PP 7767/09/2010(025354)

Economic Highlights
Global
•MARKET DATELINE

29 April 2010

1 Spain’s Credit Rating Cut As Contagion Spreads In Europe

2 US Federal Reserve Pledged To Keep Rates At A Low

Level For An Extended Period

3 China Central Bank Pledged Policy Flexibility And Sees

Fragile Global Economic Recovery

Tracking The World Economy...

Today’s Highlight

Spain’s Credit Rating Cut As Contagion Spreads In Europe

After the downgrade of Greece and Portugal’s credit rating, the Standard & Poor’s cut Spain’s credit rating by one notch
to AA on 28 April, signifying that the contagion from Greece’s debt crisis is spreading given the slow progress in approving
the rescue package for Greece. S&P said in a statement that its outlook on Spain is negative, indicating possible further
downgrade if the budgetary position underperforms to a greater extent than it currently anticipates. Spain, which has
the third-largest deficit in Euroland after Ireland and Greece, was last cut by S&P in January 2009. S&P downgraded
Portugal two notches to A- on 27 April and cut Greece’s rating three notches to junk status of BB+, saying bondholders
may recover as little as 30% of their investments if the latter defaults.

Spain’s downgrade prompted German Chancellor Angela Merkel and the International Monetary Fund pledged to step up
efforts to overcome the Greek fiscal crisis. German Chancellor has delayed German approval of a rescue package in
the face of voters’ opposition and is demanding Greece to provide up to three years (2010-2012) of budget plan in order
to secure the aid. A failure by policymakers to match such talk with action has fanned concern that the crisis will spread
beyond Greece. Under the rescue package of €45bn, €30bn will come from the Euroland with the rest likely to be made
up by the International Monetary fund (IMF). Among the Euroland countries, Germany is expected to folk out almost
€8.4bn or 28% of the share, followed by France €6.3bn and Italy €5.5bn. The rest of the countries are expected to
contribute pro rata, based on their capital subscriptions to the European Central Bank (ECB). Even Portugal has to lend
Greece about €774m even though it is also having some trouble.

Although Spain’s credit rating was downgraded, its government’s financial conditions were far better than Greece and
Portugal. Spain’s budget deficit rose to a high of 11.2% of GDP in 2009, from a deficit of 4.1% of GDP in 2008 and
a surplus of 1.9% in 2007, due to the severe global economic downturn. As a result, the government debt rose to a
high of 53.2% of GDP in 2009, from 39.7% in 2008. The debt level, however, was significantly lower than Greece
(115.1%) and Portugal (76.8%). Meanwhile, Spain plans to cut its budget deficit to less than 3% by 2013.

Separately, the Greece default, if happens, could have great implications on European banks. According to the Bank for
International Settlement, French banks have the highest exposure of US$78.8bn, followed by Germany banks of US$45bn
and UK banks of US$15.4bn. Banks from Netherlands, Portugal, Ireland and Italy have exposure of US$12.2bn,
US$9.8bn, US$8.6bn and US$6.9bn respectively.

Peck Boon Soon

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

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 29 April 2010

The US Economy

US Federal Reserve Pledged To Keep Rates At A Low Level For An Extended Period

◆ The US Federal Reserve left its key policy rate unchanged at 0-0.25% and reiterated that low rates are
likely to stay for an extended period, as substantial resource slack would continue to restrain cost pressures
and inflation is likely to be subdued for some time while longer-term inflation expectations will be stable. The Fed,
however, is of the view that economic activity has continued to strengthen and that the labour market is beginning
to improve. Growth in household spending has picked up recently but remains constrained by high unemployment,
modest income growth, lower housing wealth and tight credit. Already, consumer spending rose for the fifth month
in a row in February, putting on track to grow at the fastest pace since 1Q 2007. Similarly, unemployment rate
eased to 9.7% in March and non-farm payrolls recorded an increase in jobs for the third month in five months
during the month. At the same time, business spending on equipment and software has risen significantly but
investment in non-residential structures is declining. Although housing starts have edged up, it remains at a
depressed level. As a whole, the Fed’s assessment suggests the US economic recovery will likely be gradual
and the Fed is in no hurry to raise its key policy rate. Meanwhile, given the improved functioning of financial
markets, the Fed said that it has closed all but one of the special liquidity facilities that it created to support markets
during the crisis. The only remaining such programme, the Term Asset-Backed Securities Loan Facility, is scheduled
to be closed on 30 July for loans backed by new-issue commercial mortgage-backed securities after the Fed closed
its programme for loans backed by all other types of collateral on 31 March.

China Central Bank Pledged Policy Flexibility And Sees Fragile Global Economic Recovery

◆ The People’s Bank of China pledged to keep policies flexible to respond to new conditions and highlighted
downside risks to the global economic recovery. The central bank reaffirmed a moderately loose monetary
policy based on a target to reduce new loans by 22% in 2010, from a record of US$1.4 trn in 2009. This suggests
that the central bank is unlikely to raise interest rates and allow the renminbi to appreciate anytime soon. China
has been reluctant to use the market price driven measures to control its inflation and property prices. Instead,
it continued to rely on administrative measures targeting specifically on slowing down the rapid credit expansion
and measures to cool down property demand and prices. Although the world economy may stage a recovery in
2010, the central bank is of the view that the foundation is still fragile and complicated by shifts in their macro-
economic policies. Indeed, Europe’s debt crisis highlights the central bank’s concern that another world slump is
possible even as China’s own economy risks overheating.

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