn of Chinese goods China's tariffs on US$110bn of US's goods Share of US s total imports 10.7% Share of US s total exports 7.1% Share of imports from China 49.5% Share of exports to China 84.7% US's tariffs on US$250bn of Chinese goods China's tariffs on US$110bn of US's goods Share of China s total imports 6.0% Share of China s total exports 11.0% Share of imports from US 71.5% Share of exports to US 58.2% Source: US Census Bureau; China Customs Socio-Economic Research Centre 16

The industries most AT RISK in the US-China trade war The US industries most at risk in a trade war with China Leading export categories by HS code United States to China in 2017 (US$ billion) The Chinese industries most at risk in a trade war with US Leading export categories by HS code China to United States in 2017 (US$ billion) Transportation & Parts 29.5 (22.6%) Machinery & Electrical 256.6 (50.8%) Machinery & Electrical 25.0 (19.2%) Miscellaneous* 74.3 (14.7%) Agricultural products, food & beverages 18.9 (14.5%) Textiles, Apparel & Footwear 57.0 (11.3%) Chemicals & Allied Industries Mineral Products 11.2 (8.6%) 10.0 (7.7%) Stone, Glass & Metals Plastics & Rubbers 35.5 (7.0%) 19.8 (3.9%) * Miscellaneous including furniture & parts, toys, games & sport equipment, optic & medical instruments, etc. Exposure to the value chain (%) Figure in parenthesis indicates % share of gross exports in 2017 Indonesia Malaysia Singapore Thailand Indonesia Malaysia Singapore Thailand Wood & products 0.1 0.0 0.0 0.1 Textiles 1.1 0.6 0.3 0.7 Food products 0.2 0.1 0.0 0.1 Machinery 1.1 0.7 0.4 0.5 Electronics 3.4 6.6 2.7 3.0 Motor vehicles 0.1 0.0 0.0 0.0 Paper & products 0.1 0.0 0.0 0.0 Other transport 0.1 0.1 0.0 0.0 Chemicals 1.0 0.5 0.2 0.4 Basic metals 0.9 0.3 0.1 0.1 Electrical machinery 2.8 2.5 1.1 1.8 Total 10.9 11.4 5.0 6.8 Source: US Census Bureau; Oxford Economics Socio-Economic Research Centre 17

RISING interest rates mean TIGHTER liquidity conditions The risk of RAPID INFLATION has heightened. Further US INTEREST RATE TIGHTENING CYCLE (2018E: 2.25-2.50%; 2019F: 2.75-3.25%); ECB to start raise rate in 2H19. HIGHER DEBT SERVICING; TIGHTER FUNDING COST and US DOLLAR LIQUIDITY CONDITION. CAPITAL OUTFLOWS and CURRENCIES PRESSURE in emerging markets. 3 2 1 Policy rate (%, end-year) +1 +1 +3 est. +4 105 100 95 90 85 Fed confirmed to end the five-year QE program in Oct 2014 US dollar index First rate hike since GFC US dollar is strengthening recently 0 80 75-1 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep Fed ECB (Deposit Facility) BoJ 70 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Federal Reserve; ECB; BoJ; The Wall Street Journal Socio-Economic Research Centre 18

FINANCIAL VOLATILITY induces markets pressure Two things are happening that threaten to tighten global financial conditions even more: First, HIGHER US INTEREST RATES and CONTINUED UNWINDING OF THE FED S BALANCE SHEET which withdraws US dollar liquidity from global markets; and Second, INCREASED ISSUANCE of US TREASURY BILLS to fund fiscal expansion, which accentuates tightness in US dollar funding. More acute WITHDRAWAL OF US DOLLAR LIQUIDITY induces SERIOUS BOUTS OF FINANCIAL VOLATILITY. 3 Policy rate (%, end-year) est. +4 4 10-year government bond yield (%, monthly average) 2 +3 3 1 +1 +1 2 1 0 0-1 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sep Fed ECB (Deposit Facility) BoJ -1 2011 2012 2013 2014 2015 2016 2017 2018 US Japan Germany Source: Federal Reserve; ECB; BoJ; U.S. Department of the Treasury; MOF, Japan; Eurostat Socio-Economic Research Centre 19

CURRENCY CONTAGION RISK in emerging markets POWERFUL CROSSWINDS: Higher global crude oil prices, rising US interest rates and bond yields, strong US dollar, the escalation of US-China trade war and political conflicts. CAPITAL REVERSALS and CURRENCIES PRESSURES on countries with WEAK ECONOMIC FUNDAMENTALS (twin deficits in both budget and external payments position, large foreign debt exposure and high domestic inflation pressures). Cumulative index performance net returns (USD) (Oct 2003 Oct 2018) Argentina peso is the worst performing currency against the US dollar in 2018 Source: MSCI Socio-Economic Research Centre 20

GEOPOLITICAL and POLITICAL risks PRESIDENT TRUMP Post MID-TERM ELECTIONS. It is unlikely to change Washington's trade war with Beijing. Both Democrats and Republicans are believed to support a tougher stance on Chinese trade and intellectual property practices. The US s SANCTIONS on IRAN and SYRIA WAR tend to drive up the oil price. EUROZONE: fiscal slippage in Italy the coalition government s commitment to take the follow actions. BREXIT NEGOTIATIONS are stalling and governments (in the UK and in the rest of the EU) are openly preparing contingency plans in case of no agreement on 31 March 2019 (Hard Brexit). The end of the MERKEL ERA fast approaching as Germany s long-serving chancellor prepares to stand down as leader of her party. The ECB s QE is ending just as MARIO DRAGHI, the bank s president, begins his last year in office. CURRENCY CRISIS in HIGH RISK EMERGING MARKETS - Turkish financial crisis may get even worse; Argentina s currency woes crisis deepens. Socio-Economic Research Centre 21

Next GLOBAL RECESSION What will trigger and when? First, the US s fiscal-stimulus effects RUNNING OUT OF STEAM. Second, with inflation rising above target PUSHING THE FEDERAL FUNDS RATE TO AT LEAST 3.5% by 2020. By then, other central banks would have normalized interest rates; reduce global liquidity and put upward pressure on interest rates and the US dollar. Third, the Trump administration s ESCALATING TRADE SPATS with China and other trading partners, leading to slower growth and higher inflation. Fourth, other countries will retaliate against US protectionism. CHINA S GROWTH will be challenged by continued deleveraging; highly vulnerable emerging markets will be significantly pressured by capital reversals. Fifth, GLOBAL EQUITY MARKETS ARE GETTING FROTHY. US P/E ratio is 50% above historical average, steep market valuations, government bonds are too expensive. Global debt has hit another high (US$247 trillion, exceeding 318% GDP at end-mar). Some of the US$3.7 trillion in debt taken on in the ten years since the 2008-09 Global Financial Crisis. THE EXPANSION IS NINE YEARS OLD. AN ILL-TIMED END OF FISCAL STIMULUS, CORPORATE DEBT BUBBLE AND THE TRADE WAR ARE THE POWERFIRES THAT COULD MOST EASILY END IT Socio-Economic Research Centre 22

Section 3 Emerging Markets Is the worst of the storm over? Socio-Economic Research Centre 23

EM Growth Tracker DOWNWARD TREND continues Global Composite Indexes EM Growth Tracker Socio-Economic Research Centre 24

EM equity markets still in the DOLDRUMS Socio-Economic Research Centre 25

EM Growth vs. Portfolio Flows Socio-Economic Research Centre 26

It is too early to declare that the storm in EM is WANING HEADWINDS Tighter liquidity conditions. Further hikes in the US interest rate; and monetary tightening in EM to contain FX weakness TAILWINDS Attractive valuations in emerging market assets have emerged after pronounced weakness The US-Sino trade dispute, including US s trading partners Responsive policies to rein in economic imbalances China s fiscal and monetary policy mix. Softer economic growth; further CNY weakness can affect sentiment Risk of contagion and financial volatility via sentiment, economic and financial channels Electoral or political uncertainty (India, Indonesia and Philippine) or opaque reform outlook Geopolitical tensions (Russia, Turkey, or Iran) A truce in the US-China trade war. No major negative news Some weakness in the US dollar; the Fed turns dovish the rate hikes not more than what the market are pricing in No major surprises to global growth and China economy. Announcement of fiscal stimulus Stable commodity prices and easing pressure on currencies Socio-Economic Research Centre 27

Emerging markets in Asia How are they prepared? Is 1997-style emerging country crisis on the cards? Countries, notably in SEA still growing at decent economic growth rate, albeit slower. Domestic demand continued to support growth, underpinned by infrastructure spending. Exports had slowed. Fewer domestic imbalances. Smaller budget deficit amid larger current account deficit for some (Indonesia, India and Philippines). External debt levels generally aren t alarming and, in some countries, debt burdens are lower than previously. The dollar liquidity squeeze and higher US interest rate will hit the vulnerable countries with high current account deficits and high levels of USD-denominated debt. Foreign reserves adequacy are maintained at healthy level to cushion against external outflows. Exchange rate flexibility allows domestic currencies to absorb the two-way of capital flows. Some central banks have tightened monetary policy to contain capital outflows as well as ease downward pressure on their currencies. So far, there is no risk of contagion to any other EM economy. EMERGING MARKETS, DESPITE STRENGTHS, STILL GET NO RESPITE. Socio-Economic Research Centre 28

CONTAGION FEAR in emerging Asia STRONGER ECONOMIC FUNDAMENTALS: Larger foreign reserves and bank capital buffers; robust financial regulatory frameworks. Pre-emptive interest rate hikes to support exchange rate stability. Asian Non-Asian Source: BlackRock Investment Institute (23 Aug 2018) Socio-Economic Research Centre 29

The state of CURRENT ACCOUNT BALANCE 20.0 Current Account Balance (% of GDP) 15.0 10.0 1999: 14.8 5.0 2017: 3.0 2018F: 2.7 0.0-5.0-10.0 % of GDP 2018F % of GDP 2017 % of GDP 1999 Thailand Russia Malaysia Brazil China Argentina India Indonesia South Africa Philippines 9.1 6.2 2.7 0.7-1.3-1.5-2.4-3.0-3.2-3.7-5.7 11.2 2.2 3.0 1.4-0.5-0.8-1.7-1.9-2.5-4.9-5.6 9.8 12.6 14.8 1.9-4.3-3.5 3.4-1.0-0.5-3.9-0.4 Turkey Source: IMF; MOF (Malaysia (2017, 2018F)) Socio-Economic Research Centre 30

The state of FISCAL BALANCE General Government Overall Balance (% of GDP) 2 % 0-2 -4 2017: -3.0-6 -8-10 -12 Brazil India Argentina South Africa Emerging Asia China Malaysia Indonesia Turkey Russia Thailand Philippines 2017-7.8-7.2-6.7-4.6-4.2-3.9-3.0-2.3-2.3-1.5-0.9-0.4 2015-10.3-7.2-6.0-4.8-3.3-2.8-3.2-2.6-1.3-3.4 0.1 0.6 Source: IMF; MOF (Malaysia) Socio-Economic Research Centre 31

IMF s ASSESSING RESERVE ADEQUACY (ARA) Ratio of reserves/ara metric 300 % 250 2007: 207.2 200 150 100 2017: 112.5 Desired range: 100-150% 50 0 Russia Thailand Philippines Brazil India Indonesia Malaysia South Korea China Argentina Turkey 2017 265.4 214.3 204.2 161.7 159.2 128.4 112.5 106.4 96.6 84.7 80.3 62.4 2007 177.9 181.7 147.5 117.3 256.2 120.3 207.2 108.6 191.8 114.4 91.1 68.7 South Africa Source: IMF Socio-Economic Research Centre 32

The state of EXTERNAL DEDT Gross External Debt (% of GDP) 80 % 70 2017: 65.0 60 50 40 30 20 10 0 Malaysia Turkey South Africa Argentina Indonesia Thailand Russian Federation Brazil Philippines India China 2017 65.0 53.4 49.6 36.8 34.7 34.1 32.8 32.5 23.3 19.8 14.0 2016 74.3 47.4 48.3 32.7 34.2 32.1 40.0 37.7 24.5 20.1 12.7 Source: World Bank; MOF (Malaysia) Socio-Economic Research Centre 33

LOCAL CURRENCY markets have dominated EM debt Socio-Economic Research Centre 34

The state of FEDERAL GOVERNMENT DEBT General Government Debt (% of GDP) 90 % 80 70 60 50 2017: 50.7 40 30 20 10 0 Brazil India Argentina Malaysia South Africa China Thailand Philippines Indonesia Turkey Russia 2017 84.0 71.2 57.6 50.7 53.0 47.0 41.9 39.9 28.8 28.3 15.5 2015 72.6 70 55.1 54.4 49.3 41.1 42.5 41.5 27.5 27.6 16.3 2007 63.8 74.0 61.0 39.9 27.1 29.0 36.0 52.4 32.3 38.2 8.0 Source: IMF; MOF (Malaysia (2015, 2017)) Socio-Economic Research Centre 35

Section 4 Domestic economic conditions: Challenging Transition for New Malaysia Socio-Economic Research Centre 36

SOLID consumer spending but will it normalise? FUNDAMENTAL DRIVERS: Income growth and labour market conditions Household spending will NORMALIZE post 3-month zerorised GST tax holiday and the introduction of SST on 1 Sep Potential DAMPENING FACTORS: Review of fuel subsidy and cost of living aid 12 10 8 6 4 2 Private Sector s Employee Income (%, YoY) Manufacturing Services 0 2013 2014 2015 2016 2017 2018 7.6 1.1 140 130 120 110 100 90 80 70 MIER Consumer Sentiments Index (CSI) 60 2013 2014 2015 2016 2017 2018 107.5 8.9 6.4 4.1 4.9 5.2 6.2 6.3 6.1 Private Consumption Growth (%, YoY) 6.7 7.1 7.2 7.0 6.9 8.0 9.0 7.2 7.2 6.8 6.7 Q1 2015 Q2 Q3 Q4 Q1 2016 Q2 Q3 Q4 Q1 2017 Source: Department of Statistics, Malaysia (DOSM); MIER Q2 Q3 Q4 Q1 2018 Q2 Q3 2018E MOF 2018E SERC 2019B MOF 2019F SERC Socio-Economic Research Centre 37

Private investment growth ON TRACK but CAUTIOUS Private investment growth ON TRACK to 6.9% yoy in 3Q (6.1% in 2Q) CAUTIOUS about external environment; new government s policy implications 2019 Budget to BOOST private investment in tourism, manufacturing, IR 4.0 and e-commerce 90 88 86 84 82 80 78 76 74 72 Capacity Utilisation Rate (%) 70 2013 2014 2015 2016 2017 2018 82.8 120 115 110 105 100 95 90 85 MIER Business Conditions Index (BCI) 80 2013 2014 2015 2016 2017 2018 108.8 11.5 Private Investment Growth (%, YoY) 12.9 3.8 5.3 4.7 2.1 5.6 4.8 4.9 7.4 7.9 9.2 0.5 6.1 6.9 4.5 3.9 5.0 4.1 Q1 2015 Q2 Q3 Q4 Q1 2016 Q2 Q3 Q4 Q1 2017 Q2 Q3 Q4 Q1 2018 Q2 Q3 2018E MOF 2018E SERC 2019B MOF 2019F SERC Source: DOSM; MIER Socio-Economic Research Centre 38

Public investment remains CLOUDED ahead PUBLIC INVESTMENT GROWH CONTRACTED for four straight quarters. Rationalisation of development expenditure means moderate public investment growth. Further consolidation of development expenditure in 2019. 12 Real public investment growth (%, YoY) 8 7.7 4 0-4 -8-12 0.4 Q1 2015-8.2 1.8 0.4-4.4 Q2 Q3 Q4 Q1 2016-3.9-0.4 3.2 Q2 Q3 Q4 Q1 2017-5.0 4.1-1.4-1.0 Q2 Q3 Q4 Q1 2018-9.8-5.5 Q2 Q3 2018E MOF -1.5-1.5-5.4-4.8 2018E 2019B 2019F SERC MOF SERC Source: DOSM Socio-Economic Research Centre 39

DEFERRED OR CANCELLED mega projects: manageable impact 2018 2019 2020 2025 On-going projects help mitigating the impact on growth: RAPID RM81bn MRT 2 RM32bn LRT 3 RM17bn ECRL RM55bn MRT 3 RM50bn HSR RM70bn 2015-2019 2016-2022 2018-2024 2018-2024 2019-2026 2019-2026 In early stages of construction or have yet to commence Spreading effects (contained impact in single year) due to long period of development Depend on the localisation vs. imported of construction related materials and services Manageable impact on domestic employment Ongoing Deferred Socio-Economic Research Centre 40

SECTORAL target at a glance Both the services and manufacturing sectors continued to drive overall growth. The agriculture and mining sectors are expected to rebound in 2019. Growth in the construction sector will remain moderate. Agriculture Mining and Quarrying Manufacturing Construction Services 2017 7.2% (8.2%) 1.0% (8.4%) 6.0% (23.0%) 6.7% (4.6%) 6.2% (54.5%) 2018E -0.4% (7.8%) -1.0% (7.9%) 4.8% (23.0%) 4.5% (4.6%) 6.4% (55.3%) 2019F 2.0% (7.6%) 0.5% (7.6%) 4.5% (22.9%) 4.4% (4.5%) 5.8% (55.9%) Figure in parenthesis denotes % share of GDP % 8 6 Agriculture % 20 16 Construction 4 2 12 0 8 Services -2-4 -6 Mining and quarrying 2011 2012 2013 2014 2015 2016 2017 2018E 2019F 4 0 Manufacturing 2011 2012 2013 2014 2015 2016 2017 2018E 2019F Source: BNM; SERC Socio-Economic Research Centre 41

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 2018E 2019F Exports in 2H18 and 2019 will be more CHALLENGING Exports continue growing Broad-based expansion, except CPO & LNG RM billion 18.9% SERC s estimation Major export products in 2018 (Jan-Sep) [% share] Value (RM billion) Growth (% yoy) 1.2% 6.3% 4.9% 935 3.3% 734 E&E products [38.0%] 278.5 10.7 Petroleum products [7.6%] 55.9 3.1 Chemical & chemical products [5.7%] 41.7 20.1 Manufactures of metal [4.6%] 33.5 22.1 Machinery, equipment & parts [4.2%] 30.6 0.5 Palm oil [4.0%] 29.2-15.4 LNG [3.7%] 27.4-10.6 * Jan-Sep Exports Value Exports Growth (yoy) Crude petroleum [3.6%] 26.7 31.9 Optical & scientific equipment [3.6%] 26.5 12.3 PRESSING FACTORS: 1) Exceptionally high export levels averaging RM80.6 billion per month in 2H2017; 2) Moderate pace of global semiconductor sales (estimated 12-16% this year vs. 21.6% in 2017); 3) Softer CPO prices; and 4) Trade tensions between the US and its major trading partners. Export growth estimates: 4.9% in 2018 and 3.3% for 2019. Source: DOSM Socio-Economic Research Centre 42

Further ESCALATION in trade tensions to have significant impact on GDP Overall, the impact of bilateral trade tensions on Malaysia s export performance is largely dependent on the substitutability of the affected products, manufacturing capacity constraints and Malaysian firms value proposition. Source: Bank Negara Malaysia Socio-Economic Research Centre 43

Malaysia s exports to the US and CHINA Ranking Exports Imports 13.5 % Exports 2017 9.5% Imports 2017 19.6 % 8.3% China United States Major export products to China in 2017 E&E products - Semiconductor Chemical & related products (excl. non-primary plastics) RM mil 50,386 36,332 % share* 39.9 28.8 14,449 11.5 Petroleum products 13,312 10.6 Liquefied Natural Gas 5,798 4.6 Manufactures of metal 4,529 3.6 Palm Oil 4,027 3.2 Total 126,150 Major export products to United States in 2017 E&E products - Semiconductor RM mil 49,148 16,034 % share* 55.4 18.1 Optical & scientific equipment 5,562 6.3 Rubber gloves 5,502 6.2 Furniture & parts 3,604 4.1 Machinery, equipment & parts 3,271 3.7 Chemical & related products (excl. non-primary plastics) Total 88,693 3,243 3.7 Source: DOS, Malaysia * % share to total exports to respective country Socio-Economic Research Centre 44

Malaysia s key ECONOMIC INDICATORS Real GDP Growth (%) Private Consumption Growth (%) Private Investment Growth (%) Gross Exports Growth (%) 4.2 5.9 4.8 MOF 4.9 4.7 SERC 6.0 7.0 7.2 MOF 6.8 6.7 SERC 4.3 9.3 MOF 4.5 5.0 3.9 4.1 SERC 1.2 18.9 MOF 4.4 SERC 4.9 3.9 3.3 MOF SERC 2016 2017 2018E 2019F 2016 2017 2018E 2019F 2016 2017 2018E 2019F 2016 2017 2018E 2019F 2.1 Inflation Rate (%) 3.7 MOF 1.5-2.5 1.3 2.5-3.5 2.0-2.5 SERC Unemployment Rate (%) SERC 3.4 3.4 3.4 3.3 MOF 3.3 44 Brent Crude Oil Prices (US$/barrel) 54 EIA 73 72 71 72 MOF 2,653 Crude Palm Oil Prices (RM/tonne) 2,783 MOF 2,400 2,300 2,350 SERC 2016 2017 2018E 2019F 2016 2017 2018E 2019F 2016 2017 2018E 2019F 2016 2017 2018E 2019F Source: DOSM; MOF; EIA; MPOB; SERC Socio-Economic Research Centre 45

Sources of GDP growth: DEMAND and SUPPLY side Private sector expenditure will cushion the effects of lower public spending. All economic sectors are expected to register positive growth in 2019. % growth, 2010=100 2016 2017 2018 (Jan-Sep) GDP by demand component 2018E (MOF) 2018E (SERC) 2019B (MOF) Private consumption (55.0%) 6.0 7.0 8.0 7.2 7.2 6.8 6.7 Private investment (17.3%) 4.3 9.3 4.5 4.5 3.9 5.0 4.1 Public consumption (12.5%) 0.9 5.4 3.0 1.0 1.8 1.8 0.7 2019F (SERC) Public investment (7.5%) -0.5 0.1-5.3-1.5-1.5-5.4-4.8 Exports of goods and services (70.9%) 1.3 9.4 1.6 2.0 2.5 1.6 2.0 Imports of goods and services (63.0%) 1.3 10.9 0.1 1.4 2.6 1.8 2.3 GDP by economic sector Agriculture (7.8%) -5.2 7.2-0.4-0.2-0.4 3.1 2.0 Mining & quarrying (8.0%) 2.1 1.0-2.2-0.6-1.0 0.7 0.5 Manufacturing (23.0%) 4.4 6.0 5.1 4.9 4.8 4.7 4.5 Construction (4.5%) 7.4 6.7 4.8 4.5 4.5 4.7 4.4 Services (55.3%) 5.7 6.2 6.8 6.3 6.4 5.9 5.8 Overall GDP 4.2 5.9 4.7 4.8 4.8 4.9 4.7 Figure in parenthesis indicates % share to GDP in 2018E Source: DOSM; MOF Socio-Economic Research Centre 46

Fiscal deficit RESET on a clean slate Overall fiscal deficit is reset higher to -3.7 % of GDP in 2018 (from -2.8% previously) due to: a) Shortfall in revenue b) The GST and income tax refunds (RM3.9bn or 0.3% of GDP in 2018 and RM37.0bn or 2.4% of GDP in 2019); and c) Restating of off-budget items and unbudgeted expenses as well as reclassification of capital expenditure in operating expenditure to development expenditure. Fiscal deficit to GDP ratio will come down to -3.4% in 2019, narrowing further to -3.0% in 2020 and -2.8% in 2021. Restoring fiscal health remains a priority. A timeline returning the budget to balance is important to rebuild fiscal space. 0% -1% -2% -3% -4% -5% -6% -7% -8% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019B 2020F 2021F -6.7% Source: BNM, MOF -5.3% -4.7% Previous fiscal reduction path towards a near-balanced balanced budget in 2020-4.3% -3.8% -2.8% -3.4% -3.2% -3.1% -3.0% -3.7% -0.6% -3.4% -3.0% -2.8% Medium- Term -2.0% Fiscal deficit RESET in 2018 Socio-Economic Research Centre 47

Will Malaysia s sovereign rating at RISK? S&P Global Ratings A heavier reliance on revenuefitch Ratings Malaysia s public debt is high relative to rating peers, and a further increase in debt over the mediumterm could have a ratingcommodity-based impact. s presents an additional risk to Malaysia s fiscal accounts. Moody s Wider deficits and a heightened reliance on volatile oil-related revenues. Impact on Malaysia s sovereign rating: a low likelihood of a rating downgrade. A downgrade could be triggered by any one of a series of factors: slowing economic growth prospects, deteriorating external debt, political instability or lack of fiscal reforms. Date of change Grade From To Date of change Outlook From To 8 November 2004 BBB+ A- 30 June 2015 Negative Stable 7 October 2003 BBB+ A- 15 May 2008 Positive Stable 16 December 2004 Baa1 A3 11 January 2016 Positive Stable Source: Fitch; S&P; Moody s; Trading Economics Socio-Economic Research Centre 48

HOUSEHOLD DEBT (HHD) at a glance Household debt to GDP ratio eases Household debt by income group 86.8 89.0 88.3 84.2 83.8 30.8% 31.2% 31.5% 33.0% 33.0% 960 1,031 1,086 1,140 1,166 22.6% 24.1% 25.1% 26.3% 26.8% 22.3% 21.9% 21.5% 20.8% 20.6% 24.3% 22.8% 21.9% 19.9% 19.6% 2014 2015 2016 2017 1H2018 HH Debt (RM billion) HH Debt/GDP (%) Healthy households balance sheet: Financial assets are above 2 times of household debt Ratio 209.9 205.7 205.5 212.6 210.9 147.5 142.4 140.7 145.2 144.1 * Prudential threshold = 100 2014 2015 2016 2017 1H2018 HH Financial Asset-to-HH Debt HH Liquid Financial Asset-to-HH Debt 2014 2015 2016 2017 1H2018 <RM3,000 RM3,000-5,000 RM5,000-10,000 >RM10,000 Household loans rise moderately 14% 12% 10% 8% 6% 4% 2% 0% 2011 2012 2013 2014 2015 2016 2017 2018 Sep 6.0% Source: BNM Socio-Economic Research Centre 49

Monetary policy remains ACCOMMODATIVE (OPR at 3.25% at end-2019) Overnight policy rate (OPR) vs. Annual inflation rate 4% 3% 2% 1% 0% 2011 2012 2013 2014 2015 2016 2017 2018 Policy Rate Annual Inflation Rate HEADLINE INFLATION: Underlying inflation remains low in 2018 due to transitory effect from 3-mth tax holiday and fuel subsidy. This transitory effect is expected to lapse in 2H19. Inflation outlook hinges on SST and the continued fuel subsidy (2018E: 1.3%; 2019F: 2.0-2.5%). GROWTH OUTLOOK: The hurdle rate for BNM to consider cutting interest rate is when GDP growth slows to around 4.0% (GDP estimates 2018E: 4.8%; 2019F: 4.7%). WILL THE WEAK RINGGIT OUTLOOK AND HIGHER US INTEREST RATES constrain Bank Negara Malaysia s monetary policy? Note: Average inflation rate for 2018 accounts from Jan-Sep. Source: BNM; DOSM Socio-Economic Research Centre 50

The ringgit is UNDER PRESSURE (end-2018: RM4.15-4.20; 1Q19: 4.15-4.20; 2Q: 4.10-4.15; 3Q: 4.00-4.10; 4Q: 3.95-4.00) FACTORS WEIGH ON RINGGIT: New political and policies transition; trade war; capital reversals; surging US Treasury yields; the expectation of further US interest rate hikes; contagion fear in emerging markets and a revived strength of the dollar. COUNTERACT STRENGTH to support the ringgit: Strong fundamentals, the clarity of policies, the fiscal and debt path as well as the affirmation of Malaysia s sovereign ratings. Ringgit s movement against the USD 3.0583 End- 2012 3.2815 (-6.8%) End- 2013 3.4950 (-6.1%) End- 2014-31.8% 4.2920 (-18.6%) 4.4860 (-4.3%) End- 2015 End- 2016 +16.2% 3.8620 4.0620 (+5.2%) (+10.4%) End- 2017 30 Mar 2018-7.9% 4.1920 (-3.1%) 16 Nov 2018 Ringgit s movement against regional currencies CNY KRW IDR PHP THB SGD JPY GBP EUR USD -31.8% -24.0% -23.0% -17.8% -20.2% -19.3% -14.5% -10.3% -5.1% -7.5% -1.5% -0.6% 0.1% 1.8% 4.0% 2.8% 6.9% 7.0% 16.0% 13.7% Figure in parenthesis denotes changes from end of previous year Source: BNM (end-period; rates at 12:00) Socio-Economic Research Centre End-2016 to 16 Nov 2018 End-2012 to End-2016 51

MYR EUR GBP JPY SGD THB PHP IDR KRW CNY MYR EUR GBP JPY SGD THB PHP IDR KRW CNY Regional currencies SUCCUMBED to strong US dollar The US dollar index strengthened by 7.1% against a basket of foreign currencies (measured in real effective exchange rate (REER)) in the first ten months of 2018. Major and regional currencies vs. the US dollar* (%) 2018 (Jan Mar) 2018 (1 Apr 16 Nov) Most currencies appreciated against the US dollar, albeit softer compared to 2017 6.1 5.2 4.3 4.7 3.1 2.0-4.2-1.5 0.4 4.0 Overall currencies weakened against the greenback -4.7-5.4-6.3-7.9-8.0-8.8-0.8-5.6-5.6-9.7 Year-to-date, most currencies have been depreciated against the greenback JPY THB SGD MYR GBP PHP EUR KRW CNY IDR -4.9% -5.0% -0.9% -5.1% -5.2% -6.1% -7.0% -2.8% -3.1% -0.6% -0.9% -0.8% 3.5% 6.6% 9.7% 8.2% 10.4% 9.5% 13.4% 12.8% Source: BNM (end-period; rates at 12:00) * Calculation based on cross-rate End-2017 to 16 Nov 2018 End-2016 to End-2017 Socio-Economic Research Centre 52

Malaysia: OUTFLOWS in both debt and equity markets EXTERNAL FACTORS: Prospects of higher US interest rates; strong US dollar; uncertainties on global trade tensions; pressure on emerging markets triggered contagion risk DOMESTIC FACTORS: Post GE14 political and domestic policies transition In Apr-Jun, foreigners net sold RM24.3 billion of ringgit-denominated debt securities. Despite net buying occurred in July (+RM4.0 billion), it reverted to net selling in Aug-Sep (-RM5.4 billion) Post GE14 s 32 consecutive days of net selling of equities by foreigners have moderated in July and August. Net foreign buying interests have returned marginally in September but retreated again in October and early November. Source: BNM; Bursa Malaysia Net portfolio investment: Largest outflows since 3Q 2008 RM billion 15.7 Q1 2016 RM billion 8 6 4 2 0-2 -4-6 Jan 2014 0.1-9.8-20.1-32.4 Q2 Q3 Q4 Q1 2017 Jul Jan 2015 Jul Jan 2016 17.5-9.1 11.6-2.6 Q2 Q3 Q4 Q1 2018 Jul Jan 2017 Jul Foreign net buy/sell in equities (LHS) Foreign Holdings of MGS (RHS) Jan 2018-38.3 Q2 Oct 40.7 Jul 0.6 Q3 % 70 60 50 40 30 20 10 0 Socio-Economic Research Centre 53

LONG-TERM NR investors remain key holders of Malaysian government bonds Source: BNM Socio-Economic Research Centre 54

Malaysia has experienced SIZEABLE capital reversals NR Portfolio Flows, Reserves, Ringgit Performance and GDP Growth during Outflow Periods Note: Current data for reserves is at end-july 2018; MYR/USD as at 14 August 2018; NR portfolio flows as at 13 August 2018 Source: BNM Socio-Economic Research Centre 55

DIVERSIFIED external debt & DECENTRALIZATION of reserves 20 15 10 NO TWIN DEFICIT Budget balance and BOP s current account (% of GDP) Budget Balance Debt profile 52% - M&L 48% - ST 5 0-5 -10 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: BNM Socio-Economic Research Centre 56

社会经济研究中心 SOCIO-ECONOMIC RESEARCH CENTRE 谢谢 THANK YOU Address : 6 th Floor, Wisma Chinese Chamber, 258, Jalan Ampang, 50450 Kuala Lumpur, Malaysia. Tel : 603-4260 3116 / 3119 Fax : 603-4260 3118 Email Website : serc@acccimserc.com : http://www.acccimserc.com