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Page 1 of 25
3 November 2016
Fig 1: Malaysia GDP growth Fig 2: Trade to GDP ratio: Regional comparison
Source: Bank Negara Malaysia (BNM), CEIC, Affin Hwang estimates Source: World Bank
The International Monetary Fund (IMF), in its October issue of the World
Economic Outlook (WEO), expects some improvement in the global
economy, with global GDP growth rising by 3.4% in 2017, higher than its
forecast of 3.1% in 2016 (3.2% in 2015). There is a possibility of some
slowdown in world economic indicators that may prompt IMF to make
another round of downward revisions to global GDP growth for 2017, which
has already been revised downward three times from the earlier projection
of 3.8% a year ago.
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3 November 2016
According to the IMF, the downside risks to 2017 would also be influenced
by tensions from the US political scene, where anti-immigrant and anti-trade
rhetoric has been prominent from the start of the current presidential
election. Across the world, the IMF noted that protectionist trade measures
have been on the rise. The World Trade Organization (WTO) also cautioned
about rising concerns of growing anti-globalization sentiment, where anti-
trade policy positions could worsen from the perspective of global trade as
well as job creation and economic growth and development, which are
closely linked to an open trading system.
According to the WTO, in its latest report, despite some downside risks from
anti-trade sentiment on international trade, growth in global trade is
projected to improve from 1.7% in 2016 to a range of 1.8-3.1% in 2017, with
a mid-point of 2.5%. While higher, this would still be the sixth consecutive
year with less than 3% growth for global trade, reflecting WTO’s cautious
view of the global economy in 2017.
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3 November 2016
Real GDP at market exchange rates 2.3 2.2 2.5 2.4 2.2 2.5
Developed economies 1.1 1.0 1.7 1.9 1.5 1.7
Developing economies 4.7 4.5 4.2 3.4 3.4 4.1
North America 2.3 1.5 2.4 2.3 1.6 2.3
South and Central America 2.9 3.4 1.0 -1.0 -1.6 1.4
Europe -0.2 0.5 1.5 1.9 1.7 1.5
Asia 4.4 4.3 4.0 4.0 3.9 3.9
Other regions* 3.9 2.6 2.6 0.9 1.4 2.6
Note: *Other regions comprise the Africa, Commonwealth of Independent States and Middle East
Source: WTO Secretariat for trade, consensus estimates for GDP
The modest recovery in OECD CLI was also reflected in the non-OECD
member countries, with the CLI for China staying flat at 98.9 for the second
straight month, but still below the 100 mark for the 21st consecutive month.
Source: OECD
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3 November 2016
Source: Bloomberg
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3 November 2016
The US household debt-to-GDP ratio, which was above 95% of GDP during
Global Financial Crisis 2008-09, has trended lower and stabilized, at 78.3%
of GDP as of 2Q16. With US labour market conditions improving, as well as
increasing signs of improvement in leveraging at the consumer level and
higher net worth of US households, we believe the improvement in US
consumer spending will likely be sustained.
Source: CEIC
Consistent with the IMF forecasts, the US Fed expects the US economy to
be a tad higher, as household spending has continued to advance, and the
housing sector has shown further signs of improvement. For 2017, GDP
growth forecast has been maintained at the range of 1.9-2.2%. However,
the US unemployment rate was revised higher to 4.7-4.9% range for 2016,
which was higher than 4.6-4.8% previously forecasted, but likely to improve
to 4.5-4.7% in 2017, slightly better when compared to the US Fed’s long-
term average of 4.8%.
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3 November 2016
According to the latest Wall Street Journal's monthly survey, about 81.7% of
the economists have predicted that the US Fed will likely raise the FFR in
December. However, judging from the dot plots of FFR expectations, the
FOMC members are guiding that any increase in the FFR is likely to be
gradual, where it indicated one rate hike for 2016, and possibly a gradual
two hikes in 2017. We believe the gradual increase in the US policy rate
signals that the US Fed is not looking solely at the performance of the US
economy, but also at global financial developments.
China's GDP growth rose by 6.7% in 3Q 2016, the same level compared to
the first half of the year, and still within the annual growth target range of
6.5% to 7.0%, official data showed. According to the Political Bureau of the
Communist Party of China (CPC) Central Committee, China's economy had
posted stable growth in the past three quarters with concrete progress made
in structural reforms, as evidenced by rapid high-tech sector development,
strong service sector growth, a stable financial market and better-than-
expected employment.
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3 November 2016
Source: IMF
The IMF already has cautioned that economic, political, and institutional
uncertainty and the likely reduction in trade and financial flows between the
UK and the rest of the EU over the medium term are expected to have
negative macroeconomic consequences. We believe this uncertainty as well
as lingering concerns about Brexit and the political contagion in the EU may
hurt business and consumer sentiment, which would eventually hurt the real
economy, especially in the UK.
Source: Bloomberg
However, with the easy monetary policy still in place to support economic
growth in the Euro area, we expect GDP growth for the area to be 1.7% in
2016 and 1.5% in 2017.
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3 November 2016
At the recent October meeting, the European Central Bank (ECB) Governing
Council decided to keep its monetary policy unchanged, alleviating some
concerns of possible tapering. The ECB has targeted to maintain its policy
interest rate at 0%, while rates for the marginal lending facility and the
deposit facility remain at 0.25% and -0.40%, respectively.
The ECB also decided to keep the pace of monthly asset purchases at
€80bn, and the buying program is to continue to March 2017. The Bank of
England (BOE), at its recent MPC meeting, also kept its monetary policy
unchanged, but we believe the BOE may still lower its bank rate by 0.25%
and expand its current pace of asset purchases, if necessary in 2017, to
support the UK economy after the triggering of Article 50, possibly by the
end of March 2017.
In its latest announcement, the Bank of Japan (BOJ) decided to maintain its
policy interest rate at -0.1% as well as leaving asset purchases unchanged,
where BOJ will continue to buy Japanese Government Bonds (JGBs) at an
annual pace of about ¥80trn, as well as previous plans for purchases of other
assets, such as exchange-traded funds (ETF) and Japanese real estate
investment trusts (J-REITs). However, while the BOJ is delaying further
easing measures, after the announcement in September, we believe the
central bank remains committed towards further monetary stimulus if the
recently announced fiscal stimulus and construction activity measures are
not strong enough measures to boost Japan’s economy and commitment to
CPI inflation exceeding 2%.
Page 9 of 25
3 November 2016
The key variance lies in the higher growth projection on private sector
spending, where private consumption and private investment are projected
to expand by 6.3% and 5.8% respectively in 2017 (against Affin Hwang’s
5.4% and 5.0%). However, we concur with the MOF that the recovery in
exports should remain largely intact in 2017, which is forecast to expand by
2.5% in 2017 (against Affin Hwang’s 2017 2.0%). This also reflected in our
cautiously optimistic view of a modest recovery in the global economy.
Source: CEIC
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3 November 2016
Source: CEIC
Fig 21: Slowdown in household debt growth Fig 22: Impaired loan
Source: CEIC
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3 November 2016
Over the years, the country’s labour market conditions have been relatively
stable in Malaysia amid the increase in the share of the working age
population to total population. This is despite some recent retrenchments
announced by corporates both in the services and manufacturing sectors,
which have led to a rise in the unemployment rate from 3.1% in 2015 to 3.6%
currently. However, the unemployment rate in Malaysia remained relatively
low compared to international standard. Meanwhile, employment has
remained at a healthy level.
With the consistent increase in the proportion of the population aged 15-64
in Malaysia in the past three decades, where the percentage-point increase
is the largest compared to other Asean countries in the past 10 years, we
believe private consumption will remain healthy going into 2017. This has
contributed to private consumption growth of 6.9% during the same period
(2006-2015), the strongest pace among the Asean countries.
Fig 24: Population aged 15-64 (% of total population) Fig 25: Private consumption vs GDP growth (2006-2015)
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3 November 2016
Fig 27: Nominal private investment Fig 28: Total approved investment
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3 November 2016
Source: MOF
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3 November 2016
This may lead to a possible shortfall in tax revenue receipts, especially from
direct taxes. However, with GST providing a more steady stream of revenue,
as collection is less subject to business cycle fluctuations, this should
provide better management of government finances. The GST collection has
reached nearly RM30bn as at mid-October 2016, which is only RM8.5bn
short of the full-year target of RM38.5bn (RM27bn in 2016). GST collection
is expected to increase to RM40bn in 2017.
With the establishment of the MTFF and CIA, we believe the government
will continue with strategies and implement plans to achieve an average
medium-term fiscal deficit of 2.7% of GDP over 2016-2018, as well as the
target set in the 11th Malaysia Plan (11MP) of achieving 0.6% of GDP or
RM9.9bn by 2020. Please refer to our associated report, Budget 2017 and
MOF Economic Report 2016/2017, dated 24 October 2016, for assessment
on 2017 Budget analysis.
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3 November 2016
Malaysia’s E&E sector has benefitted from global demand in the usage of
mobile devices, storage devices, optoelectronics, and embedded
technology. Given Malaysia’s participation in the global E&E value chain,
E&E exports are expected to trend higher following the projection of a
turnaround in worldwide semiconductor market. The World Semiconductor
Trade Statistics (WSTS) organization expects global semiconductor sales to
improve to US$331bn in 2017 (2% higher than US$325bn in 2016),
supported by increases from the Americas and Asia Pacific markets.
Fig 33: Average export unit value Fig 34: LNG net export
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3 November 2016
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3 November 2016
With the revision to the minimum wage from RM900 per month to RM1,000
per month, effective 1 July 2016, outward remittances by foreign workers
are likely to trend higher, resulting in larger deficits in the secondary income
account in 2017.
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3 November 2016
While the recent depreciation of the Ringgit against the US$ should have
some impact on Malaysia’s currency competitiveness, the country’s real
effective exchange rate (REER) has also moved in tandem with regional
currencies, see Fig 40.
Source: Bloomberg
Affin Hwang Investment Bank Bhd (14389-U)
Page 19 of 25
3 November 2016
Source: CEIC
We estimate that Petrol (RON95 & 97) and diesel, which contribute a weight
of about 8.5% to the CPI basket, will likely add about 1.0 percentage points
to CPI and raise headline inflation to around 2.0-2.5% in 4Q16. For full-year
2016, we expect headline inflation to average around 2.2-2.3% (2.1% in
2015) before trending higher to 2.7% in 2017. The concern on inflation going
forward is that a recovery in global commodity prices could put some upward
pressure on domestic food inflation, especially with sustained expansion in
the growth of domestic private consumption and economic activity.
Source: CEIC
Page 20 of 25
3 November 2016
The interest rate differential between the US FFR and Malaysia’s OPR
remains wide and positive. If the US Fed raises the policy rate by 25bps in
late 2016 from the current level, as expected by the consensus surveyed by
Bloomberg, 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. This is despite some regional central banks continued with their
easing of monetary policy, such as Bank Indonesia (BI).
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 especially, as we believe the BNM will put more focus
on economic growth, if both the European slowdown from Brexit and the
global economic growth deteriorate.
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3 November 2016
Focus Charts
Chart 1: Asean-5 countries GDP growth forecast Chart 2: 2017 IMF forecast
Chart 3: Global trade Chart 4: Manufacturing PMI
Chart 5: Brent price forecast by EIA Chart 6: World commodities price forecast
Source: All data for charts sourced from IMF, CEIC, Bloomberg,EIA
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3 November 2016
Focus Charts
Chart 7: MYR versus major currencies Chart 8: Malaysia trade
Chart 9: Manufacturing approved Chart 10: Index of services
Chart 11: Balance of payments Chart 12: Household debt by purpose of financing
Source: All data for charts sourced from IMF, CEIC, Bloomberg, BNM
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3 November 2016
Focus Charts
Chart 13: Breakdown of Malaysia exports
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3 November 2016
HOLD Total return is expected to be between -5% and +10% 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
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OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months
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