November 2016 Higher GDP growth in 3Q16, led by net exports Real GDP growth trended higher for the first time since 2Q15 Economic growth rebounded after slowing down for five consecutive quarters since 2Q15, but this was not reflected across all components of GDP. Higher growth was due mainly to a turnaround in net real export of goods and services, which contributed 0.5 percentage point to GDP growth (-0.6 percentage points in 2Q16). Growth in domestic demand slowed significantly from 6.3% yoy in 2Q16 to 4.7% in 3Q16, attributed to lower public sector spending. Economic Update Malaysia- GDP & BOP 3Q16 Maintaining our real GDP growth forecast at 4.2% for 2016 With the accumulated average GDP growth of 4.2% yoy in the first three quarters of 2016, and in view of healthy private consumption and private investment, we are maintaining our long held real GDP growth projection of 4.2% for 2016, which was in line with the official estimate of 4-4.5%. Downside risks to Malaysia s economic growth in 2017 have increased With headwinds from the external front, following uncertainties over the outcome of US Presidential election and post-referendum future of the UK in the EU, the downside risks on Malaysia s external trade, investment and domestic demand, have increased and possibility a downgrade of Malaysia s real GDP growth for 2017, which we are currently maintaining at 4.4% for now, against the official forecast of 4.5-5.0%. Current account surplus widened to RM6.0bn in 3Q16 The country s current account surplus widened from RM1.9bn, or 0.6% of GNI in 2Q16 to RM6.0bn, or 2.0 of GNI in 3Q16 (RM5bn, or 1.8% of GNI in 1Q16), the largest quarterly surplus in 2016. This was driven by higher surplus in the goods account of RM26.5bn (RM19.8bn in 2Q16), offsetting a higher deficits services and primary account. We maintained our current account surplus forecast of RM15bn, or 1.3% of GNI for 2016, lower than 3% of GNI in 2015. Sharp weakness in Ringgit against US$ due speculative positioning The Malaysian ringgit has weakened sharply by around 3% in recent days to RM4.34/US$ as of th November, due to speculative positioning from offshore trading, such as ringgit non-deliverable forward (NDF). BNM is taking measures to reinforce existing rules that have been in place to prohibit facilitation of ringgit NDF. BNM noted there is no change in the Foreign Exchange Administration (FEA) rules and there is no introduction of any new measures. Since ringgit is a non-internationalised currency, we believe this will prevent speculators through offshore rates to determine and decide on the direction of the onshore exchange rates. Revising our Ringgit forecast to RM4.20/US$ by end 2016 As Malaysia may experience some volatility in short term capital flows due to the shift in investor sentiments as well as portfolio rebalancing due to external events, we are revising downward our forecast on the Ringgit to 4.20/US$ by end-2016, but an appreciation of 3.2% from the current level, as against our earlier forecast of RM3.95-4.00/US$ by end 2016. Malaysia s economic fundamentals would continue to remain sound. Despite some downside risks to the country s reserves, through the establishment of reciprocal currency arrangements or swap-lines between central banks in Asia, we believe the facilities will be available for regional central banks to obtain US$ funding, and providing the necessary liquidity in the foreign exchange market, if necessary. Economic Research (603) 26 7540 alan.tan@affinhwang.com yeeping.lim@affinhwang.com Affin Hwang Investment Bank Bhd (389-U) Page 1 of
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q 2Q 3Q 4Q 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 November 2016 Higher real GDP growth in 3Q16, mainly from net exports Malaysia posted a better than expected economic performance in 3Q16, where real GDP growth rose from 4.0% yoy in 2Q16 to 4.3%, higher than market expectations of 4%. Economic growth rebounded after slowing down for five consecutive quarters since 2Q15, but this was not reflected across all components of GDP. Higher growth was due mainly to a turnaround in net real export of goods and services, which contributed 0.5 percentage point to GDP growth (-0.6 percentage points in 2Q16). However, the positive contribution from net exports was due to a sharp decline in real import growth of goods and services (-2.3% vs +2.0% in 2Q16), compared to real export growth of goods and services (-1.3% vs +1.0% in 2Q16), signalling some slowdown in domestic economic activity. Fig 1: GDP by expenditure components ppt to GDP growth 6 4 2 0-2 -4-6 -8 %yoy Changes in inventories Net exports Real GDP (RHS) 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 Source: Bank Negara Malaysia (BNM) Similarly, despite smaller drag by commodity exports, where demand and prices for most major commodities improved during the quarter, the fact that real exports retreated into negative growth in 3Q16, also reflects slower exports of manufactured goods, which may continue to drag the country s external demand in 4Q16. On other GDP components, contribution from change in stocks of inventories remained a drag to the headline GDP growth, with a decline of 0.5 percentage point (-1.3 percentage points in 2Q16), as businesses continued to drawdown their inventories. We believe manufacturers are cautious in raising production and prefer to wait for more clearer economic signs to emerge on the global front before increasing production higher. Fig 2: GDP by expenditure component 4Q15 1Q16 2Q16 3Q16 4Q15 1Q16 2Q16 3Q16 4Q15 1Q16 2Q16 3Q16 %yoy %qoq % pts to GDP growth GDP by Expenditure Components Total Consumption 4.5 5.1 6.4 5.8 6.1-7.5 2.2 5.5 3.0 3.3 4.1 3.8 Private consumption 4.9 5.3 6.3 6.4-1.9 0.8 0.6 7.0 2.4 2.9 3.3 3.4 Public consumption 3.3 3.8 6.5 3.1 40.3-32.7 9.8-0.5 0.6 0.5 0.8 0.4 Total Investment 2.7 0.1 6.1 2.0-1.2-0.1 10.2-6.2 0.7 0.0 1.7 0.5 Private investment 4.9 2.2 5.6 4.7-23.8 34.3 15.2-11.1 0.6 0.4 1.1 0.8 Public investment 0.4-4.5 7.5-3.8 45.8-37.4-1.5 6.9 0.1-0.4 0.5-0.3 Domestic Demand 4.0 3.6 6.3 4.7 4.0-5.6 4.4 2.1 3.7 3.4 5.8 4.3 Net exports 4.3-12.4-7.0 5.9-1.5-9.9-5.1 25.8 0.4-1.2-0.6 0.5 Exports 4.0-0.5 1.0-1.3 2.9-8.1 0.0 4.3 2.9-0.3 0.7-0.9 Imports 4.0 1.3 2.0-2.3 3.5-7.8 0.6 1.8 2.6 0.8 1.3-1.5 Changes in inventories - - - - - - - - 0.5 2.0-1.3-0.5 GDP (2010 real prices) 4.5 4.2 4.0 4.3 3.2-4.6 2.3 3.6 4.5 4.2 4.0 4.3 Source: Bank Negara Malaysia (BNM) Affin Hwang Investment Bank Bhd (389-U) Page 2 of
3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q 3Q 1Q15 3Q15 1Q16 3Q16 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q 2Q 3Q 4Q 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 November 2016 Domestic demand dragged down by lower public sector spending Growth in domestic demand slowed significantly from 6.3% yoy in 2Q16 to 4.7% in 3Q16, due mainly to lower public sector spending. Growth in public consumption slowed sharply to 3.1% yoy in 3Q16 (6.5% in 2Q16), attributed to lower government spending on supplies and services, but was partially offset the higher spending on emoluments. Growth in public investment also fell sharply by 3.8% yoy in 3Q16 (+7.5% in 2Q16), with lower spending on fixed assets by Federal Government. However, the slower public sector spending coincided with improvement in fiscal deficit to 0.6% of GDP in 3Q16, as compared to -5.6% of GDP in 1H16, bringing the average to 3.8% of GDP in the first three quarters of 2016 (compared to government s deficit target of 3.1% of GDP for 2016 as a whole). Fig 3: Fiscal deficit and public sector spending %yoy 35 Public expenditure Fiscal balance (RHS) 30 25 20 15 10 5 % of GDP -12-10 -8-6 -4-2 0 0 Source: BNM, CEIC Sustained activity in private sector, but mainly private consumption Among the components of domestic demand, growth in private consumption has bucked the trend, rising further from 6.3% yoy in 2Q16 to 6.4% in 3Q16, due to higher consumption of food & beverages, housing & utilities and transportation, given continued wage and employment growth as well as the increase in minimum wage effective 1 July 2016. We believe expansion in total employment during the quarter, registering a net gain of 45,000 jobs (mainly in services sub-sectors), will likely support private consumption growth in the quarter ahead, if favourable employment conditions continue. Fig 4: MIER s Business Condition Index (BCI) and Consumer Sentiment Index (CSI) Index 130 120 110 100 90 80 70 60 50 MIER: Business Condition Index MIER: Consumer Sentiment Index Source: MIER, CEIC Affin Hwang Investment Bank Bhd (389-U) Page 3 of
November 2016 The downside surprise was growth in private investment in 3Q16, which slowed from 5.6% yoy in 2Q16 to 4.7%, and also posted a negative growth of 11% qoq during the same quarter (+15.2% qoq in 2Q16), despite continued capital spending in the services and manufacturing sectors. This was reflected in the MIER s Business Conditions Index (BCI), which fell sharply from 106.4 in 2Q16 to 83.9 in 3Q16. Going forward, businesses will likely to remain cautious in expanding capacity, due to headwinds and uncertainties on external environment, especially the UK s EU referendum and volatility in both commodity and financial markets. Stronger growth in services, construction and mining sectors On the supply side, services, manufacturing and mining sector registered a stronger growth on a yoy basis during the quarter. In particular, growth in services sector rose from 5.7% yoy in 2Q16 to 6.1% in 3Q16, underpinned by higher household spending, which has led to stronger growth in wholesale trade (8.9% yoy), retail trade (7.5%) restaurant (8.2%) and accommodation (4.9%). Meanwhile, information and communications sub-sector growth remained robust at 7.6% yoy (8.8% in 2Q16) on strong demand for data communication services, while transportation and storage sub-sector was driven by higher growth in airport passenger traffic in 3Q16, amid slower trade activity. With growth in the services sector continuing, the sector share to GDP rose to 54.2% (54% in 2Q16), and contributed 3.2 percentage points to GDP growth in 3Q16. Similarly, manufacturing sector growth also trended slightly higher to 4.2% yoy in 3Q16 (4.1% in 2Q16), supported by growth in export-oriented industries, including chemical and chemical products, as well as electrical and electronics products (6.6%). Meanwhile, stronger private expenditure led to further growth in domestic-oriented industries such as beverages and tobacco products (6.8% vs 6.2% in 2Q16), while transport equipment growth remained negative (-2.6% vs -6.2% in 2Q16) as sales of passenger cars continued to contract during the quarter. Construction sector growth grew at a slower pace of 7.9% yoy (8.8% in 2Q16), supported by civil engineering works amid continuation of petrochemical, transport and utility projects, while higher growth in residential subsector was driven by new and on-going construction activity in the mass market housing segment. Fig 5: GDP by economic activity 4Q15 1Q16 2Q16 3Q16 4Q15 1Q16 2Q16 3Q16 4Q15 1Q16 2Q16 3Q16 %yoy %qoq % contribution pts to GDP growth GDP by Economic Activity Agriculture, Forestry and Fishing 1.5-3.8-7.9-5.9-11.4-15.1 5.8 18.2 0.1-0.3-0.7-0.6 Mining and Quarrying -1.3 0.3 2.6 3.6 8.6 2.3-1.9-4.9-0.1 0.0 0.2 0.3 Manufacturing 5.0 4.5 4.1 4.2 4.2-4.9 5.3-0.1 1.1 1.0 1.0 0.9 Construction 7.4 7.9 8.8 7.9-1.1 4.9-5.3 9.8 0.3 0.4 0.4 0.4 Services 5.0 5.1 5.7 6.1 4.7-4.7 2.2 4.1 2.6 2.8 3.1 3.2 Import duties 39.1 27.0 4.1 5.7.9-4.7-4.5 1.1 0.4 0.3 0.1 0.1 GDP (2010 real prices) 4.5 4.2 4.0 4.3 3.2-4.6 2.3 3.6 4.5 4.2 4.0 4.3 Source: BNM On the other hand, growth in mining & quarrying improved further from 2.6% yoy in 2Q16 to 3.6% in 3Q16, on stronger crude oil production, particularly in Sabah. However, growth in the agriculture, forestry and fishing contracted for the third quarter, albeit at a slower pace of -5.9% yoy (-7.9% in 2Q16), due to the lagged impact of adverse El Niño dry weather conditions on crude palm oil yields, resulting in 13.8% decline in production of palm oil during the quarter (-19.3% in 2Q16). Affin Hwang Investment Bank Bhd (389-U) Page 4 of
November 2016 Maintaining our real GDP growth forecast at 4.2% for 2016 With the accumulated average GDP growth of 4.2% yoy in the first three quarters of 2016, and in view of healthy domestic demand, with real GDP estimated at around 4.2-4.3% in 4Q16, we are maintaining our long held projection of a full year 2016 real GDP of 4.2%, which was in line with the official estimate of 4.0-4.5%. Downside risks to economic growth in 2017 have increased Going forward, the economic outlook has turned to greater uncertainty from external development. We believe that, with Donald Trump winning the US Presidency, and given the uncertainty surrounding his international trade policies when he takes office, there are rising concerns on the growth momentum of global trade and global economy next year. The possibility of rising US protectionist policies has led to speculative short-term volatility in the foreign exchange and financial markets in emerging Asia. This may have been caused by the fear of unpredictability in Trump s trade and foreign policies, with fear that Trump may use the threat of tariffs against Asian countries (especially China) to correct US trade imbalances with the region. Recently, the IMF has warned the diminishing pace of new trade reforms in recent years, together with a rise in protectionist measures, appears to have contributed in part to the global slowdown in trade. Real GDP growth forecasted at 4.4% for 2017 for now The headwinds from the external front, which may put downward pressure on Malaysia s external trade, investment and domestic demand, have increased the possibility of a downgrade of Malaysia s real GDP growth for 2017, which we are currently maintaining at 4.4%, against official forecast of 4.0-5.0% next year. Given that China is Malaysia s largest trading partner, if the newly elected US President honoured his campaign pledge to impose a 45% across-the-board tariff on goods imported from China from 2017, the Malaysian economy will not be spared from the possible global trade wars, if it happened. There are also uncertainties over the outcome of the post-referendum future of the UK in the EU. Fig 6: Affin Hwang s GDP forecasts 2015 2016E 2017F 2015 2016E 2017F 2015 2016E 2017F %yoy % of GDP Ppt to GDP growth GDP by Expenditure Components Total Consumption 5.7 5.0 4.8 65.8 66.3 66.6 3.7 3.3 3.2 Private consumption 6.0 5.5 5.4 52.4 53.0 53.5 3.1 2.9 2.9 Public consumption 4.4 3.0 2.5 13.5 13.3 13.1 0.6 0.4 0.3 Total Investment 3.7 3.4 4.0 25.8 25.6 25.5 1.0 0.9 1.0 Private investment 6.4 4.5 5.0 16.9 16.9 17.0 1.1 0.8 0.8 Public investment -1.0 1.5 2.0 8.9 8.7 8.5-0.1 0.1 0.2 Domestic Demand 5.1 4.5 4.6 91.6 91.9 92.1 4.7 4.2 4.2 Net exports -3.8-0.8 2.8 8.6 8.2 8.0-0.4-0.1 0.2 Exports 0.6 1.1 2.0 72.9 70.7 69.1 0.5 0.8 1.4 Imports 1.2 1.3 1.9 64.3 62.5 61.0 0.8 0.9 1.2 GDP (2010 real prices) 5.0 4.2 4.4 100.0 100.0 100.0 5.0 4.2 4.4 GDP By Kind of Economic Activity Agriculture, Forestry and Fishing 1.2-2.8 2.0 8.9 8.3 8.1 0.1-0.2 0.2 Mining and Quarrying 4.7 1.6 1.5 9.0 8.7 8.5 0.4 0.1 0.1 Manufacturing 4.9 4.3 4.5 23.0 23.0 23.0 1.1 1.0 1.0 Construction 8.2 8.3 8.0 4.4 4.6 4.7 0.3 0.4 0.4 Services 5.1 5.2 5.1 53.5 54.0 54.4 2.7 2.8 2.8 GDP (2010 real prices) 5.0 4.2 4.4 100.0 100.0 100.0 5.0 4.2 4.4 Source: BNM, Affin Hwang estimates Affin Hwang Investment Bank Bhd (389-U) Page 5 of
November 2016 Domestic demand is key to sustain economic growth Growth in domestic demand will remain as an anchor of Malaysia s economic growth, supported by healthy private consumption and private investment in infrastructure projects. In the recently announced Government Budget 2017, Government continued to address the rising cost of living concerns, which raised the quantum of cash handouts through BR1M by RM50-200, as well as lifestyle tax reliefs, which are likely to support private consumption next year. Meanwhile, on-going big-scale infrastructure projects, such as Pan Borneo and MRT Line 2, as well as new projects such as East Coast Railway Line (ECRL) as well as other Memorandum of Understanding (MOUs) signed between Malaysia and China, totalling RM4bn is also projected to support investment activity. However, most of the MOUs are in negotiation stage and these projects have also long gestation periods. Tax and expenditure of 2017 Budget supportive of the economy As such, despite generous measures were introduced for the people and business, in the 2017 Budget proposals, total expenditure allocation of RM260.8bn was also 3.4% higher than decline of 2.2% estimated expenditure for 2016, where operating expenditure is projected to increase by 3.7% to RM2.8bn in 2017, while development expenditure is expected to increase by 2.2% to RM46bn in 2017. We believe the focus of sustaining economic growth in Budget 2017 (through stimulus and government spending) still takes slightly more precedence over fiscal deficit reduction, therefore the Budget is supportive of the economy in 2017. Current account surplus widened to RM6.0bn in 3Q16 From the balance of payment (BOP) position, the country s current account surplus widened from RM1.9bn, or 0.6% of GNI in 2Q16 to RM6.0bn, or 2.0 of GNI in 3Q16 (RM5bn, or 1.8% of GNI in 1Q16), the largest quarterly surplus in 2016. This was driven by higher surplus in the goods account of RM26.5bn (RM19.8bn in 2Q16), offsetting a higher deficits services and primary account. This was despite negligible improvement in trade surplus during the quarter (RM18.0bn in 3Q16 vs RM17.9bn in 2Q16) that was due to larger contraction in gross exports (-2.3% yoy) relative to gross imports (-0.1%). Exports of manufactured goods declined 1.1% yoy, the first contraction since 2Q13, dragged by major resource and non-resource based manufactured products. Fig 7: Balance of Payments (BOP) Balance of Payments (RMbn, unless stated otherwise) 20 2015 3Q 4Q 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Current account 48.6 34.7 7.3 6.2 11.3 8.1 4.7 10.5 5.0 1.9 6.0 (% of GDP) 4.4 3.0 2.6 2.1 4.1 2.9 1.6 3.5 1.7 0.6 1.9 (% of GNI) 4.9 3.5 2.7 2.2 4.2 2.9 1.7 3.6 1.8 0.6 2.0 Goods 113.3 109.6 25.7 28.9 27.7 23.6 27.2 31.1 23.5 19.8 26.5 Services -10.7-21.0-3.9-5.1-3.5-5.0-6.0-6.4-6.8-4.6-5.1 Primary income -36.6-32.0-9.5-12.8-7.7-4.6-10.6-9.1-6.7-8.2-10.8 Current transfers -17.4-21.9-5.1-4.9-5.1-5.9-5.9-5.0-4.9-5.1-4.6 Capital account 0.3-1.1 0.1 0.3 0.0-1.1 0.0 0.0 0.0 0.1 0.0 Financial account -80.0-50.9-2.2-27.6-29.8 5.7-30.7 3.9 5.8 9.5-6.3 Direct investment -18.0 4.8 2.2-1.8-1.4 0.7-0.2 5.8 3.7 5.3 3.0 Portfolio investment -39.4-28.2-11.2-20.4-7.9-11.8-24.4 15.9 13.1 0.1-10.6 Financial derivatives -1.0-0.7 0.0 0.2 0.0-0.4-0.1-0.1 0.5 0.0-0.1 Other investments -21.7-26.8 6.7-5.7-20.5 17.3-5.9-17.6-11.5 4.1 1.4 Errors and omissions -5.5 21.1-11.8 9.6 2.8-4.3 43.0-20.4-38.4-2.7.9 Overall balance -36.5 3.8-6.7-11.5-15.7 8.4 17.0-6.0-27.6 8.8.6 Foreign reserves (Outstanding in US$) 115.9 95.3 127.3 115.9 105.1 105.5 93.3 95.3 97.0 97.2 97.7 Source: BNM Affin Hwang Investment Bank Bhd (389-U) Page 6 of
Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb- Jun- Oct- Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 November 2016 Meanwhile, the services account recorded a larger deficit of RM5.1bn in 3Q16 (RM4.6bn in 2Q16), due to higher payments for construction services and outbound tourism and participation in international sport events. According to BNM, higher payments for personal, cultural, and recreational services were also recorded as residents engaged foreign-service providers in hosting some international events during the quarter. Likewise, deficits in primary income also widened to RM10.8bn (-RM8.2bn in 2Q16) due to higher income accrued to foreign investors, especially as FDI firms in the manufacturing, services and mining sectors continued to declare sizeable profits following higher demand and recovery in commodity prices. On the other hand, income accrued to Malaysian firms with ventures abroad was lower. However, secondary income account recorded a smaller deficit of RM4.6bn (RM5.1bn in 2Q16), mainly due to lower outward remittances by foreign workers. Financial account recorded a net outflow for the first time since 3Q15 Meanwhile, Malaysia s financial account recorded a net outflow of RM6.3bn during the quarter (net inflow of RM9.5bn in 2Q16), due to large outflows in portfolio investment, offsetting net inflows in direct investment and other investment accounts. Continued net inflow in direct investments (RN3.0bn in 3Q16 vs RM5.3bn in 2Q16) was supported by higher incurrence of direct investment liabilities compared to the accumulation of direct investment assets. Direct investments abroad (DIA) by Malaysia companies amounted to RM3.6bn (RM3.5bn in 2Q16), due to equity capital injections to subsidiaries abroad, mainly in services sector. Meanwhile, foreign direct investment (FDI) into Malaysia moderated to RM6.5bn (RM8.8bn in 2Q16), as sustained equity capital injection and higher reinvested earnings were partially offset by a net extension of loans by subsidiaries in Malaysia to their parent companies. However, portfolio investment recorded a significant net outflow of RM10.6bn during the quarter, as maturity of foreign-currency denominated Wakala Global Sukuk by Federal Government and Bank Negara Monetary Notes (BNMN) led to a net outflow of RM3.5bn by non-residents. Foreign holding of Malaysian Government Securities (MGS) was lower by RM654m to RM181.2bn as at end-september. Furthermore, higher net outflow of RM7.1bn was registered in portfolio investment by residents, driven by higher net acquisition of foreign debt and equity securities. Fig 8: Foreign holding of MGS RM bn MGS % of total oustanding MGS (RHS) 200 180 160 0 120 100 80 60 40 20 0 % 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% Source: BNM, Affin Hwang Affin Hwang Investment Bank Bhd (389-U) Page 7 of
November 2016 Meanwhile, other investments account recorded a net inflow for the second quarter, at RM1.4bn, as the repatriation of maturing interbank placements abroad by domestic banks were mostly offset by the maturity of non-resident financial institutions deposits in domestic banks. However, errors and omissions turned around by recording a net inflow of RM.9bn or 4% of total trade, mainly due to the foreign exchange revaluation changes in international reserves as a result of weakening ringgit against major currencies during the quarter. As a result, the overall balance of payments also recorded a higher surplus of RM.6bn for the second quarter, while Malaysia s international reserves remained relatively stagnant at US$97.8bn as at 31 st October 2016, sufficient to cover 8.4 months of retained imports (significantly higher than 3-month international threshold) and 1.2 times short-term external debt. Maintaining our forecast for 2016 current account surplus at RM15bn In 9M16, current account surplus amounted to RM12.9bn, or 1.5% of GNI, as 3Q16 current account surplus exceeded our expectation. Nevertheless, we maintained our current account surplus forecast of RM15bn, or 1.3% of GNI for 2016, as we expect growth in gross imports continued to outpace gross exports in 4Q16, driven by imports of capital goods as major infrastructure projects continue. We expect full-year 2016 trade surplus to narrow to RM82.7bn, compared to RM91.6bn in 2015 (RM59.8bn for 9M16). Sharp weakness in Ringgit against US$ due speculative positioning Since Donald Trump claimed victory in the US Presidential Election, the Malaysian ringgit has weakened by around 3.2% to RM4.34/US$ as of 11 th November. However, the offshore rate, the ringgit's one-month nondeliverable forwards (NDFs), fluctuated in recent days and depreciated sharply against US$, as a result of speculative positioning. Bank Negara Malaysia (BNM) had earlier highlighted in a press release that the ringgit is a non-internationalised currency, where prices should be fully determined by onshore financial market transactions that are be driven only by the fundamentals and genuine trade and investment activities in Malaysia. Since ringgit is a non-internationalised currency, we believe this will prevent speculators through offshore rates to determine and decide on the direction of the onshore exchange rates, and limiting the ability for foreign speculators to short and artificially depreciate the ringgit sharply. BNM is taking measures to ensure the markets do not price ringgit excessively and out of sync, while providing the necessary liquidity in the foreign exchange market. BNM noted that there is no change in the Foreign Exchange Administration (FEA) rules and there is no introduction of any new measures. BNM is taking measures to reinforce existing rules that have been in place to prohibit facilitation of ringgit NDF, stating that the Malaysian licensed banks must avert from facilitating any foreign exchange (FX) transaction that could be related to offshore ringgit NDF market activities. However, no further details of the measures were announced. Government officials ruling out capital control or Ringgit peg Recently, a senior Government official from Ministry of Finance (MOF) was quoted as saying that Malaysia remains committed to an open economy and pegging of the ringgit against US$ or capital controls were not options. Affin Hwang Investment Bank Bhd (389-U) Page 8 of
Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct- Oct-15 Oct-16 November 2016 BNM Governor also said that the country s central bank will not be pegging the Ringgit as the currency should not be decided on speculative positioning. We also believe that the flexibility of the country s exchange rate is important to absorb these global adjustments and volatility, with commitment to marketfriendly policies as well as maintaining market integrity. As happened previously, to protect the economy from capital outflows and excessive volatile Ringgit movements, Malaysia had experienced sharp drop in BNM international reserves, witnessed in previous episodes of market volatility, such as the decline in reserves of about US$38.1bn during 2008-09 Global Financial Crisis (GFC) and US$16.7bn drop during 1997-98 Asian Financial Crisis (AFC). On both occasions, Malaysian Ringgit and the reserves level recovered. Fig 9: Malaysia s reserves USD bn Official reserve asset MYR/USD (average) 160 0 120 100 80 60 40 20 0 MYR/USD 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Source: BNM, Affin Hwang Currently, BNM s international reserves have continued to increase steadily on a monthly basis to RM405.5bn (US$97.8bn) as at 31 October 2016, from RM390.4bn (US$97.2bn) as at end-june 2016. Despite some downside risks to the country s reserves moving forward, we believe in recent years, through the establishment of reciprocal currency arrangements or swap-lines between central banks in Asia, the facilities will be available for regional central banks to obtain US$ funding, and providing the necessary liquidity in the foreign exchange market, if necessary. Against any major downside risks from external developments, we believe Malaysia s economic fundamentals would continue to remain sound, supported by an improving economic outlook, lower fiscal deficit position, sustainable (though narrowing) current account surplus, healthy foreign exchange reserves as well as manageable inflationary pressure. The uncertainty on Ringgit volatility may likely be temporary The recent strength in the US$ against regional currencies is not associated to a stronger US economic growth but the surge in volatility was attributed to investors concerns regarding Trump s trade policies against China and expectations of possible devaluation of the Chinese yuan (CNY), in tandem with the possibility of US Fed raising its Fed Funds rate later. However, there were no clear US macroeconomic indicators to point towards a strong and sustainable US economy, where it can improve yields of the US$ denominated assets significantly to cause a large capital outflow from Asia. Affin Hwang Investment Bank Bhd (389-U) Page 9 of
Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan- Sep- May-15 Jan-16 Sep-16 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun- Jan-15 Aug-15 Mar-16 Oct-16 November 2016 As such, we believe the short term negative volatility, particularly on the capital and foreign exchange markets in the region, will likely be manageable. Going forward, BNM will also likely intervene to smoothen out wide fluctuations in the foreign exchange market to support the Ringgit. Revising our Ringgit forecast to RM4.20/US$ by end 2016 Before the announcement of Trump as US President, based on the country s sound macroeconomic fundamental, we had forecasted that Ringgit will likely appreciate to RM3.95-4.00/US$ towards end 2016 and gradually appreciate to RM3.90-3.95/US$ by end 2017. Nevertheless, as Malaysia may experience volatility in short term capital flows due to the shift in investor sentiments as well as portfolio rebalancing due to external events, we are revising downward our forecast on the Ringgit to RM4.20/US$ by end-2016, which is still an appreciation of 3.2% from the current level. We expect Ringgit to likely appreciate to RM4.10/US$ by end 2017, where the country s exports and economic growth will have some positive impact from a weaker Ringgit. Stance on monetary policy to remain accommodative We expect the country s headline inflation to increase but remain manageable, rising from an average around of 2.2-2.3% in 2016 (2.1% in 2015) to 2.7% in 2017. With a dual mandate to ensure a balance between inflation and economic growth, we believe BNM will focus on providing support for the sustainability of economic growth in the months ahead. The interest rate differential between the US FFR and Malaysia s OPR remains wide and positive. We believe BNM would prefer to leave its policy rate unchanged at the next and last MPC meeting for the year on 23 November, in order to keep the interest rate differential between the US and Malaysia at around 225bps. BNM likely to maintain its overnight policy rate at 3.0% However, any possibility that the BNM may cut its OPR rate by another 25bps at the MPC meetings in 1H17 will likely be data-dependent on external uncertainties. BNM cautioned that downside risks remain high, arising from the uncertainties over the timing and outcome of the UK-EU negotiations following the UK s EU referendum, persistence of low energy and commodity prices as well as possible disorderly market conditions arising from policy shifts in major economies. Fig 10: Inflation and OPR %yoy CPI (RHS) BNM OPR (RHS) 10 8 6 4 2 0-2 -4 % 4.0 3.5 3.0 2.5 2.0 1.5 Fig 11: Real effective exchange rate and MYR/USD Index REER MYR/USD 110 105 100 95 90 85 80 MYR/USD 4.5 4.3 4.1 3.9 3.7 3.5 3.3 3.1 2.9 2.7 2.5 Source: BNM Source: BNM, BIS Affin Hwang Investment Bank Bhd (389-U) Page 10 of
November 2016 Focus Charts Chart 1: Malaysia s GDP growth Chart 2: Asean countries quarterly GDP growth Chart 3: Private vs public expenditure Chart 4: Net exports Chart 5: Population aged 15-64 Chart 6: Cumulative fiscal balance Source: All data for charts sourced from CEIC and BNM Affin Hwang Investment Bank Bhd (389-U) Page 11 of
November 2016 Focus Charts Chart 7: GDP by economic activity Chart 8: Manufacturing GDP Chart 9: Services sector Chart 10: Manufacturing GDP breakdown Chart 11: Asean countries official forecast Chart 12: Asean manufacturing PMI Source: All data for charts sourced from CEIC and BNM Affin Hwang Investment Bank Bhd (389-U) Page 12 of
November 2016 Focus Charts Chart 13: Current account balance Chart : Main components in current account Chart 15: Goods account vs trade balance Chart 16: Direct investment and portfolio investment Chart 17: Gross imports Chart 18: Services account components Source: All data for charts sourced from CEIC and BNM Affin Hwang Investment Bank Bhd (389-U) Page 13 of
November 2016 Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (389-U) (formerly known as HwangDBS Investment Bank Berhad) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affinhwang.com Email : affin.research@affinhwang.com Tel : + 603 23 8668 Fax : + 603 25 3005 Affin Hwang Investment Bank Bhd (389-U) Page of