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Economic Update - The Bank Negara Malaysia 2009 Annual Report : Economic Recovery Gains Momentum, Normalisation Of Policy Will Continue-24/03/2010

Economic Update - The Bank Negara Malaysia 2009 Annual Report : Economic Recovery Gains Momentum, Normalisation Of Policy Will Continue-24/03/2010

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Published by Rhb Invest
Executive Summary
Bank Negara Malaysia (BNM) expects the economy to grow by between 4.5-5.5% in 2010,
slightly lower than the Prime Minister/Finance Minister’s aim of achieving a growth of 5-6% announced on 24 February. Based on the various demand component forecasts, the underlying real GDP forecast by the Central Bank for 2010 works out to be +4.65%. This is broadly in line with our projection of a growth of 4.5% and we see no reason to hange our forecast at this stage, as the global economic recovery remains uneven, given sustained high unemployment situation in the key developed countries, the gradual fizzling out of stimulus spending, debt problems in some of the European countries, and deflation in Japan.
Executive Summary
Bank Negara Malaysia (BNM) expects the economy to grow by between 4.5-5.5% in 2010,
slightly lower than the Prime Minister/Finance Minister’s aim of achieving a growth of 5-6% announced on 24 February. Based on the various demand component forecasts, the underlying real GDP forecast by the Central Bank for 2010 works out to be +4.65%. This is broadly in line with our projection of a growth of 4.5% and we see no reason to hange our forecast at this stage, as the global economic recovery remains uneven, given sustained high unemployment situation in the key developed countries, the gradual fizzling out of stimulus spending, debt problems in some of the European countries, and deflation in Japan.

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Economic UpdateThe Bank Negara Malaysia 2009 AnnualReport
Economic Recovery Gains Momentum, Normalisation Of Policy Will Continue
Bank Negara Malaysia (BNM) expects the economy to grow by between 4.5-5.5% in 2010,slightly lower than the Prime Minister/Finance Minister’s aim of achieving a growth of 5-6%announced on 24 February. Based on the various demand component forecasts, the underlyingreal GDP forecast by the Central Bank for 2010 works out to be +4.65%. This is broadlyin line with our projection of a growth of 4.5% and we see no reason to change our forecastat this stage, as the global economic recovery remains uneven, given sustained highunemployment situation in the key developed countries, the gradual fizzling out of stimulusspending, debt problems in some of the European countries, and deflation in Japan.
In line with a recovery in the global economy, albeit uneven, the Central Bank projected thatthe country’s real exports will increase by 7.7% in 2010, after contracting by 10.1% in 2009.This is broadly in line with our expectation. On the supply side, BNM expects a broad-basedrecovery in activities, from manufacturing to services, agriculture and mining sectors.Construction sector will continue to expand, albeit at a more moderate pace.
The Central Bank expects inflation to increase by between 2.0-2.5% in 2010, faster than+0.6% in 2009, but will not be a major concern for policymakers. This is broadly in linewith our expectation. We believe inflation rate will likely inch up, on the back of strongerdomestic demand and higher crude oil and commodity prices.
Whilst inflation is not a major concern, the threat of a fundamental recession is diminishing.This implies that a very high degree of monetary stimulus is considered no longer warranted,the Central Bank said. As a result, it has begun to normalise its monetary conditions byraising the overnight policy rate (OPR) by 25 basis points to 2.25% on 4 March. We expectBank Negara to raise its OPR at a measured pace and by another 25 basis points in July2010 to 2.5%. Thereafter, the OPR will likely stay at this level until the end of the year.
Similar to our view, the Central Bank expects the current account in the balance of paymentsto record a smaller surplus of RM103.8bn or 14.3% of GNI in 2010, compared with thesurplus of RM112.7bn or 17.0% of GNI in 2009. This will continue to fuel domestic liquidityand provide a strong underlying support to the ringgit. In our view, the ringgit couldovershoot RM3.30/US$ temporarily due to inflow of speculative funds, as Asian currencies(ex-Japan) strengthen against the US dollar on account of a stronger economic recovery inAsia and a faster pace of policy normalisation, before settling at around RM3.30/US$ at end-2010.
Executive Summary
Peck Boon Soon(603) 9280 2163bspeck@rhb.com.my
Please read important disclosures at the end of this report.
Malaysia
                •        •        •
 
PP 7767/09/2010(025354)
MARKETDATELINE
24 March 2010
 A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from
www.rhbinvest.com
 
ECONOMIC UPDATE
2
 A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from
www.rhbinvest.com
The Bank Negara Malaysia 2009 Annual Report
Real GDP To Grow By Between 4.5-5.5% In 2010
Bank Negara Malaysia
(BNM)
expects the economy to grow by between 4.5-5.5% in 2010
(see Table 1), slightly lower than the Prime Minister/Finance Minister’saim of achieving a growth of 5-6% announced on 24 February. Based on the variousdemand components forecast , the underlying real GDP forecast by the Central Bankfor 2010 works out to be +4.65%. This is
broadly in line with our projectionof a growth of 4.5%
and we see no reason to change our forecast at this stage,as the global economic recovery remains uneven, given sustained high unemploymentsituation in the key developed countries, the gradual fizzling out of stimulus spending,debt problems in some of the European countries, and deflation in Japan.Nevertheless, we believe the
prospects of a sustainable global economicrecovery have improved significantly in recent months
, despite variouschallenges that threaten to derail it. This is primarily on account of a combinationof factors, including aggressive policy stimulus around the globe where policymakersare unlikely to roll it back prematurely, significant improvement in financial marketsand risk appetite of investors, and more importantly, asset prices have reached afavourable inflection point. Unlike during the crisis, investors are no longer fearfulof catching a falling knife and more substantial weakness in asset prices will be takenas investment opportunities. As a result, policymakers around the globe, with theexception of Japan, have
begun to exit their extremely loose policy andemergency lending programmes
, but the process remains gradual in our view.This suggests that its impact on economic activities will unlikely be significant.As a whole, we expect the pick-up in global economic activities to translate intohigher demand for the country’s manufactured goods and commodity products. Thiswill lead to higher production, investment and employment, and
the economy willlikely expand by 4.5% in 2010
, a rebound from -1.7% in 2009.In terms of contribution, the pick-up in the economy will likely be driven by higherprivate sector demand. This is on account of a larger contribution from consumerspending to GDP, which is projected to pick up to 2.0 percentage points in 2010, from+0.4 percentage points in 2009. Similarly, private investment is projected to turn
BNM expects the economyto grow by between 4.5-5.5% in 2010, slightlylower than the PrimeMinister/FinanceMinister’s aim of achievinga growth of 5-6%We believe the prospectsof a sustainable globaleconomic recovery haveimproved significantly inrecent months, despitevarious challenges thatthreaten to derail itWe expect the economyto expand by 4.5% in2010, a rebound from-1.7% in 2009The pick-up in theeconomy will be driven byhigher private sectordemand...
2009p2010
Real GDP growth (%)-1.74.5 to 5.5Aggregate domestic demand (real, %)-0.43.2Exports of goods and services (real, %)-10.17.7Federal Govt budgetary position (RMbn)-47.4-40.5(% of GDP)-7.0-5.6Public sector budgetary position (RMbn)-25.9-8.0(% of GDP)-3.8-1.1Inflation rate (%)0.62.0 to 2.5Unemployment rate (% of labour force)3.73.6Current account balance (RMbn)+112.7+103.8(% of GNI)+17.0+14.3Gross national savings (% of GNI)31.335.2External debt service ratio6.5n.a(% of total export earnings)
f : Forecasts p : preliminarySource : Bank Negara Malaysia 2009 Annual Report.
Table 1Key Economic Indicators
 
ECONOMIC UPDATE
3
 A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from
www.rhbinvest.com
around and contribute +0.1 percentage point to GDP growth in 2010, from a subtractionof 2.6 percentage points in 2009. These, however, will likely be offset partially bya slowdown in public sector’s contribution to GDP, which is projected to ease to 0.7percentage point in 2010, from a contribution of 1.9 percentage points in 2009. Thisis attributed mainly to a cutback in the Government’s development expenditure, inline with fiscal consolidation to reduce its budget deficit. In the same vein, netexports are projected to subtract 2.7 percentage points from the GDP in 2010,compared with a contribution of 1.1 percentage points in 2009, on account of a fasterincrease in imports as domestic demand picks up.
Exports Will Likely Return To Positive Growth
In line with a recovery in the global economy, albeit uneven, the Central Bankprojected that the country’s
real exports will increase by 7.7% in 2010
, aftercontracting by 10.1% in 2009. This is
broadly in line with our expectation
.Indeed, we believe the global economic recovery is gaining momentum as indicatedby a pick-up in global manufacturing and services activities for the last sevenconsecutive months up to February (see Chart 1). Similarly, the OECD compositeleading indicator’s 12-month rate of change strengthened to 9.6% in January, thefifth successive month of increase and from +8.1% in December and +6.0% inNovember (see Chart 2). The improvement was broad-based, suggesting thatprospects of OECD countries’ economies are likely to improve in the months ahead.In the
US
, the economy grew at a stronger pace in the 4Q, underpinned by inventoryrebuilding and an increase in business spending. This is gradually
trickling downto a better job market
, as indicated by the employment of temporary workers,which picked up for the last five consecutive months up to February. As a result,non-farm payrolls recorded a significantly smaller drop of an average of 31,000 jobsa month in January-February, compared with a loss of 557,000 a month in 1H 2009.Similarly, the personal consumption expenditure (PCE) strengthened to an annualisedrate of 2.1% in January, from +1.7% in December and after hitting a low of +1.1%in November. Although the improvement in the housing sector has weakenedsomewhat, it will unlikely pose a major drag to the US economic recovery.In the same vein, we expect the
Euroland
’s economy to gradually recover, despitethe emergence of sovereign debt worries of late, on the back of an improvementin business confidence, while consumer confidence held up at the highest level inmore than a year. Given its export dependency, the
Japanese
economic recoverywill likely be sustained into 2010 as well, in tandem with a recovery in exports. In
China
, the country’s economy will likely continue to expand in the months ahead,after recording +10.7% yoy in the 4Q, on account of a recovery in exports and asustained increase in domestic demand. Meanwhile, the Chinese authorities have
Chart 5Global ISM
Index
 
Chart 2Global Manufacturing And ActivitiesPicking Up
303540455055606505 06 07 08 09 10
ISMManufacturing
➤  ➤  ➤  ➤  ➤  
Index
ISMServices
    ➤    ➤    ➤    ➤    ➤
 
Chart 1OECD Composite LeadingIndicator Points To A Brighter EconomicProspects
% 12-mth annualised rate of change
-20-15-10-505101520253000 01 02 03 04 05 06 07 08 09 10
Total OECDJapan US Euroarea China
The Central Bankprojected that thecountry’s real exports willincrease by 7.7% in 2010,after contracting by10.1% in 2009The US economic recoveryis gradually trickling downto a better job market... offset partially by aslowdown in public sector’scontribution to GDP and asubtraction from netexportsThe Euroland and Japan’seconomies will recover in2010, while China’seconomy will likelycontinue to expand in themonths ahead

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