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MALAYSIAN ECONOMIC OUTLOOK

Executive Summary (MIER)

Although it may be too early to say that the global recession has ended, numerousindicators are suggesting that the downturn is somewhat subsiding. Massive nationalfiscal stimuli and monetary expansions have largely aided the gradual recovery.Questions have been raised as to whether economic activities can be sustained once thesemeasures are withdrawn..In Oct 09, the IMF anticipates that the global economy to expand by 3.1% yoy in 2010,from a 1.1% yoy decline in 2009. For 2010, the U.S. is projected to grow by 1.5% yoy,the euro zone at 0.3% yoy, Japan at 1.7% yoy, and China 9.0% yoy. The comparable yoyfigures in 2009 are -2.7% (U.S.), -4.2% (euro zone), -5.4% (Japan), and +8.5% (China).Regionally, the ADB has also lifted its GDP growth forecast for developing Asia to+3.9% yoy in 2009 and +6.4% yoy in 2010. The regional economies are seen to be moreresilient to the downturn than initially feared. Underpinning the region's growth prospectsis China, whose aggressive monetary easing and fiscal stimulus could accelerate the GDPgrowth rate to +8.2% yoy in 2009 and to +8.9% yoy in 2010.Malaysia's GDP registered a smaller contraction of -3.9% yoy in 2Q09 (-6.2% in 1Q09)after rebound in the external sector. Although the external sector was still weak, publicspending had cushioned the economy from a deeper slide. In view of the widening fiscaldeficit, the government plans to reduce its expenditure in the 2010 Budget, possiblythrough reduction in energy subsidies and/or tax reform. On the supply side, the servicessector had turned positive in 2Q09, while the manufacturing sector reported a smaller decline.

In order to make Malaysia more attractive to foreign investors, liberalisation measures of the services sector have been announced. Effective Apr 09, 27 services sub-sectors werefully liberalised to foreign investors, on the premise that Malaysia lacks expertise andlocal investments in many of these sub-sectors. Among the sectors opened up arecomputer and related services, health and social services, tourism services, transport,recreational, business services, and shipping. Moreover, on 30 Jun 09, the long standing30% bumiputra equity requirement for newly listed companies was removed, makinginvestment conditions less restrictive. This will bring Malaysia's financial market closer to regional benchmarks, but the impact remains to be seen since there are many factorsinfluencing investment decisions.Monthly indicators up to Jul 09 have shown some improvement, in line with regionaleconomies, albeit at a slower rate. In Jul 09, industrial output fell by 8.4% yoy (-9.5% inJun 09), signalling recovery across all industries. This is also supported by the fact thatindustrial production index (IPI), which surged 7.1% mom in Jul 09 (+0.3% in Jun 09).Exports contraction moderated to -19.8% yoy in Aug 09 (-22.9% in Jul 09) due to better performance in crude oil, chemicals, electrical, and electronic products. On a mom basis,exports fell 2.0% (Jul 09: +8.3%) after three consecutive months of gains, indicating a patchy recovery. On the other hand, imports performance deteriorated to -18.6% yoy inAug 09 (-16.2% in Jul 09) due to slower rate of re-stocking parts and components. On amom basis, imports also sagged 6.6% (+14.0% in Jul 09). Stronger growth in exportrelative to import led to a larger trade surplus of RM 9.57 billion (RM 7.81 billion in Jul09).As a result of higher base effects, overall consumer price inflation fell for a thirdconsecutive month, by 2.4% yoy in Aug 09 (-2.4% in Jul 09). Food prices moderated,while transport and communication decelerated further in Aug 09. Core inflation declined by 4.2% yoy in Aug 09 (-4.5% in Jul 09) due to higher recreation, services, and cultureactivities. On a mom basis, consumer inflation rose 0.2% in Aug 09 (+0.1% in Jul 09).This lends credence to MIER's expectation of a positive inflation to re-emerge in 4Q09.

On the other hand, falling prices in both local and imported materials continued to dragdown producer prices by 12.8% yoy in Jul 09 (-12.2% in Jun 09).The Central Bank of Malaysia has left the Overnight Policy Rate (OPR) unchanged at2.00% for the fourth consecutive meeting since Feb 09. While the economic contractionis expected to decrease from 1H09 into a slight positive growth in 4Q09, the monetary policy stance is expected to be fairly accommodative for the remainder of the year. Thisis also facilitated by the absence of inflationary expectations in the near term. Hence,MIER expects the OPR to be relatively unchanged at least until 2010 or when theeconomy recovers, both domestically and externally.Moreover, this is also supported by the fact of the cautious sentiments as captured by thein-house Consumer Sentiment (CSI) and Business Conditions Indices (BCI). Ongoingeconomic uncertainties due to global financial deleveraging activities, low wage growth,and the possibility of a sudden withdrawal of economic stimuli continued to repressconfidence among consumers and corporate entities. While both CSI and BCI settledabove the crucial 100-point mark in 3Q09, the rate of change has decreased qoq. (CSI:105.4 in 3Q09, 105.8 in 2Q09; BCI: 113.7 in 3Q09, 105.3 in 2Q09)There are glimmer signs that the global downturn has stabilised somewhat, but therecovery is expected to be sluggish and uneven. The healing from the current crisis will be difficult compared to previous ones because of the synchronised nature of thedownturn. It will take time and huge resources to revive the deeply entangled USfinancial sector while policy options are running out. The weak external sector willimpede a faster recovery, and the lower commodity prices are not helping either. Banksare becoming more cautious as bad loans could rise soon, limiting the flow of funds tofirms. The services sector will be the pillar of strength amidst a glum manufacturingsector. The technical recession in the 1H09 is likely to continue into 3Q09 before theeconomy could exit from it in the 4Q09. However, Malaysia may not regain morestrength until the global economy is back on track, which is going to be at adisappointingly slow pace.