bank islam economic report on malaysia - jan 2013 - ge 13

7/28/2019 Bank Islam Economic Report On Malaysia - Jan 2013 - GE 13

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MALAYSIA: ECONOMIC &

POLITICAL OULOOK 2013AZRUL AZWAR AHMAD TAJUDIN

CHIEF ECONOMIST

Strictly Private & Confidential


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3

STILL LANGUISHING GLOBAL ACTIVITIES

Spots of deterioration in the globaleconomy since 3Q2012 withheightened downside risks part ofsluggish and bumpy recovery ORbeginning of a more prolonged

downturn? Global economicchallenges:o Short-term : Proactive response to short-

run slowdowno Medium-term: The global economy is

operating in a world of high public debt

and/or budget deficits in particular risingdoubts over:the viability of the Euro zone as

weaknesses in the periphery appears tohave spread to core economies

capability of peripheral Euro countries todeliver the required fiscal and structural

adjustments

Sources: JP Morgan & Markit, Bank Islam

Sources: OECD, Bank Islam

30

35

40

45

50

55

60

65

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

GLOBAL PURCHASING MANAGERS' INDICES (PMI)

Composite PMI Manufacturing PMI Services PMI

-15

-10

-5

0

5

10

15

20

25

30

Jan-96

May-96

Sep-96

Jan-97

May-97

Sep-97

Jan-98

May-98

Sep-98

Jan-99

May-99

Sep-99

Jan-00

May-00

Sep-00

Jan-01

May-01

Sep-01

Jan-02

May-02

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

OECD LEADING INDICATORS (12-MONTH ANNUALISED GROWTH)

China India Brazil Russia Japan Euro US UK Total


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LIMITED IMPROVEMENT TO GLOBAL TRADE

The World Trade Organisation (WTO)cut its global trade growth forecasts to2.5% for 2012 from 3.7% and to 4.5%

for 2013 from 5.6%:o given heightened risks on the downside

due largely to the prolonged Euro zone

crisis, sub-trend US growth, Chinasslowdown (after expanding by 7.7%during the first 3Qs of 2012, official GDPgrowth targets of 7.5% in 2012 and7.0%-7.5% in 2013) and Japanssubdued growth

o Improving trade growth outlook indeveloping economies given tentativesigns of a pick-up in recent exportperformance could be limited mainly to

Asian economies whose supply chainnetworks closely integrated with Chinaand could only partially fill up the global

slack

Sources: IMF, Bank Islam

Sources: SIA, SEMI, Bank Islam

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012F

2013F

2014F

2015F

2016F

2017F

ANNUAL WORLD MERCHANDISE TRADE GROWTH

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Jan-95

May-95

Sep-95

Jan-96

May-96

Sep-96

Jan-97

May-97

Sep-97

Jan-98

May-98

Sep-98

Jan-99

May-99

Sep-99

Jan-00

May-00

Sep-00

Jan-01

May-01

Sep-01

Jan-02

May-02

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

GLOBAL CHIP INDUSTRY

Global Semiconductor Sales (US billion, LHS) US Book-to-Bill Ratio (RHS)


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5

SLOW AND UNEVEN RECOVERY IN SIGHT

Potential major causes ofdisappointing global growth in2H2012 and 1H2013:o No let-up in the intensity of the Euro zone

sovereign debt crisiso Short-term contractionary effects on

growth due to austerity measures andfiscal cutbacks worldwide especially inEurope in particular peripheral Eurozone, the US and UK and spillovers ondeveloping countries

o Weak financial institutions and

inadequate policy responses in keyadvanced economieso Tail-off in Japans disaster reconstruction

spendingo Downshift in prospects for China, India

and Brazil

Sources: JP Morgan & Markit, Bank Islam

Sources: OECD, Bank Islam

30

35

40

45

50

55

60

65

Mar-06

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

EU MANUFACTURING PURCHASING MANAGERS' INDICES (PMI)

Eurozone Germany France Italy UK

-15

-10

-5

0

5

10

15

20

25

30

Jan-96

May-96

Sep-96

Jan-97

May-97

Sep-97

Jan-98

May-98

Sep-98

Jan-99

May-99

Sep-99

Jan-00

May-00

Sep-00

Jan-01

May-01

Sep-01

Jan-02

May-02

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

OECD LEADING INDICATORS (12-MONTH ANNUALISED GROWTH)

China India Brazil Russia Japan Euro US UK Total


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6

SLOW AND UNEVEN RECOVERY IN SIGHT (continued)

o The 11th hour compromised deal only averted the immediate pain of the fiscalcliff,a harsh combination worth US$609 billion of harsh spending cuts (US$109 billion indefence and non-defence programmes) and sharp tax increases (US$500 billion)due to take effect 1 Jan 2013 BUT not all possible negative impact: another potential political bickering and gridlock in the Congress as early as mid-Feb

2013 over the need to raise the US$16.4 trillion US Federal Govt debt ceiling as the

Treasury Dept exhausts extraordinarymeasures taken since 31 Dec 2012 to financeabout US$200 billion in deficits possible damage to fragile consumer and businessconfidence

2-month delay to automatic spending cuts orsequestration (US Govts belt-tightening topare down deficits) but to finally take effect on 1 March 2013 US growth to slowespecially in the 1H2013 but not grind to a halt

o Possibility of waning momentum in domestic demand in developing economies dueto fiscal constraints (Malaysia), overheating concerns (Indonesia) and a host ofother factors

o Stalled E&E turnaround? US SEMI book-to-bill ratio, a forward-looking indicator for the global chip industry

remained below parity for the 6th month in a row in November 2012 to 0.79x aftertentative signs of recovery with above the 1x-threshold for a short period of 4 consecutive

months between Feb 2012 and May 2012. The World Semiconductor Trade Statistics (WSTS) forecast modest growth in global

semiconductor sales in 2013 and 2014, by 4.5% and 5.2% to US$303 billion and US$319billion respectively vs. a 3.2% decline in 2012 to US$290 billion .


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7

SLOW AND UNEVEN RECOVERY IN SIGHT(continued)

On 9 October 2012, the IMF downgradedits global growth forecasts to 3.3% (from3.5%) for 2012 and 3.6% (from 3.9%) for2013 global slowdown to persistespecially in the earlier part of 2013 on:o Lacklustre US recoveryo Flimsy turnaround from recession in the

Euro zone and the UKo Stalled recovery in Japano Sub-par growth in China, India and Brazil

Asia will continue to power the global

growth at a faster clip than the globaleconomy despite risks of the Asian growthslowing to levels last seen during the 2009global financial crisis.

Sources: IMF, Bank Islam

Sources: IMF, national authorities, Bank Islam

2008 2009 2010 2011 2012 F 2013 F 2012 F 2013 F 2012 F 2013 F

World Output 2.8 -0.6 5.3 3.9 3.5 4.1 3.5 3.9 3.3 3.6

Advanced Economies 0.0 -3.6 3.2 1.6 1.4 2.0 1.4 1.9 1.3 1.5* United States -0.3 -3.5 3.0 1.7 2.1 2.4 2.0 2.3 2.2 2.1

* Euro Zone 0.4 -4.3 1.9 1.5 -0.3 0.9 -0.3 0.7 -0.4 0.2

* Japan -1.0 -5.5 4.4 -0.7 2.0 1.7 2.4 1.5 2.2 1.2

* United Kingdom -1.1 -4.4 2.1 0.7 0.8 2.0 0.2 1.4 -0.4 1.1

* Canada 0.7 -2.8 3.2 2.4 2.1 2.2 2.1 2.2 1.9 2.0

* Newly Indu str iali zed Asi a 1.8 -0.7 8.5 4.0 3.4 4.2 2.7 4.2 2.1 3.6

* Malaysia 4.8 -1.6 7.2 5.1 4.4 4.7 4.0 4.7 4.4 4.7

* China 9.6 9.2 10.4 9.2 8.2 8.8 8.0 8.5 7.8 8.2

* India 6.2 6.6 10.6 7.1 6.9 7.3 6.1 6.5 4.9 6.0

9-Oct-12

International Monetary Fund's Forecasts

16-Jul-12

Selected Economies

17-Apr-12

-10

-5

0

5

10

15

1Q95

3Q95

1Q96

3Q96

1Q97

3Q97

1Q98

3Q98

1Q99

3Q99

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

QUARTERLY REAL OR CHAINED GDP GROWTH OF SELECTED BRIC & OECD COUNTRIES (YoY %)

US UK EU Japan China India Brazil


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8


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GRAVITY-DEFYING FIRST 3QS OF 2012

Stronger-than-expected GDP showing inthe first 3Qs of 2012 in particular thesurprise 5.2% YoY pace in 3Q2012 andthe upgrade in 2Q2012 reading to 5.6%YoY from 5.4% YoY. Key takeaways in3Q2012:o 3.0% YoY contraction in exports, the first

decline on a quarterly basis since 3Q2009after decelerating for 2 consecutive Qs(2Q2012:+2.1% YoY, 1Q2012:+2.8% YoY) external demand to remain a major dragon the Malaysian economy at least until

1H2013o Very robust domestic demand, sustaining

double-digit growth of 11.4% YoY(2Q2012:+14.0% YoY, 1Q2012:+10.0%YoY), led by both public and privatesectors in particular:

Sources: BNM, Bank Islam

Sources: BNM, Bank Islam

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

1Q2006

2Q2006

3Q2006

4Q2006

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

QUARTER LY DEMAND SIDE PERFORMANCE (% YoY)

Ove rall GDP Pr ivat e Consumpt ion Public Co nsum pt ion Privat e Inve st me nt

Public Investment Exports Imports

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

1Q2006

2Q2006

3Q2006

4Q2006

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

QUARTERLY SECTORAL PERFORMANCE (% YoY)

Overall GDP Agriculture Mining & Quarrying

Manufacturing Construction Services


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GRAVITY-DEFYING FIRST 3QS OF 2012 (continued)

22.7% YoY spike in GFCF(2Q2012:+26.1% YoY, 1Q2012:+16.1%YoY), supported by both domestic andforeign investments of which publicinvestment was up by +22.4% YoY(2Q2012:+28.9% YoY, 1Q2012:+10.3%YoY) and private investment by +22.9%

YoY (2Q2012:+24.6% YoY,1Q2012:+19.8% YoY) 8.5% YoY jump in household spending

(2Q2012:+8.8% YoY, 1Q2012: +7.4%YoY), lifted by Govt cash transfers andassistance benefits while publicconsumption was up by 2.3%YoY(2Q2012:+10.9% YoY, 1Q2012:

+9.1% YoY)

Sources: Department of Statistics, MATRADE, Bank Islam

Sources: MIER, Bank Islam

50

60

70

80

90

100

110

120

130

1Q98

3Q98

1Q99

3Q99

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

MIER INDICATORS

Consumer Sent iment Index B usiness Condit ions I ndex

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

YoY GROWTH (3-MONTH MOVING AVERAGE BASIS)

IPI Gross Exports


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GRAVITY-DEFYING FIRST 3QS OF 2012 (continued)

o Growth moderation across almost all sectors: Construction sector remained the major growth leader: +18.3% YoY (2Q2012:+22.2%

YoY, 1Q2012: +15.5% YoY), led by the civil engineering sub-sector spanning acrossvarious industries/sub-sectors in particular roads/highways/bridges, transportation,utilities, oil & gas and services related as well as residential sub-sector

Pick-up in services output growth to 7.0% YoY (2Q2012:+6.6% YoY, 1Q2012:+5.7% YoY),

underpinned domestic-oriented activities Apparent slowdown in manufacturing activities, increasing by just 3.3% YoY(2Q2012:+5.6% YoY, 1Q2012:+4.4% YoY) on moderation in export-oriented anddomestic-oriented industries

Return to the positive territory for the agriculture sector despite a marginal 0.5% YoYgrowth (2Q2012:-4.7% YoY, 1Q2012:+2.1% YoY) thanks to a turnaround in CPO output

Unexpected slump in mining activities with a 1.2% YoY drop (2Q2012:+2.3% YoY,1Q2012:+0.3% YoY) as a result of lower natural gas production due to planned facility

shutdowns


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MALAYSIA: 2013, YEAR OF 2 HALVES?

The progress of economic rebalancingand transformation, on a journey tobecome a developed, high-incomenation by 2020 to gain traction.

Pockets of weakness in the 1H2013 witho erratic export performance given the still

tentative global recoveryo uncertainties related to GE13

A pick-up in Malaysias growthmomentum in 2H2013 with significantexport recovery on the widely expectedglobal turnaround thanks to:o Clarity about resolution to the Euro zone

crisis - resumption of recovery by mid-2013 particularly for core countries andreturn to growth for all nations by 2014

o More conclusive signs of sustainablebottoming out in the US and China

Sources: Department of Statistics, MATRADE, Bank Islam

Sources: MIER, Bank Islam

50

60

70

80

90

100

110

120

130

1Q98

3Q98

1Q99

3Q99

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

MIER INDICATORS

Consumer Sent iment Index B usiness Condit ions I ndex

-13.00

-8.00

-3.00

2.00

7.00

12.00

Jan-97

Apr-97

Jul-97

Oct-97

Jan-98

Apr-98

Jul-98

Oct-98

Jan-99

Apr-99

Jul-99

Oct-99

Jan-00

Apr-00

Jul-00

Oct-00

Jan-01

A

r-01

Jul-01

Oct-01

Jan-02

Apr-02

Jul-02

Oct-02

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

YoY GROWTH RATES OF LEADING, COINCIDENT & LAGGING INDICATORS

Leading Index Coincident Index Lagging Index


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13

PROSPECTS IN 2013

Notwithstanding a multitude ofuncertainties in the global economy andfinancial environment, the latest officialGDP growth guidance of between 4.5%-5.0% for 2012 and 4.5%-5.5% for 2013seems reasonably realistic - In-house

GDP growth forecasts of 5.1% for 2012and 5.3% for 2013 respectively exceedor at the upper-end of official targetedranges:o Domestic demand (+11.8% YoY during

the first 3Qs of 2012), proven so far to

be more than adequate to withstandexternal headwinds and absorb externalshocks, will continue to anchor growthon disposable income enhancementmeasures and other domestic demandsupportive incentives under Budget

2013, particularly led by:

Sources: BNM, Economic Report 2012/2013, Bank Islam

GROWTH (%) 2008 2009 2010 2011 1H2012 2012 BI 2012 MoF 2013 BI 2013 MoF

GDP (constant prices, 2000=100) 4.8 -1.5 7.2 5.1 5.1 5.1 4.5-5.0 5.3 4.5-5.5

Demand Side

Final Consumption Expenditure 8.4 1.4 5.8 8.9 8.1 7.8 7.9 5.2 4.2

* Private Consumption 8.7 0.6 6.6 7.1 8.1 8.0 7.0 6.2 5.7

* Public Consumption 6.9 4.9 2.9 16.1 8.4 7.2 11.3 1.2 -1.2

Gross Fixed Capital Formation (GFCF) 2.4 -2.7 10.4 6.5 21.3 19.9 13.5 10.2 9.3* Private Investment 0.1 -7.4 15.5 12.2 22.4 19.7 11.7 11.7 13.3

* Public Investment 5.2 2.9 5.0 -0.3 19.5 20.1 15.9 8.3 4.2

Domestic Demand 6.6 0.3 7.0 8.2 11.8 11.1 9.4 6.6 5.6

Exports 1.6 -10.9 11.3 4.2 2.5 1.4 1.6 4.2 2.8

Imports 2.3 -12.7 15.6 6.2 7.5 6.5 5.1 5.7 3.6

Supply Side

Agriculture, Fishing & Forestry 3.8 0.05 2.4 5.9 -1.5 -0.6 0.6 1.8 2.4

Mining & Quarrying -2.4 -6.5 -0.4 -5.7 1.3 1.0 1.5 2.5 2.7

Manufacturing 0.8 -9.0 11.9 4.7 5.0 4.3 4.2 5.1 4.9

Construction 4.4 6.2 6.0 4.6 18.9 18.1 15.5 11.0 11.2

Services 8.6 2.9 7.2 7.0 5.8 6.0 5.5 5.9 5.6


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14

PROSPECTS IN 2013 (continued)

investment revival, both private and public consumer spending notwithstanding expectations of public consumption slowdown given

limited room for further fiscal stimulus

o Across-the-board expansion in all sectors in 2013 with construction, servicesand manufacturing sectors as growth leaders: double-digit growth rates for construction activities, anticipated to persist in 2012 and

2013 with huge multiplier effects on the overall economy increase in services activities to sustain above 5.5% underpinned particularly by robustactivities in financial, real estate, communications segments

respectable manufacturing output growth, driven by both export-oriented and domestic-oriented industries


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15


Direct measures to further boost foreign and domestic direct investments(FDIs and DDIs), private or public sector led:o RM3 billion allocation to accelerate the implementation of the Entry Point Projects

(EPPs) under the 12 National Key Economic Areas (NKEAs) including the RM1billion Domestic Investment Strategic Fund under the Malaysian InvestmentDevelopment Authority (MIDA) announced in July 2012 to promote DDIs and

accelerate the participation of Malaysian companies in the global supply chainwhile leveraging on outsourcing activities and acquisition of technology byMalaysian companies

o RM6 billion allocation under the Private Finance Initiatives (PFI 2) to implementvarious projects such as refurbishment and maintenance of schools & healthclinics, housing development, water tanks, flood mitigation plans and sport facility

building to ensure the peoples well-being while spurring investment activities


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16


Notwithstanding the marginal 0.6% YoY increase in exports during the first3Qs of 2012 of which the 3Q2012 suffered a 3% contraction as evidence ofthe impact of global slowdown, the baseline scenario points to improvingprospects towards 1H2013, paving the way for a commendable accelerationespecially towards 2H2013 and in 2014 due to:o Optimism from stimulus measures such as aggressive monetary easing and/or

reflationary fiscal policy or other pro-growth macroeconomic policies already or willbe undertaken by the worlds major economies, coordinated or otherwise After spending US$2.3 trillion in QE1 and QE2, the US QE3 was announced in mid-Sep

2012, comprising a monthly programme to purchase mortgage-backed bonds worthUS$40 billion until a sustained turnaround in the job market, most probably after theunemployment rate dips to way below 7% (although still above the desired 5%-6% range)while helping to nurse the housing market to recovery

Chinas CNY1 trillion infrastructure stimulus package over 3 to 8 years to build subwaylines, railways, roads, highways, ports, etc announced in early Sep 2012

Launch of the Outright Monetary Transactions (OMT) in September 2012 (but ready toactivate from Day 1), the European Central Banks (ECB) new bond buying programme tocalm financial markets and bring down sovereign bond spreads of troubled countries (withhigh borrowing costs) sterilised purchase of unlimited amounts of sovereign bonds ofEuro zone countries that seek assistance and agree to fiscal adjustment programmes andsound economic policies

.


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17


A 10-trillion yen extension, announced in Sep 2012 to Bank of Japans asset-buyingprogramme amounting to 80 trillion yen in total 5 trillion yen on short-term bills by June2013 and another 5 trillion yen on long-term bonds by end-Dec 2013

o Tentative signs of a shift in US household borrowing patterns in 2Q2012 and3Q2012, indication of the beginning of an end to the long private sectorsdeleveraging process in particular households who may demonstrate greater

willingness to loosen their purse strings despite muted income growth as debt hasincreasingly become less of a burden if corporate deleveraging subsides at thesame time, then deleveraging will no longer be a big drag on the economy

o Rather stable commodity prices in particular related to energy and food could to acertain extent cushion the downside risks to global growth although it may not be

able to spur a meaningful economic recovery. Lower commodity prices: help boost domestic demand to partially make up for sluggish exports thanks to improvedcapacity to spend with better consumers purchasing power and businesses balancesheets

provide the scope for monetary policy support as central banks should be able to maintainor even lower interest rates if necessary

come as a relief for Governments struggling to pay national subsidy bills


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18

DOMESTIC AREAS OF VULNERABILITY?

Some domestic-driven risk factors that could potentially constrain growthpotential in 2013:

o Delay in holding the 13th General Election (GE13) - negative for the economy given theinclination among both businesses and consumers to adopt a wait-and-see attitude,deferring their spending decisions as well as a potential burden on the Federal Govtsfinances if the ruling party continues dishing out more generous handouts

o

Delay in the full start-up ofMalaysias Gumusut-Kakap deep-sea oilfield (2

nd

deepwaterdevelopment after Kikeh field offshore Sabah) with a full production capacity of up to135,000 bpd to the 2H2013 (instead of the 2H2012) due the longer-than-expected timeneeded to construct the floating production facility - protracted modest growth for themining sector. However, its maiden production was made possible since Nov 2012 via aninterim crude evacuation system (ICES) by tying back or linking its 2 wells to the existingKikeh field and is expected to hit the maximum of 25,000 bpd.

o Limitations of domestic demand after 4 straight quarters of beyond expectations -concerns whether it has further leg to hold up and provide support to Malaysias economicgrowth if the global slowdown prolongs; sudden upturn in inflationary pressures especiallyfrom food and fuel prices; escalating household and Govt indebtedness which mayrequire some macroeconomic policy tightening and pending potential policy shift ingeneral in particular post-GE13


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TAME INFLATION OUTLOOK

Very subdued inflationary pressures asheadline CPI growth in Nov 2012 remainedstuck at 1.3% for 3 months in a row, theslowest pace since March 2010, reflecting:o high base effectso price declines for communications;

recreation services & culture and clothing &footwear

o slowdown in price gains for food & non-alcoholic beverages; transport; alcoholicbeverages & tobacco and housing, utilities& fuels

Continued easing in core inflation tobelow 1.0% YoY since July 2012 andnegative PPI growth since June 2012, anindication of cooling price pressures orlimited pass-through effects on the ground.

Sources: Department of Statistics, Bank Islam


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

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1985

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1988

1989

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1991

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1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012BI

2013BI

ANNUAL HEADLINE CPI GROWTH

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Jan-06

Mar-06

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

CPI vs. PPI (YoY Growth)

Headline CPI Headline PPI


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20

TAME INFLATION OUTLOOK (continued)

However, remain cautious of the upside risks to inflation emanating from bothexternal and domestic factors such as:

o Sudden reversal in global commodity prices particularly related to energy, food andbuilding materials surge in global surplus liquidity; rising risk premium of global oilprices due to heightened geopolitical concerns; supply chain disruptions due to naturalcatastrophes and adverse weather conditions due to climate change

o Strict implementation of the PEMANDUs Subsidy Rationalisation Programme (SRP) removal or significant reduction to subsidies (price hikes and upward tariff reviews) thathave shielded somewhat the impact of higher global commodity prices on selling prices ofgoods & services in Malaysia and their impact on the Malaysian economy

o Sticky food inflation could bump up the overall CPI as the Food & Non-AlcoholicBeverages is the largest CPI component (30.3%)

o Income effects from the implementation of minimum wage policy for some 3.2 million

private sector workers and 7%-13% increments for some 1.4 million civil servants


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21

TAME INFLATION OUTLOOK (continued)

Notwithstanding these upside risks to inflation and the relative strength indomestic demand, the current easing cycle in inflation should be able to sustainthanks to:o Significant excess capacity in the economy that should help contain inflationary

pressures despite robust domestic demando Cost-push and demand-pull inflation dynamics have yet to show signs of a breakout in

the absence of significant price pressures from labour market, credit expansion orsupply bottlenecks

o Moderate pressures from food and energy inflation as global commodity prices inparticular agricultural commodities and oil & gas are expected to stay withinacceptable/manageable ranges despite expectations of much improved globaleconomic conditions in 2H2013

o Relatively well-anchored inflation expectations

Assuming no upward revision to retail prices of subsidised items in particularpetrol and diesel and barring other unforeseen circumstances, CPI growth:o may have hit bottom at 1.3% YoY in November 2012o may gain some ground in December 2012 but still to average around 1.7% in 2012

(way below the BNMs targeted range of 2.0%-3.0%) vs. 3.2% in 2011o should average below 2.5% in 2013 with a spike nearing the implicit tolerance

levels of 3% in the 2H2013 on base-effect lapses, changes to administrative prices bymid-2013 and an uptick in demand-pull inflation


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22

OPR PAUSE TO CONTINUE WITH A SLIGHT UPSIDE RISK

The outlook for both growth and inflationshould be carefully assessed to avoidover or under adjustment of monetarypolicy.

While rather benign inflation outlook in

2013 provides the scope for OPR cuts orat least extended rate-pause, there is aminor tightening risk to OPR towardsthe later part of 2013 especially if growthturns out much stronger than expected,exerting a strain on inflation.

Deemed accommodative and adequate tosupport domestic demand whilepreventing a build-up of financialimbalances, OPR should remain atnormalised levels of 3% throughout 2013.

Stable OPR outlook in 2013 while the

earliest rate-hike delayed to 1H2014?


Sources: Bank Negara Malaysia, Bank Islam

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Apr-04

Jun-04

Aug-04

Oct-04

Dec-04

Feb-05

Apr-05

Jun-05

Aug-05

Oct-05

Dec-05

Feb-06

Apr-06

Jun-06

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Jun-07

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Jun-08

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Jun-10

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Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13

Aug-13

Oct-13

Dec-13

ACTUAL AND FORECAST REAL SHORT-TERM INTEREST RATES

CPI OPR Real OPR

-25

-20

-15

-10

-5

0

5

10

15

20

25

Jan-0

6

Mar-06

May-0

6

Jul-06

Sep-0

6

Nov-0

6

Jan-0

7

Mar-07

May-0

7

Jul-07

Sep-0

7

Nov-0

7

Jan-0

8

Mar-08

May-0

8

Jul-08

Sep-0

8

Nov-0

8

Jan-0

9

Mar-09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-10

May-1

0

Jul-10

Sep-1

0

Nov-1

0

Jan-1

1

Mar-11

May-1

1

Jul-11

Sep-1

1

Nov-1

1

Jan-1

2

Mar-12

May-1

2

Jul-12

Sep-1

2

Nov-1

2

YoY GROWTH OF SELECTED CPI COMPONENTS

Headline CPI Adjusted or Non-Food CPIFood CPI Housing, Utilities & Fuel CPITransport CPI


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23

RATHER BULLISH MYR OUTLOOK

Sources: Bloomberg, Bank Islam


Although we can expect some volatility inthe 1H2013, the general uptrend that MYRhas experienced since August 2012should persist for much of 2013 withoutbeing out-of-synch vis--vis its regionalpeers. Asian currencies should drawstrength from:o Capital inflows particularly portfolio funds

in search of high-yielding assets. TheInstitute of International Finance (IIF)estimates that private flows into emergingmarkets to hit US$1.1 trillion in 2013 trillion

(vs. US$1 trillion in 2012) of which 46.3%or US$0.51 to reach Asia. By default,

Asian currencies should benefit since Asiavis--vis other regions: is projected to be the worlds fastest-

growing region with the most reliable andexciting growth story

has solid underlying fundamentals

MYR PERFORMANCE VS. USD & EUR

COMPARATIVE NORMALISED PERFORMANCE : MYR, SGD, KRW, TWD


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24

RATHER BULLISH MYR OUTLOOK (continued)



o Boost to risk appetite for emergingcurrencies due to rosier economicprospects especially for Asian economiesthanks to some form of stimulus measuresto be or already undertaken by the worldslargest economies to stem the slowdown improving export outlook for trade-dependent economies hence wideningcurrent account surpluses

o Reduced safe-heaven appeal of USD dueto QE3 in favour of other currencies withbetter economic growth potential and morefavourable yield prospects such as Asian

currencies

Asian currencies may gain significantgrounds towards year-end and hence,MYR may end at a RM2.97-3.02range from RM3.052 as at end-2012.

COMPARATIVE NORMALISED PERFORMANCE : MYR, CNY, THB, IDR

8.88

7.64

5.68

4.50 4.333.82

1.20

0.20

-2.76

-6.03

-12.17-13.00

-8.00

-3.00

2.00

7.00

KRW PHP SGD TWD MYR THB CNY HKD INR IDR JPY

SPOT PERFORMANCE OF SELECTED ASIAN CURRENCIES VS. USD (%) -1 JAN 2012 TO DATE


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25


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26

GE13: D-DAY IS A GUESSING GAME

The constitutional Parliamentaryterm is valid from 29 April 2008, thedate of the Parliaments first sitting afterthe 12th General Election (GE12). Assuch, the Parliament must be dissolvedby 28 April 2013. From the dissolution

date, the GE13 must be held within 60days. Historically, Malaysia has nevercome close to the full term of 5 yearsexcept for the GE3 in 1969 and GE4 in1974.

Given deep changes in Malaysiaspolitical landscape since 8 March 2008,its difficult for the PM to arrive at aperfect time to dissolve the Parliamentand to hold the GE13.

Sources: Election Commission, Bank Islam


Polling Date Interval Period

GE1: Wednesday, 19 August 1959

GE2: Saturday, 25 April 1964 4 years 8 months

GE3: Saturday, 10 May 1969 5 years

GE4: Saturday, 24 August 1974 5 years 3 months

GE5: Saturday, 8 July 1978 3 years 10 months

GE6: Thursday, 22 April 1982 3 years 9 months

GE7: Sunday, 3 August 1986 4 years 3 months

GE8: Sunday, 21 October 1990 4 years 3 months

GE9: Tuesday, 25 April 1995 4 years 6 months

GE10: Monday, 29 November 1999 4 years 7 months

GE11: Sunday, 21 March 2004 4 years 4 monthsGE12: Saturday, 8 March 2008 3 years 11 months

GE13: March 2013? 5 years?

The Gap Period Between Two Consecutive Election Dates


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27

GE13: FREE & FAIR ELECTION?

As at 16 August 2012, explosion in thenumber of registered voters, crossingthe 13 million mark to 13.05 millionpeople and surging by 19.5%:

o compared to a very mild growth of ONLYbetween 6%-7% as at GE10, GE11 and

GE12o from just 10.92 million at GE12, equivalent

to 2.13 million increase, the biggest inMalaysias history

o out of whom 274,247 people or 2.1% areabsent voters comprising armed forces,

police and overseas voters Top 3 stateswith most absent voters are FederalTerritory of KL (40,543 people), Perak(38,367) and Johor (25,058) while Selangorhas the highest number of overseas voterswith 579 people



Dewan Rakyat Dewan Undangan Negeri

Perlis 3 15

Kedah 15 36

Penang 13 40

Perak 24 59

Selangor 22 56

Negeri Sembilan 8 36

Melaka 6 28

Johor 26 56

Pahang 14 42

Terengganu 8 32

Kelantan 14 45

Sarawak 31 71

Sabah 25 60

FT Kuala Lumpur 11 N/AFT Putrajaya 1 N/A

FT Labuan 1 N/A

TOTAL 222 576

SEAT DISTRIBUTION AT HOUSE OF REPRESENTATIVES AND STATE LEGISLATIVE ASSEMBLIES

Year No of Registered Voters Growth (in number) Growth (%)

1959 2,171,097

1964 2,763,077 591,980 27.27

1969 3,843,782 1,080,705 39.11

1974 4,132,032 288,250 7.50

1978 5,059,689 927,657 22.45

1982 6,081,628 1,021,939 20.20

1986 6,964,960 883,332 14.52

1990 7,968,640 1,003,680 14.41

1995 9,012,173 1,043,533 13.10

1999 9,564,071 551,898 6.12

2004 10,284,591 720,520 7.53

2008 10,922,139 637,548 6.20

2012* 13,052,374 2,130,235 19.50

VOTER BASE


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28

GE13: FREE & FAIR ELECTION? (continued)

Although there are still about 3.2 million unregistered eligible voters (out of16.3 million eligible voters), concerns whether this phenomenon of sharpincreases in voter registry really reflects increased voter awareness, growingpolitical interest and voter registration efforts by political parties risingpressures on the Election Commission (EC) to:o speed up the clean-up of the electoral roll from dubious entrieso address the 8 demands by BERSIH especially related to free and fair electoral

system and election process


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29

GE13: CHALLENGES OF PREDICTING

The unprecedented Oppositions victory on 8 March 2008 at the GE12 andcontinued close cooperation of Opposition parties even post-GE 12 until theestablishment of Pakatan Rakyat (PR), the first cohesive, credible and viablealternative coalition in Malaysia since Independence to challenge BN hasfundamentally transformed expectations of what could be the outcome offuture elections.

As no two GEs can provide almost exactly the same reading and in view of thesurprise GE12 results, predicting the outcome of the GE13 could prove verychallenging and a highly speculative attempt. However, we will focus only onthe outcome for Parliamentary seats since that will determine the compositionof the Federal Government.

While acknowledging that economists are in no way political analysts, we will

try to predict the outcome of GE13 and look for clues by:o Analysing:

current voter profile (age groups, gender, ethnic groups, urban-rural, income brackets,etc), etc

past voting trends in all GEs in particular GE12


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GE13: CHALLENGES OF PREDICTING (continued)

results of all 16 by-elections where both BN and PR secured an equal share of 8 seats ofwhich the final 5 by-elections were captured by BN with bigger majorities compared toGE12 (Kerdau in Pahang, Merlimau in Melaka, Tenang in Johor, Galas in Kelantan andBatu Sapi in Sabah)

results of Sarawak state elections in April 2011 where PR made major inroads (securing16 state seats from 9 previously with 44.6% of popular votes vs. 38.2% previously) couldprovide indications of how fierce battles of GE13 will be and voting trends of

Sarawakians and Sabahans

o Taking stock of the feedback from our ground visits to selected areas nationwide togauge the underlying voter sentiment

o Identifying election issues, local or national that could affect voters decisionso Assessing possible voting patterns among wild card groups that could swing

either way, namely: newly registered voters young voters urban voters voters in Sabah and Sarawak (with 56 Parliamentary seats) voters in Felda constituencies (54 Parliamentary seats) 17 marginal seats where the winning majority was less than 1,000 votes at GE12 (a

swing of 500 votes in these constituencies may sway the election results either way)


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GE13: GREATER POLITICAL TSUNAMI

Based on the analysis of selected factors that we think could affect theelection outcome, we have outlined 3 possible scenarios:o Scenario with moderate probability orbest-case scenario: Narrow win for BN,

securing 112-122 Parliamentary seats (narrow loss for PR: 100-110) Failure to retake Kedah, Penang, Selangor and Kelantan Lose control of Perak and Negri Sembilan

o Scenario with high probability or base-case scenario: Narrow loss for BN,securing only 97-107 Parliamentary seats (narrow victory for PR: 115-125)

Failure to retake Kedah, Penang, Selangor and Kelantan Lose control of Perak, Negri Sembilan, Terengganu and Perlis Narrowly retain Pahang and Johor Lose significant grounds in Melaka, Sabah and Sarawak

o Scenario with low probability orworst-case scenario: Big loss for BN, securingonly 82-92 Parliamentary seats (big victory for PR: 130-140)

Failure to retake Kedah, Penang, Selangor and Kelantan Lose control of Perak, Negri Sembilan, Terengganu, Perlis and Pahang Narrowly retain Johor and Melaka Lose significant grounds in Sabah and Sarawak


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32

GE13: GREATER POLITICAL TSUNAMI? (continued)

Assumptions for the base-case scenario (no 2/3 majority but enough for PR toform the Federal Govt):

o 2-cornered fightso 75%-80% in overall national voter turnouto Conservative but realistic voting tendency/share of votes for BN by ethnic

breakdown: 55%-60% among Malays, 20%-25% among Chinese, 45%-50%among Indians and 60%-65% among Others

o

Electoral fraud cases such as phantom voters, vote rigging, ballot stuffing, etcmake up less than 5% of total voter turnout

No. of Seats Won Change from % of Total Seats % of Popular Votes No of Seats Won Change from % of Total Seats % of Popular Votes No of Seats Registered Voters Voter Turnout

Previous GE Previous GE (million) (%)

1959 74 71.2 51.7 30 28.9 48.3 104 2.17 73.3

1964 89 15 85.6 58.5 15 -15 14.4 41.5 104 2.76 78.9

1969 95 6 66 49.3 49 34 34.0 50.7 144 3.84 73.6

1974 135 40 87.7 60.7 19 -30 12.3 39.3 154 4.13 75.1

1978 130 -5 84.4 57.2 24 5 15.6 42.8 154 5.06 75.3

1982 132 2 85.7 60.5 22 -2 14.3 39.5 154 6.08 74.4

1986 148 16 83.6 57.3 29 7 16.4 42.7 177 6.96 70.0

1990 127 -21 70.6 53.4 53 24 29.5 46.6 180 7.97 72.61995 162 35 84.4 65.2 30 -23 15.6 34.8 192 9.01 71.4

1999 148 -14 76.6 56.3 45 15 23.3 43.5 193 9.60 71.1

2004 199 51 90.8 63.9 20 -25 9.2 36.1 219 10.28 73.5

2008 140 -59 63.1 50.4 82 62 36.9 49.6 222 10.92 76.0

2012? 97 to 107? (33) to (43)? 43.7 to 48.2 ? 115 to 125? 33 to 43? 51.8 to 56.3? ? 222 13,052,374* 75 to 80?

* as last gazetted on 16 August 2012 out of whom 12,778,127 ordinary voters and 274,247 absent voters

ALLIANCE/BN OPPOSITION TOTAL

Year

GE RESULTS FOR PARLIAMENTARY SEATS


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33

GE13: GREATER POLITICAL TSUNAMI? (continued)

We can expect negative, knee-jerk (over)reaction on the first day of tradingof financial markets post-GE13 on fears over political instability,administrative uncertainties and policy inconsistency; short-termnervousness over power handover and transition; perceived up-tick inMalaysias political risk, among others:o Sell-down in equity, bond and foreign exchange markets the circuit breaker

could be triggered in Bursa Malaysia i.e. the KLCI is down by more than 10% in atrading session; sudden spike in bond yields and slide in MYR

o Other factors mostly external such as emergence of more conclusive signs ofresumption of a global recovery; improving global risk appetite, etc to significantly

limit the downside

Number of days before or after GE -180 -90 -30 -7 -1 1 7 30 90 180

GE8 -9.1% -23.8% -6.0% 1.6% 1.6% 4.0% 4.9% 0.2% 2.2% 24.9%

GE9 -11.5% 12.0% 1.8% 1.3% -0.3% -1.7% -2.5% 6.6% 7.2% -1.6%

GE10 -0.5% -2.8% 0.4% 1.7% 1.0% -1.5% -2.6% 7.9% 34.4% 18.6%

GE11 22.7% 16.7% 5.0% 2.3% 0.3% 0.5% -1.0% -4.8% -9.1% -5.0%

GE12 0.4% -9.6% -8.4% -4.5% -0.3% -9.5% -7.8% -5.8% -3.7% -16.3%

FBMKLCI PERFORMANCE PRE-AND-POST GENERAL ELECTIONS



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GE13: MID-AND-LONG TERM POSITIVE FOR MSIA

In the medium-to-long term, after this mild political revolution or the so-called Malaysianspring, the stiff competition for the hearts and minds ofvoters will make the PR-led Federal Government always disposed to provethat it can strike the balancing act between meeting the aspirations of thepeople and the needs of the business/investing community i.e. conduciveenvironment for both the people and businesses not at the expense of theother within a short period of time by implementing recommended measuresin Buku Jingga.

Success stories of PR states in particular Selangor and Penang andthumbs-up from the Auditor-General in his annual report should be a clearindication whats in store with a PR Federal Government.

Malaysia may even emerge as an even more attractive and viableinvestment destination as proven by the capability of Penang and Selangor,2 PR-held states in luring the most approved manufacturing investments in2010 and 2011.

Faster reduction in budget deficits and public debt levels as proposed in thePR Alternative Budget 2013 compared to the BN Govt?


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(continued)

Given the anticipated narrow PR win, the presence of relatively strongopposition in the Parliament should keep the PR government on its toes at alltimes and help push through:o a well functioning and genuine check-and-balance system to protect the rights of all

citizens, consistent with the Federal Constitutiono the reformist agenda acceleration - economic, structural, institutional, political,

social and law reforms, required to raise Malaysias long-term competitivenesso greater transparency, accountability, governance and integrity in all aspects in

particular award of Govt contracts (through open tender), procurement process andother business practices & dealings, necessary to regain and retain investorconfidence

o promotion of business-friendly and free-market policies without imposing hardshipon the rakyat

o zero-tolerance for corruption and rent-seeking culture as well as dismantling ofmonopolies/oligopolies and cumbersome regulations should in turn reduce theoverall costs of doing business in Malaysia and create a more conducive businessenvironment

o lower long-term risk premium assigned to Malaysia


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36


(continued)

Increased well-being of the rakyat and strengthening of the democraticprocess:

o No amendment to the Constitution at whims and fancies since constitutionalamendments under Articles 159 (3), 159 (5) and 161 E require a supermajority of2/3

o The emergence of a genuine two-coalition system, mirroring the two-partysystem that exists in the UK, the US, etc as well as other changes to theGovernmental system such as limiting to 2 terms a person can hold the position asPM, limiting to only 1 key cabinet portfolio a minister can hold. For example, thePM cannot become the Finance Minister to avoid conflict of interest

o Adjustments to the affirmative action such as NEP and other welfare policies that

have deviated from the original objectives; transformation to a needs-based, merit-based and market-oriented affirmative action for all instead of a race-basedprogramme to flush out NEP-related shortcomings and abuses in particularcronyism, corruption and systemic inefficiency while assisting the poor andmarginalized

o Positive changes in policy-making process with policies that serve the interest of

the masses especially the small people rather than enriching the politicallyconnected elite group (within the inner circle of people in power)


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(continued)o Higher quality debates in the Parliament and State Assemblies

o Perhaps, more freedom for MPs to vote in the Parliament based on their wisdomor the feedback from the people they represent?

Among major concerns if PR unseats BN:

o Economicsabotage, resistance and non-cooperation by those in the businesscommunity and civil service who are aligned to the losing coalition

o Perceptions of political instability especially during the period of power transitionwith threats of chaos by some political leaders, simmering ethnic and religioustensions (delicate race-religion relations), protests against the PRs reform

policies especially the needs-based affirmative action to correct socio-economicimbalances

o No assurance of continuity of Govt policies and guarantee of the sanctity ofcontracts in particular related to lopsided concession agreements

o No introduction of GST, much needed to diversify the Govts revenue base


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bank islam economic report on malaysia - jan 2013 - ge 13

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