BIMB SECURITIES RESEARCH

MARKET INSIGHT
PP16795/03/2012(029624)

16 February 2012

Economics

ECONOMICS

2012 Economic Outlook: Story of Two Halves?

In line with the regional moderating trend in the 4Q2011. Not far from our initial estimate of 5.0% YoY, Malaysias GDP growth cooled to 5.2% YoY in the 4Q2011 compared to surprise 5.8% YoY jump in the previous quarter, in sync with the moderation trend across most countries in the region. Malaysia was indeed among the regions top 5 GDP growth performers in the 4Q2011. The slightly better-thanexpected economic growth in the 4Q2011 (vs. market consensus of 4.8% YoY) was largely driven by a resilient domestic demand, which surged by 10.5% YoY (3Q2011: +9.0% YoY) in particular public sector-led activities. Of significance was the 23.6% YoY spurt in public consumption (3Q2011: +21.7% YoY) notably to meet higher expenditure on emoluments and supplies & services. Private consumption growth remained sturdy at above the 7% pace thanks to strong household spending on communications, food & non-alcoholic beverages and transportation services. As a result, the final consumption expenditure widened further by 11.1% YoY (3Q2011: +9.9% YoY), accompanying the 8.5% YoY increase in gross fixed capital formation (GFCF) (3Q2011: +6.1% YoY) especially due to continued capital expenditure by private sector businesses and non-financial public enterprises as well as the Governments investment in transportation, trade and industry, to more than make up for the modest 4.9% expansion rate for exports. Robust growth in excess of 6% YoY for agriculture, construction and services sectors on the strength of domestic-oriented activities and milder mining contraction offset lacklustre manufacturing activities. On the supply side, growth was rather broad-based in the 4Q2011 except for the mining & quarrying sector which continued to be mired in an interrupted downcycle for 6 quarters in a row although the mining retrenchment was almost halved to 3.3% YoY (3Q2011: +6.1% YoY) largely on account of a 1.6% YoY rebound in natural gas production and a much slower contraction of 4.6% YoY in crude oil production. Faltering export demand pushed the manufacturing sector to grow by 5.2% YoY in the 4Q2011, almost unchanged from the 5.3% YoY pace in the previous quarter thanks mainly to solid gains of 14.8% YoY in non-metallic mineral, basic metal & fabricated metal products sub-sector, closely linked with the residential & civil engineering segment and 11.1% YoY in transport equipment & other manufactures sub-sector. Boosted by strong jumps of 16.4% YoY in oil palm output, 9.6% YoY in livestock in particular poultry and cattle, 6.4% YoY in other agriculture such as vegetables and fruits, the agriculture sector led the pack with a 6.9% YoY growth. Led by commendable YoY increases in finance & insurance (+6.4%), communications (+8.8%) and transport & storage (+6.2%), the services sector rose 6.4% YoY in the 4Q2011, moderating marginally from +7.0% YoY in the previous quarter. A residential and civil engineering sub-sector kept busy in particular by the implementation of major infrastructure projects and building of affordable houses was the main catalyst for the 6.4% YoY increase in construction activities in the 4Q2011.

The Research Team research@bimbsec.com.my 03-26918887 ext 111

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Domestic demand, insulator of depressed global demand. Without revisions to headline GDP numbers in the past 3 quarters, our initial forecast of 5.1% vs. market consensus of 5.0% for the full-year GDP growth for 2011 turned out to be spot-on but a slowdown from 7.2% in 2010. Expanding by 8.2%, domestic demand was clearly the key growth driver throughout 2011, led particularly by public consumption (+16.8%) but to a lesser degree, private consumption (+6.9%) and GFCF (+6.0%) as export growth slowed to 3.7% (2011: +9.9%). Sectorally speaking, the services sector remained the growth leader (+6.8%), followed by the agriculture sector (+5.6%) mainly attributed to gains in production of oil palm (+11.1%), livestock (+10%) and other agriculture (+6.9%). Reflecting the general weakness in external demand, manufacturing sectors growth eased sharply to 4.5% in 2011, a far cry from the double-digit pace of 11.4% in 2010. Given the continuous slide in mining activities since the 3Q2010, little wonder that the mining sector slipped into the negative territory in 2011, dipping by 5.7% compared to a marginal growth of 0.2% in 2010. The sharp rebound in construction activities in the 4Q2011 was not enough to deliver a faster growth for the construction sector in 2011 (+3.5%) than the 5.1% pace achieved in 2010.

Moving forward, although it has not been spared from a multitude of external headwinds, the trade-dependent Malaysian economy has emerged relatively unscathed, drawing strength from its domestic buoyancy driven by both private and public sectors that has helped cap the punishing impact of an export softening and foreign direct investment slowdown. We have faith in domestic demand to carry the Malaysian economy through by offsetting a pullback in overseas demand.

Remaining in the slow lane in the 1H2012 with chances of a rebound to near trend line growth in the later part of 2012. Being one of the most open economies in the region, Malaysias vulnerability to a challenging external environment is not shocking as slumping global growth erodes consumer and business confidence sapping demand for made-in-Malaysia goods and services while scaling back business capex and expansion plans in the process. Rather poor macroeconomic visibility at present may prevail at least until towards end-1H2012 when we should begin to see more conclusive signs of sustained improvement in global forwardlooking indicators with anticipations of an E&E turnaround, US recovery gaining momentum and the potential decisive resolution to the Euro sovereign debt crisis, among others. However, we prefer to adopt a guarded optimism approach given further downside risks to our growth outlook which may include, among others: escalation in Euro sovereign debt crisis with no conclusive and feasible resolution in sight, resulting in heightened financial volatility, impaired financial intermediation and frozen interbank markets prolonged fiscal consolidation and austerity measures around the globe in particular in Europe and other advanced economies to address public debt and budget deficit issues with a contractionary impact on the global economy hard landing in China worse-than-anticipated impact of political turmoil, social instability and even geopolitical risks on global commodity prices in particular oil & gas

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Economics
other natural catastrophes or calamities with disruptive impact on the global supply chain, similar to or even worse than the Fukushima tragedy and Thailands flooding slumping external demand filters through the economy and weighs on domestic demand

No pressing need for rate-cut buffers for now. Given expectations of just a mild slowdown and not a severe downturn in 2012, we believe interest rates at current levels are appropriate to support domestic-oriented activities without unnecessarily stoking inflation fears although BNM has wide flexibility to loosen its monetary policy in the event the economic outlook deteriorates. If anything, Malaysias proven ability so far to ride out a global slowdown gives the ammunition to BNM to extend its no-change monetary policy at least throughout this year as prices remain at risk-elevated levels although headline inflation has clearly eased after peaking in June 2011.

Quarterly Growth Rates of Malaysias GDP and 5 Sectors (% YoY)

20.0 15.0

Ratios of Consumer Spending to Domestic Demand and GDP (%)

70.00 60.00 50.00
40.00 30.00

10.0

5.0

0.0
1Q2001 3Q2001 1Q2002 3Q2002 1Q2003 3Q2003 1Q2004 3Q2004 1Q2005 3Q2005 1Q2006 3Q2006

1Q2007

3Q2007

1Q2008

3Q2008

1Q2009

3Q2009

1Q2010

3Q2010

1Q2011

3Q2011

-5.0

20.00 10.00 0.00

1992 1993 1994 1995 1999 2000 2001 2002 2006 2007 2008 2009
1990 1991 1996 1997 1998 2003 2004 2005 2010 2011 2012 BI

-10.0

-15.0

-20.0 Overall GDP Agriculture Mining & Quarrying Manufacturing Construction Services

Consumer Spending-to-Domestic Demand

Consumer Spending-to-GDP

Source: BNM, Statistics Department, BIMB Securities

Source: BNM, Statistics Department, BIMB Securities

Ratios of Private Investment to GFCF and GDP (%)

80 70 60 50 40 30 20 10 0
1991 1992 1993 1994 1997 1998 1999 2000 2003 2004 2005 2006 2009 2010 2011
1990 1995 1996 2001 2002 2007 2008

Breakdown of GDP Growth: Demand and Supply Sides

GROWTH (%) 2012 BI GDP (constant prices, 2000=100) 4.1 Demand Side Final Consumption Expenditure 5.9 * Private Consumption 5.9 * Public Consumption 6.1 Gross Fixed Capital Formation (GFCF) 5.2 * Private Investment 3.2 * Public Investment 7.1 Domestic Demand 5.8 Exports 3.5 Imports 4.4 Supply Side Agriculture, Fishing & Forestry 2.9 Mining & Quarrying 3.2 Manufacturing 4.0 Construction 3.2 Services 5.3 2011
5.1 8.9 6.9 16.8 6.0 N/A N/A 8.2 3.7 5.4 5.6 -5.7 4.5 3.5 6.8

2010
7.2 5.2 6.5 0.5 9.8 17.7 2.8 6.3 9.9 15.1 2.1 0.2 11.4 5.1 6.8

4Q2011
5.2 11.1 7.1 23.6 8.5 N/A N/A 10.5 4.9 7.0 6.9 -3.3 5.2 6.4 6.4

3Q2011
5.8 9.9 7.3 21.7 6.1 N/A N/A 9.0 4.2 3.2 8.2 -6.1 5.3 3.0 7.0

4Q2010
4.8 4.8 6.4 0.1 10.0 N/A N/A 5.9 1.7 3.5 -3.9 -1.2 6.2 5.6 6.1

Private Investment-to-GFCF

Private Investment-to-GDP

Source: BNM, Statistics Department, BIMB Securities

2012 BI

Source: BNM, Statistics Department, BIMB Securities

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GDP Performance of Selected Asian Countries

4Q2011 China Japan South Korea Taiwan Hong Kong Singapore Indonesia Philippines Vietnam Malaysia 8.90% -1.00% 3.40% 1.90% 3.00% 3.60% 6.49% 3.70% 5.90% 5.20%

3Q2011 9.10% -0.50% 3.50% 3.42% 4.30% 5.90% 6.46% 3.60% 5.80% 5.80%

Source: Bloomberg, National Authorities, BIMB Securities

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Economics
DEFINITION OF RATINGS BIMB Securities uses the following rating system: STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. NEUTRAL Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage. SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analysts coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analysts coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analysts coverage universe, is expected to underperform the relevant primary market index over the next 12 months 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. Disclaimer The investments discussed or recommended in this report not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of BIMB securities Sdn Bhd may from time to time have a position in or either the securities mentioned herein. Members of the BIMB Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgements as of this and are subject to change without notice. BIMB Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report.

Published by

BIMB SECURITIES SDN BHD (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2691 8887, Fax: 03-2691 1262 http://www.bimbsec.com.my

Kenny Yee Head of Research

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