The Malaysian Economy Prospects and critical issues in 2011-20122012 Presentation for ISIS PRAXIS Seminar Nor Zahidi Alias Chief Economist March 3 rd, 2011
In a nutshell US economy is emitting more positive signs, judging by leading indicators in the financial market (yield gaps and corporate-bond spread). Unemployment dropped the most in two months since 1958 in January, but labour market remains the key concern among policymakers. European countries are still struggling with the sovereign debt crisis. Capacity utilisation remains below the long-term average. Asian economies remain strong, fueled by the twin engines of China and India. World growth was revised upwards by the IMF. Most notable improvement was the outlook of the US economy. Malaysia s growth momentum is decelerating as the base effect wanes and the external sector is affected by slowing global demand. Among the important issues for the Malaysian economy are: (1) effect of higher prices on consumers (2) effect of possible monetary tightening measures, if policymakers react (3) effect of a possible sudden reversal in capital flows, and (4) effect of surging oil prices on government finances. 2
US light at the end of the tunnel? 3 2.5 2 1.5 1 0.5 0 0.5 Yield gap of 2-10 US Treasuries (UST) jumped to 290 basis points (bps) in February 2011, the most since Feb 2010; 30-year yield at 4.74%, the highest since April 2010. Average gap between 2009-10 was 240 bps, higher than the average between 2003-04 04 prior to the boom. Corporate bond spread shrank, suggesting that perception of risk has declined for both high- and low-rated corporate bonds. 2-10 yield gap of UST Corporate bond spread Ave: 210 bps Ave: 240 bps 7.00 6.00 5.00 4.00 3.00 200 2.00 1.00 Aaa Baa Lehman Crisis 1 Feb b 99 Aug g 99 Feb b 00 Aug g 00 Feb b 01 Aug g 01 Feb b 02 Aug g 02 Feb b 03 2 10 UST 2 yr average Source: Bloomberg Aug g 03 Feb b 04 Aug g 04 Feb b 05 Aug g 05 Feb b 06 Aug g 06 Feb b 07 Aug g 07 Feb b 08 Aug g 08 Feb b 09 Aug g 09 Feb b 10 Aug g 10 0.00 Jan 08 Jan 09 Jan 10 Jan 11 3
G3 economies European problems Astronomical levels of budget deficits and sovereign debts in European countries prevent a smooth recovery of advanced economies. Capacity utilisation (CAPU) rates remained well below historical average, suggesting that weak labour market will persist inthe near term. Government debt-to-gdp ratio (%) CAPU rates (%) 140 US Ireland Greece Portugal Spain UK 120 90 85 E Average for eurozone : 81% 100 80 80 60 75 40 20 70 US Average for US : 77% 0 Y81 Y85 Y89 Y93 Y97 Y01 Y05 Y09 65 00 01 03 04 06 07 09 10 Sources: IMF & Bloomberg 4
Global economic outlook by the IMF Overall growth forecast was revised upward in January 2011, with the US having been upgraded the most among G3 economies (+0.7 percentage points). Prospects of Asian economies remain encouraging as the twin growth engines of China and India continue to be strong. GDP forecasts by the IMF Source: IMF 5
Back home growth is also moderating Followingasharprecoveryin2010,Malaysianeconomicgrowthmoderated in the last three quarters as weaker global demand weighed on its external sector. Leading indicators are pointing to softer growth in the next few quarters. Malaysia s quarterly GDP growth KLCI (4-mth lead) and GDP growth (yoy%) 12 10 8 6 4 2 0 2 4 6 8 Recessions 60.0 50.0 40.0 30.0 20.0 10.0 0.0 10.0 20.00 30.0 40.0 50.0 GDP yoy % KLCI yoy % 12 10 8 6 4 2 0 2 4 6 8 Jun n 00 Dec c 00 Jun n 01 Dec c 01 Jun n 02 Dec c 02 Jun n 03 Dec c 03 Jun n 04 Dec c 04 Jun n 05 Dec c 05 Jun n 06 Dec c 06 Jun n 07 Dec c 07 Jun n 08 Dec c 08 Jun n 09 Dec c 09 Jun n 10 Dec c 10 GDP yoy (%) KLCI yoy (%) GDP yoy (%) 6 Source: CEIC
Back home growth is also moderating Major reason for the expected slower growth in 2011 is the weaker external trade (smaller net exports) due to waning global demand particularly for E&E products. Global chip sales are expected to grow by 6.0% and 3.4% in 2011 and 2012, down from the estimated 32.8% in 2010. Global chip sales and Malaysia ss E&E exports IPI and OECD composite leading indicators 80% Global chip sales growth (y o y%) E&E exports growth (y o y%) 60% BTB ratio (RHS) 40% 20% 0% 20% 40% 1.40 1.20 1.00 0.80 0.60 0.40 0.20 20.0% 15.0% 10.0% 0% 5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 60% 0.00 Jan 01 Jun 02 Nov 03 Apr 05 Sep 06 Feb 08 Jul 09 Dec 10 IPI yoy% OECD total yoy% 7 Source: SIA & CEIC
Issue 1 How do consumers react to higher prices? Although the consumer price index (CPI) remained below 3%, higher pump prices will dampen consumers spending habits, putting pressure on private consumption, as evidenced by the fall in the retail trade index (RTI). Over the years, actual private consumption has had a strong correlation with the consumer sentiment index (CSI), with a two-quarter lag. Consumers reaction to hikes in pump prices CSI normally leads actual private spending by 2 quarters 160.00 130.00 20.0 140.00 120.00 100.00 80.0000 60.00 40.00 03 03 CSI RTI 04 04 05 05 06 06 07 07 08 08 09 09 10 10 120.00 110.0000 100.00 90.00 80.00 70.00 60.00 50.00 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 15.0 10.0 5.0 0.0 5.0 Source: CEIC 8 CSI (index) 2Qtr lag Nom pvt consumption (%)
Issue 1 How do consumers react to higher prices? Food prices increased at exponential rates since 2005, and the Food and Agriculture Organisation of the United Nations (FAO) predicted that consumerswillcontinuetopaymoreforfoodaspriceincreasesarenot likely to slow in the near future. Malaysia s trade deficit in foodstuff has risen over the years. Global wheat, rice and F&B price indices (2005 = 100) Malaysia s trade in foodstuff 300 250 200 Wheat Rice F&B Price Index 14.0 Trade deficit. (% of GDP) Trade deficit. (RM Bn) LHS 12.0 10.0 1.7% 1.6% 1.5% 1.4% 150 8.0 6.0 1.3% 1.2% 100 50 4.0 2.0 1.1% 1.0% 0.9% 0 Y80 Y82 Y84 Y86 Y88 Y90 Y92 Y94 Y96 Y98 Y00 Y02 Y04 Y06 Y08 Y10 0.0 Y95 Y96 Y97 Y98 Y99 Y00 Y01 Y02 Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10 0.8% 9 Sources: UN and CEIC
Issue 2 How s monetary policy responding to higher prices? Capacity utilisation (CAPU) in domestic and export-oriented industries have surged beyond their long-term averages, suggesting higher risk of demandpull factors emerging. The overnight policy rate (OPR) normally reacts to rising CAPU to prevent the second-round effect. CAPU domestic and export-oriented industries (%) CAPU and OPR (%) 90.00 85.00 80.00 75.00 70.00 65.00 60.00 55.00 50.00 Mar 99 Oct 99 May 00 Dec 00 Jul 01 Feb 02 Sep 02 Apr 03 Nov 03 Jun 04 Jan 05 Aug 05 Mar 06 Oct 06 May 07 Dec 07 Jul 08 CAPU (Export oriented) % CAPU (Dom. oriented) % Source: CEIC Feb 09 Sep 09 Apr 10 Nov 10 85 80 75 70 65 60 CAPU OPR 55 50 Apr 04 Jun 06 Aug 08 Oct 10 10 4.00 3.50 3.00 2.50 2.00 1.50 1.00
Issue 2 How s monetary policy responding to higher prices? The growth in Malaysia s house price index is currently above 1 standard deviation (SD) from the historical mean, even though there is no real property bubble across the board. 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% The growth in payroll and employment in the manufacturing sector has slightly moderated after recording sharp increases in the past one year. Malaysia s house price index Ave = 3.6% +1 SD = 5.4% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 5.0% Malaysia s manufacturing payroll and employment (yoy%) y Payroll Employment 1.0% 10.0% 1 SD = 1.8% 0.0% 15.0% 00 01 03 04 06 07 09 10 Jan 08 Jun 08 Nov 08 Apr 09 Sep 09 Feb 10 Jul 10 Dec 10 Source: CEIC 11
Issue 3 - inflows, inflows Massive capital inflows are evidenced by the surge in the local stock and bond markets. Malaysia s inflows have been largely characterised by portfolios investments. Experience suggests that large amount of outflows can drastically affect both the financial market and the real economy. Portfolio flows (RM Million) 30.0 Net portfolio flows (LHS) 20.0 10.00 0.0 10.0 20.0 MGS holdings by 30.0 foreigners % of outstanding 40.0 50.0 60.0 05 4Q 06 08 2Q 10 30.0% 10.0% 25.0% 5.0% 20.0% 0.0% 15.0% 5.0% 10.0% 10.0% 5.0% 0.0% 15.0% Portfolio flows - historical experience 7.0% 7.4% 2.2% 29% 2.9% 1.0% 0.7% 0.3% 1.5% 1.7% 2.6% 2.7% 11.1% Y99 Y00 Y01 Y02 Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10* Sources: CEIC & MARC Economic Research 12
Issue 3 - inflows, inflows Amount of capital inflows into Asia (including Malaysia) is exerting upward pressure on Asian currencies, including the ringgit. Malaysia s real effective exchange rate (REER) is currently above 1SD from its mean. Any sudden reversal in flows will affect the ringgit s performance. Currency movement (Y-T-D%) Malaysia s REER MYR THB TWD SGD PHP IDR CNY INR KRW HKD 2 0 2 4 6 8 10 12 Source: Bloomberg 120.00 115.00 110.0000 105.00 100.00 95.00 90.00 Feb-98 Oct-99 Jun-01 Feb-03 Oct-04 Jun-06 Feb-08 Oct-09 REER Ave 13
Issue 4 government finances The fiscal and current-account (CA) deficit matrix indicates that Malaysia is in a less-favourable quadrant and is comparable to India and Pakistan. However, its CA position is more favourable than many Asian countries. Fiscal position and CA balance matrix 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 5.0 10.0 CA % GDP Malaysia Philippines Indonesia India 2.0 20 Pakistan Viet Nam Bahrain Thailand Oman Qatar Saudi Arabia Most favourable quadrant U.A.E Kuwait 15.0 Most unfavourable quadrant Fiscal bal % GDP 10 5 0 5 10 15 20 25 30 35 Source: CEIC 14
Thailand Korea Malaysia Issue 4 government finances Revenues are not a problem for Malaysia as the country s tax-to-gdp ratio is one of the highest in the region. However, operating expenditure (emoluments, subsidies, supply & services) has expanded over the years. China Philippines Hong Kong Singapore Indonesia India Tax-to-GDP ratio (%) 5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0 90.0% 0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 0% 10.0% 0.0% Malaysia s operating and development expenditure as a % of total expenditure Operating expenditure Developmentexpenditure Y70 Y73 Y76 Y79 Y82 Y85 Y88 Y91 Y94 Y97 Y00 Y03 Y06 Y09 Source: CEIC 15
Issue 4 government finances The rise in oil prices will result in higher revenues, but at the same time would increase the government s fuel-subsidy program. Obviously, the government has to strike a balance between restoring the budget balance and safekeeping the rakyat s welfare. Government revenue vs. prices of Tapis crude 180.0 160.0 140.00 120.0 100.0 80.0 60.0 40.0 20.0 120.0 40.0 Total subsidy vs. prices of West Texas Intermediate (WTI) crude Forecasts WTI crude (USD per barrel) Government revenue (RM Bn) 100.0 100.0 35.0 Tapis crude USD per barrel (RHS) Y98Y99Y00Y01Y02Y03Y04Y05Y06Y07Y08Y09Y10 Sources: IMF & CEIC 80.0 60.0 40.0 20.0 30.0 25.0 20.0 15.0 Subsidy in RM bn (LHS) Y08 Y09 Y10 Y11F Y12F 16 120.0 80.0 60.0 40.0 20.0 00 0.0
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