PP 7767/09/2010(025354)

Malaysia
Economic Highlights
•
MARKET DATELINE

11 May 2010

Industrial Production Rebounded In March, Real

GDP Grew Strongly In The 1Q

◆ Industrial production bounced back to increase by 14.1% yoy in March, after slowing down to +4.8% in
February and compared with +13.8% in January, as workers returned to work after the Chinese New Year festive
celebration. In view of the stronger-than-expected growth in exports and industrial output during the quarter as well
as the proposed RM12bn supplementary budget, we are revising upward our real GDP forecast for 2010 to
6.4%, from +4.5% projected previously and compared with -1.7% in 2009. The pick-up in March’s output was
reflected in higher manufacturing production and electricity output. These were aided by a smaller decline in mining
production.

◆ Cumulatively, industrial production strengthened to 11.0% yoy in the 1Q, from +2.5% in the 4Q of last year.
This was the second consecutive quarter of increase, suggesting that economic activities have picked up momentum.
Based on the preliminary numbers, we estimate that real GDP growth has strengthened to 8.3% yoy in the
1Q, after returning to a positive growth of +4.5% for the first time in a year in the 4Q.

◆ Going forward, the global economic recovery is gaining momentum and prospects of a sustainable global economic
recovery have improved in recent months, in our view. A recovery in the global economy, albeit uneven, will likely
translate into higher demand for the country’s exports. As a result, we expect the country’s real exports to bounce
back and expand by 12.5% in 2010, from -10.1% in 2009.

◆ The improvement in global economic outlook will likely boost consumer and business confidence in the country. We
envisage domestic demand to pick up and expand by 4.3% in 2010, a turnaround from -0.4% in 2009. This
is due mainly to a pick-up in consumer spending and a gradual improvement in private investment, which will likely
be offset partially by a slowdown in public spending during the year.

Industrial production bounced back to increase by Table 1 Industrial Production Index

14.1% yoy in March, after slowing down to +4.8% in (2005 = 100)
February and compared with +13.8% in January (see Table
Total Mfg Electricity Mining
1), as workers returned to work after the Chinese New Year
festive celebration. In view of the stronger-than-expected (% yoy)
growth in exports and industrial output during the quarter 2008 0.7 0.6 1.2 0.8
as well as the proposed RM12bn supplementary budget, we 2009 -7.7 -10.0 0.8 -4.3
are revising upward our real GDP forecast for 2010 2009 Q 2 -10.9 -14.9 -0.9 -3.2
to 6.4%, from +4.5% projected previously and compared Q3 -7.0 -9.1 3.2 -4.2
with -1.7% in 2009. The pick-up in March’s output was Q4 2.5 4.4 10.3 -3.4
reflected in higher manufacturing production, which
2010 Q1 11.0 15.2 18.8 0.8
rebounded to increase by 20.3% yoy in March, from +7.1%
2010 J a n 13.8 18.2 19.8 4.1
in February and compared with +18.2% in January. This
Feb 4.8 7.1 11.4 -1.4
was in tandem with a stronger growth in the exports of
Mar 14.1 20.3 24.9 -0.5
manufactured goods, which surged by 36.1% yoy in March,
after slackening to +18.2% in February. Similarly, 2009 (Jan-Mar) -14.6 -18.8 -9.1 -6.1
electricity output picked up to 24.9% yoy in March, from 2010 (Jan-Mar) 11.0 15.2 18.8 0.8
+11.4% in February, in line with a stronger increase in

Peck Boon Soon

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

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 11 May 2010

manufacturing activities during the month. These were

aided by a smaller decline in mining production, which Table 2 Industrial & Manufacturing
fell by 0.5% yoy in March, compared with -1.4% in Production
February. Stripping out seasonal factors, industrial % mom
production grew at a stronger pace of 11.0% yoy in
Total Total Electricity Mining
March, the fourth straight month of picking up and
IPI Mfg
compared with +8.8% in February, suggesting that a pick-
2010 Jan 3.8 3.5 2.1 5.1
up in industrial activities is gaining momentum.
Feb -11.2 -9.7 -9.6 -14.6
Mar 15.1 16.3 16.8 11.9
Mom, industrial production grew by 15.1% in March, a
rebound from -11.2% in February and compared with (3-month moving average)
+3.8% in January (see Table 2). This was due to a % mom % yoy
broad-based pick-up in industrial activities, from
manufacturing to electricity and mining sectors, as workers Total Total Elec- Total Total Elec-

returned to work after a long holiday break. Manufacturing IPI Mfg tricity IPI Mfg tricity

production rebounded to increase by 16.3% mom in March, 2010 Jan 0.4 -0.3 -0.2 Jan 6.7 9.9 13.1
from -9.7% in February, in line with a sharp rebound in
Feb -1.5 -1.8 -1.3 Feb 8.8 12.0 15.1
the exports of manufactured goods during the month.
Mar 2.1 2.9 2.6 Mar 11.0 15.3 18.8
Similarly, electricity output and mining production grew
by 16.8% and 11.9% mom respectively in March,
compared with the corresponding rates of -9.6% and -14.6% in February.

Cumulatively, industrial production strengthened to

11.0% yoy in the 1Q, from +2.5% in the 4Q of last year. Table 3 : GDP By Demand Aggregate
This was the second consecutive quarter of increase,
(2000=100)
'10f '11f 2009 2010
suggesting that economic activities have picked up
momentum. Stronger growth was driven by a pick-up in
manufacturing production, which strengthened to 15.2% yoy Q1 Q2 Q3 Q4 Q1e

in the 1Q, from +4.4% in the 4Q, in tandem with higher % Growth in Real Terms

exports during the quarter. Similarly, electricity output grew GDP 6.4 5.0 -6.2 -3.9 -1.2 4.5 8.3
at a stronger pace of 18.8% yoy in the 1Q, compared with Consumption:
+10.3% in the 4Q, on account of a pick-up in industrial Private 4.8 6.0 -0.7 0.5 1.5 1.7 4.3
activities. These were aided by a turnaround in mining Public 1.5 4.5 2.1 1.0 10.9 1.3 1.5
output, which rebounded to increase by 0.8% yoy in the 1Q, Total Invest'nt 5.1 8 . 4 -10.8 - 9 . 6 -7.9 8.2 6.6
from -3.4% in the 4Q. Based on the preliminary numbers, Exports 12.5 7 . 8 -15.2-17.3 -13.4 7.3 21.3
we estimate that real GDP growth has strengthened to Imports 1 7 . 9 1 0 . 5 -23.5-19.7 -12.9 6.9 28.9
8.3% yoy in the 1Q, after returning to a positive growth Agg domestic
of +4.5% for the first time in a year in the 4Q (see Table demand 4.3 6.3 -2.9 -2.2 0.4 3.0 4.4
3). This was on the back of a stronger growth in exports,
(f):RHBRI's forecasts (e):RHBRI’s estimates
while domestic demand continued to strengthen.

Real exports are estimated to have grown at a stronger pace of 21.3% yoy in the 1Q, compared with +7.3% in the
4Q. This was the second consecutive quarter of picking up, on account of a stronger demand for the country’s exports
from European Union (EU), China and Asean. These were aided by a recovery in exports to the US and Japan during
the quarter. In terms of products, the pick-up in exports was reflected in a stronger increase in the exports of electrical
& electronic (E&E) products and non-E&E manufactured goods as well as a recovery in major commodity products.

Domestic demand is estimated to have strengthened to 4.4% yoy in the 1Q, from +3.0% in the 4Q of last year. This
was on account of stronger consumer spending, which is estimated to have grown at a faster pace of 4.3% yoy in
the 1Q, after inching up to +1.7% in the 3Q, in line with the improvement in confidence and job market. Already,
manufacturers have been recruiting workers and for the last ten consecutive months up to March. Similarly, the Malaysian
Institute of Economic Research’s (MIER) consumer sentiment index rose to the highest level in two years in the 1Q. In
the same vein, new car sales strengthened to 22.0% yoy in the 1Q, from +18.5% in the 4Q and -3.5% in the 3Q, while
consumption credit picked up during the quarter. Also, the imports of consumption goods surged by 18.5% yoy in the
1Q, after turning around to record an increase of 6.4% in the 4Q, while commodity prices remained firm during the
quarter. Although tourist arrivals moderated somewhat, it remained at a high level in the 1Q.

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 11 May 2010

Similarly, private investment is estimated to have returned to a positive growth, as some investors might have begun
investing in line with an improvement in confidence and a pick-up in external as well as domestic demand. The MIER’s
Business Confidence index rose to 124 points in the 1Q, the highest in six years, indicating that businesses have become
more optimistic. As a result, sales of commercial vehicles grew at a faster pace during the quarter. Although the imports
of capital goods slowed down to 9.6% yoy in the 1Q from +18.4% in the 4Q, it was still growing, suggesting that
businesses continued to spend, albeit cautiously.

Nevertheless, we expect public investment to slow down in the 1Q, after recording a strong disbursement of funds in
the last four consecutive quarters. Consequently, fixed capital formation is estimated to have moderated somewhat
to 6.6% yoy in the 1Q, from +8.2% in the 4Q. The public consumption expenditure, however, is estimated to have inched
up during the quarter, after recording a sharp slowdown in the previous quarter.

On the supply side, value added in the manufacturing

sector is estimated to have strengthened to 14.3% Table 4 : GDP By Industrial Origin
yoy in the 1Q, after returning to a growth of 5.3% for the (2000=100)
'10f '11f 2009 2010
first time in a year in the 4Q (see Table 4). This was
underpinned by a pick-up in output of both the export- and Q1 Q2 Q3 Q4 Q1e
domestic-oriented industries. The services sector is
estimated to have grown at a faster pace of 7.6% yoy % Growth in Real Terms
in the 1Q, after rising by 5.1% in the 4Q. This was in tandem
with a pick-up in consumer spending and trade activities, GDP 6.4 5.0 -6.2 -3.9 -1.2 4.5 8.3
resulting in a broad-based pick-up in activities, from wholesale
& retail trade to accommodation & restaurants, utilities, Agriculture 2.0 2.8 -4.3 0.3 -0.5 6.0 1.5
transport & storage, finance & insurance and communications Mining 1.2 2.0 -5.2 -3.6 -3.5 -2.8 1.5
sub-sectors during the quarter. Similarly, mining output is Manufacturing 10.1 8 . 0 -17.9 -14.5 - 8 . 6 5.3 14.3
estimated to have bounced back in the 1Q, on account of a Construction 4.5 2.8 1.1 4.5 7.9 9.2 7.0
smaller drop in the production of crude oil and a pick-up in the Services 5.9 4.8 -0.2 1.6 3.4 5.1 7.6
production of LNG. Construction activities, however, are
estimated to have moderated somewhat during the quarter, in
(f):RHBRI's forecasts (e):RHBRI’s estimates
line with a slower increase in the Government’s stimulus
spending. In the same vein, agriculture output is estimated
to have slowed down in the 1Q, after a strong pick-up in the 4Q, due largely to a decline in the production of palm oil.

Going forward, the global economic recovery is gaining momentum and prospects of a sustainable global economic
recovery have improved in recent months, in our view. This is premised on an improvement in investors’ risk
appetite, as financial markets have stabilised and asset prices have reached a favourable inflection point where investors
are no longer fearful of catching a falling knife but view any weakness in asset prices as investment opportunities.
Furthermore, the sovereign debt problem in Europe is likely to be manageable, as the Euroland countries and the
International Monetary Fund have agreed to provide an emergency stabilisation loan amounting to €750bn (US$962bn)
for countries under attack by speculators and €110bn to help Greece. Also, policymakers around the globe have gained
confidence on a sustainable global economic recovery and they have begun to exit their extremely loose policy
and emergency lending programmes, albeit at a gradual pace. Meanwhile, global manufacturing and services
activities have recovered to positive growth for the last nine consecutive months in April. Similarly, the OECD composite
leading indicator’s 12-month rate of change strengthened to 10.2% in March, the seventh consecutive month of increase
and from +10.0% in February. As a whole, a recovery in the global economy, albeit uneven, will likely translate into
higher demand for the country’s exports. As a result, we expect the country’s real exports to bounce back and
expand by 12.5% in 2010, an upward revision from +6.5% projected previously and -10.1% in 2009.

In the US, the economy moderated to an annualised rate of 3.2% in 1Q 2010, after a spike up in the 4Q of last year.
Although growth was weaker than the previous quarter, the composition of growth is a lot more encouraging, as it was
driven by a pick-up in consumer spending rather than inventory rebuilding. This indicates that a recovery in the economy,
which started from the government stimulus and inventory rebuilding, has now spread to consumer spending, making
the recovery more sustainable going forward. This was underpinned by a gradual improvement in job market. Indeed,
non-farm payrolls recording the fourth consecutive month of increase in April and the recovery is becoming more broad-
based. Still, a gradual improvement in the job market and housing sector points to a gradual recovery of the US
economy.

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 11 May 2010

Similarly, the Euroland’s economy is expected to sustain its slow pace of recovery in 2010. As it stands, the emergence
of sovereign debt problem of late and a need for some governments to cut spending suggest that the region’s economic
recovery will likely be slow and uneven. The Japanese economy will likely sustain its recovery into 2010 as well, in
tandem with a sustained increase in exports during the year. China’s economy, however, is showing signs of easing
following the introduction of measures to control the rapid credit expansion and upward property prices. Although the
key economic indicators continued to point to a sustained growth in the Chinese economy, growth is likely to have peaked.

A turnaround in demand for E&E products, which accounts for about 45% of Malaysia’s total exports in 2009, would boost
the country’s exports. Already, worldwide semiconductor sales picked up for the fifth consecutive month to 58.3% yoy
in March, from +56.2% in February and +47.2% in January. Indeed, the industry experts, Semiconductor Industry
Association expects worldwide semiconductor sales to grow by 10.2% in 2010, a rebound from -9.0% in 2009.

A recovery in exports will likely boost consumer and business confidence, which in turn will likely translate into higher
domestic demand, in our view. As a result, we envisage domestic demand to pick up and expand by 4.3% in
2010, a turnaround from -0.4% in 2009. This is due mainly to a pick-up in consumer spending, which is projected
to grow at a stronger pace of 4.8% in 2010, after slowing down to +0.8% in 2009. This is in tandem with an improvement
in job market outlook and a pick-up in tourist arrivals. Already, consumer confidence improved further in the 1Q, while
manufacturers continued to recruit workers for the last nine consecutive months up to February. In addition, we believe
high savings, rising consumerism and pent-up demand will provide support to consumer spending during the year.

Similarly, we expect private investment to recover in 2010, albeit from a low base, as investors resume their
investment along with a recovery in exports. As it stands, the imports of capital goods grew for the second consecutive
quarter, albeit at a slower pace in the 1Q, while demand for corporate loans is picking up, pointing to an improvement
in investment activities. Public investment, however, is projected to slow down in 2010, on the back of a slower
increase in development expenditure, in line with the Federal Government’s efforts to contain its budget deficit. Nevertheless,
fixed capital formation will likely bounce back to record a growth of 5.1% in 2010, from -5.5% in 2009, as a
slowdown in public investment will likely be mitigated by a pick-up in private investment. Public consumption, however,
will likely ease off during the year, on the back of a fiscal consolidation.

IMPORTANT DISCLOSURES

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contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and
criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein.
RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement
by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time
have an interest in the securities mentioned by this report.

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