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TRENDS 21 February 2008

CPI, January 2008

Slightly below expectations…
Suhaimi Ilias  The Consumer Price Index (CPI, 2005=100) in January held near a 10-
603-2297 8682 month high at 2.3% YoY (Dec: +2.4% YoY). Slower increases in food
prices (3.9% YoY vs Dec: 4.3% YoY) kept the inflation rate relatively
Saifuddin Morat stable despite the faster increases in the prices of “alcoholic
603-2297 8684 beverages and tobacco” (9.0% YoY vs Dec: 8.8% YoY) ), “restaurants
and hotels” (6.7% YoY vs Dec: +6.1% YoY), “miscellaneous goods &
services” (2.9% YoY vs Dec: +1.9% YoY), “health” (1.8% YoY vs Dec:
1.6% YoY), “education” (1.5% YoY vs Dec: +1.1% YoY) and “housing,
water, electricity, gas and other fuels” (1.2% YoY vs Dec: 1.1% YoY).
 We maintain our 2008 CPI forecast at 3.4% (2007: +2%) amid
persistent increases in commodity prices – especially the impact on
food prices, and our expectations of higher fuel and energy prices by
mid-year as the Government trims the related subsidies. A key
assumption in our inflation rate forecast for this year is a hike in fuel
prices by at least 20% by mid-2008.
 Despite the expected acceleration in the inflation rate this year, we
believe Bank Negara Malaysia will leave the Overnight Policy Rate
(OPR) steady at 3.5% to support domestic demand, and hence
economic growth.

Table 1: Malaysia: Consumer Price Index (CPI, 2005=100) (%, YoY)

Jan-08 Dec-07 Nov-07 Oct-07 2007 2006
Total 2.3 2.4 2.3 1.9 2.0 3.6
Food and Non-Alcoholic
3.9 4.3 3.9 3.1 3.0 3.4
Alcoholic Beverages and
9.0 8.8 8.9 8.9 7.8 6.9
Clothing and Footwear (1.4) (0.7) (1.2) (0.7) (1.4) (1.3)
Housing, Water, Electricity, Gas
1.2 1.1 1.2 1.2 1.3 1.5
and Other Fuels
Furniture, Household
Equipment and Routine 1.2 1.2 1.2 1.0 1.1 1.1
Household Maintenance
Health 1.8 1.6 1.5 1.5 1.6 2.1
Transport 1.1 1.3 1.2 1.1 2.3 11.0
Communication (0.8) (0.8) (0.8) (0.9) (1.2) (1.4)
Recreation Services and
2.5 2.5 2.4 2.2 1.4 0.7
Education 1.5 1.1 1.4 1.5 1.8 1.6
Restaurants & Hotels 6.7 6.1 5.6 4.7 3.7 3.7
Miscellaneous Goods &
2.9 1.9 2.1 1.6 0.9 2.2
Source: Department of Statistics
CPI January 2008

Malaysia: Consumer Price Index (CPI)

5 20

4 15

3 10
2 (RHS) 5

1 0
Utilities, Housing & Other Fuels

0 (5)















Source: Department of Statistics

The Consumer Price Index (CPI, 2005=100) was up 2.3% YoY in January,
little changed from the 10-month high of 2.4% YoY in December, and slightly
below our and consensus expectations of 2.4% YoY. Overall, monthly inflation
rate has been inching up from the recent low of 1.4% YoY in May-June 2007.
Slower increases in food prices of 3.9% YoY (Dec: +4.3% YoY) helped
keep the inflation rate relatively stable last month, offsetting faster
increases in other prices of good and services, namely “alcoholic
beverages and tobacco” (9.0% YoY vs Dec: 8.8% YoY) ), “restaurants and
hotels” (6.7% YoY vs Dec: +6.1% YoY), “miscellaneous goods & services”
(2.9% YoY vs Dec: +1.9% YoY), “health” (1.8% YoY vs Dec: 1.6% YoY),
“education” (1.5% YoY vs Dec: +1.1% YoY) and “housing, water, electricity,
gas and other fuels” (1.2% YoY vs Dec: 1.1% YoY). Prices at “restaurants and
hotels” accelerated last month for the ninth consecutive month, reflecting a
combination of higher costs of food, beverages and fuel/energy (especially
cooking gas which has doubled over two years) as well as higher room rates,
which were passed through to final consumers amid strong demand thanks to
the robust growth in domestic consumer spending plus the strong increase in
tourist arrivals as “Visit Malaysia Year” was extended to 31st August 2008.
This year, we expect the inflation rate to quicken to 3.4% from 2% last
year, mainly due to the expectation that the Government is going to
resume cutting fuel/energy subsidies given the steady uptrend in crude oil
prices since the last fuel price hike in February 2006. We expect the
Government to resume cutting fuel subsidies by the middle of this year. We
estimate that fuel subsidies account for as much as 70% of the Government’s
total annual spending on subsidies, which is budgeted to drop to RM10.2b this
year from the estimated RM12.2b last year (2006: RM10.1b). We are
assuming a 20% increase in fuel prices by mid-2008, which will have
knock-on effect of prices of goods and services, especially on the costs
of public and private transportation costs (taxis, buses, lorries, ferries), on
top of the 7.7%-60% increases in toll rates for some highways that came into
effect on 1 January 2008. Furthermore, there is also a strong likelihood of a
review in Petronas’ gas price, currently fixed at RM6.40 per mmbtu since 1997,
with impact on Tenaga’s power tariff and energy costs of many industries.
In addition, high commodity prices are keeping the pressure on food
prices, as reflected by the string of major food price increases last year and
recent statements by fast food chain operators KFC and Pizza Hut that they
will raise prices this year in response to escalating raw material costs, including
crude oil, corn and soyabean.

ECONOMIC TRENDS ▪ 21 February 2008 Page 2 of 6

CPI January 2008

Nevertheless, we expect the Overnight Policy Rate (OPR) to remain stable

at 3.5%... We expect Bank Negara Malaysia to keep the OPR unchanged
throughout 2008, to sustain domestic demand and thus overall economic
growth, notwithstanding the expected faster domestic inflation rate this year
and expectations of further reductions in the US benchmark interest rate amid
the downside risk to growth in the world’s largest economy.
…as inflation will be dealt with via administrative, non-monetary policy
measures. Apart from the earlier “offset” measures to help the people deal
with the higher costs of living (e.g. hikes in civil service salaries and cost of
living allowances (COLA), Employees Provident Fund (EPF) Account 2
monthly withdrawal scheme), more recent policy and strategy to deal with the
expected faster inflation rate this year are mainly administrative measures
• Creating national stockpiles of essential goods
• Establishing a National Price Council
• Setting up a 24-hour National Call Center to report on price and supply
abuses of retailers and wholesalers
• Banning the exports of 10 essential items – sugar, wheat flour, cooking oil,
chicken, cement and clinker (except with permits), mild steel bars, petrol, all
grades of spirit and gasoline for motors, diesel and LPG.
Nonetheless, it is important to appreciate that these measures may help to
contain prices pressures on essential consumer goods, but not on the costs of
In addition, we expect Bank Negara Malaysia to allow the Ringgit to
strengthen further, to partially contain inflationary pressures coming
from import costs. Therefore, we expect the Ringgit to advance to RM3.10
per USD by end-2008 after the 6.7% and 7.1% gains in 2007 and 2006. So far
this year, the Ringgit has gained by 2.7% versus the greenback to a 10-year
high of RM3.22 as of yesterday.

ECONOMIC TRENDS ▪ 21 February 2008 Page 3 of 6

CPI January 2008

Info Box: Impact of Inflation on Consumers…?

Visible negative impact of faster inflation rates on consumers in 2005-2006. We
looked at what happened to key consumer indicators following the string of major price
hikes between 2004-2006, mainly fuel, utilities and transportation costs. As the inflation
rate trended upwards to above-3% in 2005 (3.1%) and 2006 (3.6%) from just 1.4% in
2004, we noted the following impact on consumers:
• Slowing consumer spending, as measured by the real private consumption
growth, which moderated to 8.7% in 2005 and 7.1% in 2006 from 9.8% in 2004.
• Weaker consumer sentiment, as indicated by the sharp falls in the MIER
Consumer Sentiment Index and the MasterCard Index of Consumer Confidence.
• Adjustments in spending patterns e.g. better performance in sales of
motorcycles versus passenger cars. Motorcycle sales jumped by 15.8% between
2004 and 2006, while passenger car sales declined by 3.4% over the same period,
suggesting substitution effect or switching to cheaper modes of transportation as
motorcycles consume less petrol and are not subjected to highway tolls.
While the lower inflation rate in 2007 brought consumers back to life. Inflation rate
eased back to 2% last year, largely as the Government kept to its promise not to cut fuel
subsidies and thus raise fuel prices further despite the surge in crude oil prices last
year. This, in turn, contributed to the sharp slowdown in the transport component of CPI
to 2.3% last year from the 6.3% and 11% surges in 2005 and 2006 respectively.
Concurrently, consumer indicators improved. Consumer spending moved back into
high gear, with growth accelerating to 11.9% in the first nine months of 2007, reversing
the deceleration in 2005-2006, while passenger car sales recovered last year from the
slump the year before, as consumer sentiment improved. Additional boosts to
consumer confidence and stimulus to consumer spending came from monetary and
fiscal policy measures such as Bank Negara Malaysia’s decision to leave its benchmark
interest rate, the Overnight Policy Rate (OPR) stable last year after the hikes in late
2005 and early 2006, and the civil service pay hikes effective July 2007.
This time around, the impact of higher inflation on consumers will be visible in
2H08. Given the timing of the expected price increases and introduction of GST noted
above, we expect inflation rate to pick up moderately to 2.7% in 1H08 before
accelerating to 4.2% in 2H08 and further to 4.6% 1H09, and easing back to 3.2% in
2H09. As a result of this inflation scenario, especially for 2008, we expect real GDP
growth to take a hit in 2H08, slowing to 6% YoY from 6.7% YoY in 1H08, mainly as
consumer spending growth is expected to slow to 8% YoY in the final six months of this
year, from the projected 11.6% YoY growth in the first six months.
Source: Aseambankers

Malaysia: Inflation Impact on Consumers At A Glance…

2004 2005 2006 2007
Inflation Rate (CPI, %) 1.4 3.1 3.6 2.0
CPI Food & Non-Alcoholic Beverages (%) 2.1 3.7 3.4 3.0
CPI Transport (%) 0.7 6.3 11.0 2.3
Petrol Price (RM per litre, end-period) 1.42 1.62 1.92 1.92
Petrol Price (Chg, %) 5.2 14.1 18.5 0.0

Real GDP Growth (%) 1/ 6.8 5.0 5.9 6.0

Real Private Consumption Growth (%) 1/ 9.8 8.7 7.1 11.9

MIER Consumer Sentiment Index (Avg) 113.2 112.3 103.2 117.1

MIER Consumer Sentiment Index (Chg, pts) 3.1 (0.9) (9.2) 13.9
MasterCard Index of Consumer Confidence (Avg) 81.0 65.1 44.5 71.8
MasterCard Index of Consumer Confidence (Chg, pts) (1.7) (16.0) (20.6) 27.3

Malaysians' Credit Card Spending Growth (%) 19.4 17.1 14.9 19.9
Total Motor Vehicle Sales Growth (%) 20.2 13.3 (11.1) (0.7)
Passenger Car Sales Growth (%) 19.0 5.5 (8.7) 3.5
Motorcycle Sales Growth (%) 2/ 43.2 11.3 4.0 7.0
1/ Jan-Sep 2007 2/ Jan-Nov 2007
Source: BNM, Dept. of Statistics

ECONOMIC TRENDS ▪ 21 February 2008 Page 4 of 6

CPI January 2008

Malaysia: Fuel Price Hikes, 2001-2006

Petrol Price Date Revised Price Previous Price % Chg
(RM per litre) Oct-00 1.20 1.13 6.2
Oct-01 1.30 1.20 8.3
May-02 1.32 1.30 1.5
Nov-02 1.33 1.32 0.8
Mar-03 1.35 1.33 1.5
May-04 1.37 1.35 1.5
Oct-04 1.42 1.37 3.6
Mar-05 1.42 1.42 0.0
May-05 1.52 1.42 7.0
Jul-05 1.62 1.52 6.6
Feb-06 1.92 1.62 18.5

Diesel Price Date Revised Price Previous Price % Chg

(sen per litre) Oct-00 60.1 NA NA
Oct-01 70.1 60.1 16.6
May-02 72.1 70.1 2.9
Nov-02 74.1 72.1 2.8
Mar-03 76.1 74.1 2.7
May-04 78.1 76.1 2.6
Oct-04 83.1 78.1 6.4
Mar-05 88.1 83.1 6.0
May-05 108.1 88.1 22.7
Jul-05 128.1 108.1 18.5
Feb-06 158.1 128.1 23.4

Note: Fuel Prices refer to Prices in Peninsular Malaysia

Source: Aseambankers, Media Reports

Malaysia: Major Consumer Price Increases, 2005-2008

Items Date Revised Price Previous Price Increase
Taxi, Bus Fares May 05 RM2 first km, RM2 first km, 18%-33%
10 sen every 10 sen every
150m (Taxi) 200m (Taxi)
Tenaga Electricity Tariff June 06 -- -- 12%
Cigarettes (excise duties) Sep 06 -- -- 1 sen per stick
Water Tariff (KL, Selangor, Nov 06 -- -- 13.5%-17.5%
Toll Rate (selected Klang Jan 07 -- -- 20%-60%
Valley highways)
Dairy products (e.g. Dutch Jan 07 -- -- 4%-5%
Lady, Dumex)
Dairy products & soft Apr 07 -- -- 7%
beverages (Nestle)
Non-general purpose (non- Apr 07 RM1.77 per kg RM1.34 per kg 32%
GP) flour
Price-controlled general May 07 RM1.35 per kg RM1.20 per kg 12.5%
purpose (GP) Flour
Cigarettes (excise duties) July 07 RM8.20 per 20- RM7.40 per 20- 10.8%
stick pack stick pack
Automotive Batteries Aug 07 -- -- 10%-15%
Non-general purpose (non- Oct 07 RM2.37 per kg RM1.77 per kg 34%
GP) flour
Toll Rate (selected Jan 08 -- -- 7.7%-50%
School Bus Fares (Klang Jan 08 -- -- 20%

Source: Aseambankers, Media Reports

ECONOMIC TRENDS ▪ 21 February 2008 Page 5 of 6

CPI January 2008

Definition of Ratings
Aseambankers uses the following rating system:
STRONG BUY Total return is expected to exceed 20% in the next 12 months; high conviction call
BUY Total return is expected to be above 10% in the next 12 months
HOLD Total return is expected to be between above 0% to 10% in the next 12 months
FULLY VALUED Total return is expected to be between -10% and 0% in the next 12 months
SELL Total return is expected to be below -10% in the next 12 months
TRADING BUY Total return is expected to be between 10-20% in the next 6 months arising from positive newsflow e.g. mergers
and acquisition, corporate restructuring, and potential of obtaining new projects. However, the upside may or
may not be sustainable

Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are
only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not
carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings
BV = Book Value FV = Fair Value PEG = PE Ratio To Growth
CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio
Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter
CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset
DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity
DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds
EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital
EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year
EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date
EV = Enterprise Value PBT = Profit Before Tax

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of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each
security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not
necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account
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should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment
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ECONOMIC TRENDS ▪ 21 February 2008 Page 6 of 6