PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

19 March 2010

Inflation Rate Moderated To 1.2% Yoy In February

◆ Despite the Chinese New Year celebration, the headline inflation rate moderated to 1.2% yoy in February,
from +1.3% in January. This was the first easing after two consecutive months of picking up, indicating that price
pressure has eased somewhat, as traders might have difficulties in raising prices given that economic recovery is
still at its early stage. The moderation was reflected in a slower increase in the core inflation rate. This was offset
partially by a pick-up in food & non-alcohol beverage prices.

◆ Going forward, inflation rate is expected to inch up, on the back of stronger domestic demand and the
Government’s move to gradually remove some of its subsidies. As a whole, we believe inflation will likely trend
up to 2.0% in 2010, from +0.6% in 2009.

◆ While the headline inflation is likely to gradually trend up, we believe it will likely be manageable. Nevertheless,
following the rate hike by the Central Bank on 4 March, in a move to normalise interest rates from the current
unprecedented low levels, we believe Bank Negara will likely raise its OPR by another 25 basis points in
July 2010 to 2.5% and stay at this level until the end of the year.

Despite the Chinese New Year celebration, the headline inflation rate moderated to 1.2% yoy in February, from
+1.3% in January (see Table 1). This was the first easing after two consecutive months of picking up, indicating that
price pressure has eased somewhat, as traders might have difficulties in raising prices given that economic recovery is
still at its early stage. The moderation was reflected in a slower increase in the core inflation rate, which eased
to +1.1% yoy in February, from +1.4% in January. This was attributed to a sharper drop in the prices of clothing &
footwear and slower increases in the prices of furnishing & household products as well as the costs of housing, water,
electricity, gas & other fuels; recreation services; and education. These were, however, offset partially by a pick-up in
the prices of alcoholic beverage & tobacco and the costs of transport. The costs of healthcare and communications as
well as charges at restaurants & hotels, on the other hand, remained stable during the month. Food & non-alcohol
beverage prices, however, inched up to 1.3% yoy in February, from +1.2% in January, due partly to the festive
season.

A reclassification of items according to their durability and services rendered showed that the slowdown in inflation rate
was due to a sharper decline in prices of semi-durable goods and slower increases in prices of durable-goods as well
as the costs of services. Prices of non-durable goods, on the other hand, remained stable during the month.

Mom, inflation rate remained unchanged in February, after rising by 0.2% in January. This was reflected in the
core inflation rate, which remained unchanged during the month, compared with +0.2% mom in the previous month.
Declines in the prices of clothing & footwear and furnishing & household products as well as slower increases in the costs
of healthcare and education were offset by a pick-up in the costs of housing, water, electricity, gas & other fuels and
charges at restaurants & hotels. The costs of communications and recreation services as well as prices of alcoholic
beverage & tobacco, on the other hand, remained unchanged during the month. Meanwhile, food & non-alcohol beverage
prices eased to 0.1% mom in February, from +0.2% in January.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

A comprehensive range of market research reports by award-winning economists and analysts are Page 1 of 3
exclusively available for download from www.rhbinvest.com
 19 March 2010

Table 1
Weights In The CPI
New 2008 2009 2010 2010 2009 2010
(2005=100) Jan Feb Jan Feb (Jan-Feb)
Group: Weights (%) %,yoy %,mom %,yoy %,Cum yoy

Food & non alcoholic beverages 31.4 8.8 4.1 +0.2 +0.1 1.2 1.3 9.5 1.2
Alcoholic beverages & tobacco 1.9 7.3 6.1 0.0 0.0 2.9 3.0 8.3 3.0
Clothing & Footwear 3.1 -0.5 -0.9 +0.6 -0.8 -0.7 -2.2 -0.7 -1.5
Housing, water, electricity & gas 21.4 1.6 1.4 0.0 +0.1 1.1 0.9 1.6 1.1
Furnishings, Household equipment 4.3 3.0 2.9 +0.2 -0.1 0.8 0.6 4.8 0.7
Health 1.4 2.2 2.3 +0.3 +0.2 1.5 1.5 2.6 1.5
Transport 15.9 8.8 -9.4 +0.1 +0.1 0.7 0.8 -2.1 0.7
Communication 5.1 -0.6 -0.5 0.0 0.0 -0.4 -0.4 -0.5 -0.4
Recreation services & culture 4.6 1.8 1.5 +0.1 0.0 2.7 2.6 1.0 2.6
Education 1.9 2.3 2.4 +0.8 +0.2 1.8 1.7 2.7 1.7
Restaurant & hotels 3.0 6.6 2.9 +0.2 +0.3 1.5 1.5 4.5 1.4
Miscellaneous goods & services 6.0 3.3 3.8 +0.2 -0.2 4.4 2.5 3.2 3.5

TOTAL 100.0 5.4 0.6 +0.2 0.0 1.3 1.2 3.8 1.3
Core CPI 68.6 3.7 -1.1 +0.2 0.0 1.4 1.1 1.1 1.3

Going forward, inflation rate is expected to inch up, on the back of stronger domestic demand. Higher crude oil
price, which is projected to fluctuate at between US$80-100/barrel in 2010, compared with an average of US$62/barrel
in 2009, and commodity prices will also contribute to a pick-up in prices. In addition, the Government plans to gradually
remove some of the subsidies in order to reduce its financial burden. Already, the Government has allowed sugar price
to be increased by 20 sen and it has removed the subsidy for white bread at the beginning of the year. As a whole,
we believe inflation will likely trend up to 2.0% in 2010, from +0.6% in 2009. Meanwhile, the Government said that
it had scrapped its petrol subsidy restructuring scheme, which it plans to implement in May, following negative feedback
from the public and it has no plan to raise or reduce retail petrol prices for now. Similarly, there is no news of a hike
in power tariff in the near term.

While the headline inflation is likely to gradually trend up, we believe it will likely be manageable. Nevertheless, as the
economy has turned around in the 4Q of last year and is expected to improve further in 2010, there is a need for the
Central Bank to bring interest rates back to a more neutral level to prevent financial imbalances from building up. As
a result, the Central Bank raised its overnight policy rate (OPR) by 25 basis points to 2.25% on 4 March. We believe
it will raise it again, albeit at a measured pace, and the OPR will likely be raised by another 25 basis points in
July 2010 to 2.5%. Indeed, Bank Negara Malaysia Governor Tan Sri Dr Zeti said on 16 March that “the Central Bank
may increase interest rates further to avert asset bubbles and discourage risky investments by people seeking better
returns, even as inflation will likely remain modest this year”. Nevertheless, we believe the Central Bank would not raise
interest rates at every policy meeting given expectation of a slow and uneven global economic recovery. This suggests
that the OPR will likely stay at 2.50% until the end of the year. Given that this is considered as normalisation and not
tightening per se, we believe a mild and gradual increase in interest rates from an extremely low level would unlikely
affect consumer spending and business activities in a material way.

A comprehensive range of market research reports by award-winning economists and analysts are Page 2 of 3
exclusively available for download from www.rhbinvest.com
 19 March 2010

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of
RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution
only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are
based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and
criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein.
RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement
by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time
have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual
financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable
for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and
encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will
depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees
or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and
financing activities as well as providing investment banking and financial advisory services. In the ordinary course of its
trading, brokerage, banking and financing activities, any member of the RHB Group may at any time hold positions, and may
trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of
any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding
company and the respective directors, officers, employees and agents of each of them. Investors should assume that the
“Connected Persons” are seeking or will seek investment banking or other services from the companies in which the securities
have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been
reviewed by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,”
including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report
have received compensation based upon various factors, including quality of research, investor client feedback, stock picking,
competitive factors and firm revenues.

Page 3 of 3
A comprehensive range of market research reports by award-winning economists and analysts are
exclusively available for download from www.rhbinvest.com