MALAYSIA: ECONOMIC &

POLITICAL OULOOK 2013

AZRUL AZWAR AHMAD TAJUDIN
CHIEF ECONOMIST
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2
3
STILL LANGUISHING GLOBAL ACTIVITIES
Spots of deterioration in the global
economy since 3Q2012 with
heightened downside risks part of
sluggish and bumpy recovery OR
beginning of a more prolonged
downturn? Global economic
challenges:
! Short-term : Proactive response to short-
run slowdown
! Medium-term: The global economy is
operating in a world of high public debt
and/or budget deficits in particular rising
doubts over:
the viability of the Euro zone as
weaknesses in the periphery appears to
have spread to core economies
capability of peripheral Euro countries to
deliver the required fiscal and structural
adjustments

Sources: JP Morgan & Markit, Bank Islam
Sources: OECD, Bank Islam
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GLC8AL UkCnASING MANAGLkS' INDICLS (MI)
Compos|te MI Manufactur|ng MI Serv|ces MI
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CLCD LLADING INDICA1CkS (12-MCN1n ANNUALISLD GkCW1n)
Ch|na Ind|a 8raz|| kuss|a Iapan Luro US Uk 1ota|
LIMITED IMPROVEMENT TO GLOBAL TRADE
The World Trade Organisation (WTO)
cut its global trade growth forecasts to
2.5% for 2012 from 3.7% and to 4.5%
for 2013 from 5.6%:
! given heightened risks on the downside
due largely to the prolonged Euro zone
crisis, sub-trend US growth, Chinas
slowdown (after expanding by 7.7%
during the first 3Qs of 2012, official GDP
growth targets of 7.5% in 2012 and
7.0%-7.5% in 2013) and Japans
subdued growth
! Improving trade growth outlook in
developing economies given tentative
signs of a pick-up in recent export
performance could be limited mainly to
Asian economies whose supply chain
networks closely integrated with China
and could only partially fill up the global
slack



Sources: IMF, Bank Islam
Sources: SIA, SEMI, Bank Islam
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I
ANNUAL WCkLD MLkCnANDISL 1kADL GkCW1n
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GLC8AL CnI INDUS1k
G|oba| Sem|conductor Sa|es (US b||||on, LnS) US 8ook-to-8||| kat|o (knS)
3
SLOW AND UNEVEN RECOVERY IN SIGHT
Potential major causes of
disappointing global growth in
2H2012 and 1H2013:
! No let-up in the intensity of the Euro zone
sovereign debt crisis
! Short-term contractionary effects on
growth due to austerity measures and
fiscal cutbacks worldwide especially in
Europe in particular peripheral Euro
zone, the US and UK and spillovers on
developing countries
! Weak financial institutions and
inadequate policy responses in key
advanced economies
! Tail-off in Japans disaster reconstruction
spending
! Downshift in prospects for China, India
and Brazil

Sources: JP Morgan & Markit, Bank Islam
Sources: OECD, Bank Islam
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LU MANUIAC1UkING UkCnASING MANAGLkS' INDICLS (MI)
Lurozone Germany Irance Ita|y Uk
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CLCD LLADING INDICA1CkS (12-MCN1n ANNUALISLD GkCW1n)
Ch|na Ind|a 8raz|| kuss|a Iapan Luro US Uk 1ota|
6
SLOW AND UNEVEN RECOVERY IN SIGHT (continued)
! The 11
th
hour compromised deal only averted the immediate pain of the fiscal cliff,
a harsh combination worth US$609 billion of harsh spending cuts (US$109 billion in
defence and non-defence programmes) and sharp tax increases (US$500 billion)
due to take effect 1 Jan 2013 BUT not all possible negative impact:
another potential political bickering and gridlock in the Congress as early as mid-Feb
2013 over the need to raise the US$16.4 trillion US Federal Govt debt ceiling as the
Treasury Dept exhausts extraordinary measures taken since 31 Dec 2012 to finance
about US$200 billion in deficits possible damage to fragile consumer and business
confidence
2-month delay to automatic spending cuts or sequestration (US Govts belt-tightening to
pare down deficits) but to finally take effect on 1 March 2013 US growth to slow
especially in the 1H2013 but not grind to a halt
! Possibility of waning momentum in domestic demand in developing economies due
to fiscal constraints (Malaysia), overheating concerns (Indonesia) and a host of
other factors
! Stalled E&E turnaround?
US SEMI book-to-bill ratio, a forward-looking indicator for the global chip industry
remained below parity for the 6
th
month in a row in November 2012 to 0.79x after
tentative signs of recovery with above the 1x-threshold for a short period of 4 consecutive
months between Feb 2012 and May 2012.
The World Semiconductor Trade Statistics (WSTS) forecast modest growth in global
semiconductor sales in 2013 and 2014, by 4.5% and 5.2% to US$303 billion and US$319
billion respectively vs. a 3.2% decline in 2012 to US$290 billion .

7
SLOW AND UNEVEN RECOVERY IN SIGHT (continued)
On 9 October 2012, the IMF downgraded
its global growth forecasts to 3.3% (from
3.5%) for 2012 and 3.6% (from 3.9%) for
2013 global slowdown to persist
especially in the earlier part of 2013 on:
! Lacklustre US recovery
! Flimsy turnaround from recession in the
Euro zone and the UK
! Stalled recovery in Japan
! Sub-par growth in China, India and Brazil

Asia will continue to power the global
growth at a faster clip than the global
economy despite risks of the Asian growth
slowing to levels last seen during the 2009
global financial crisis.


Sources: IMF, Bank Islam
Sources: IMF, national authorities, Bank Islam
2008 2009 2010 2011 2012 I 2013 I 2012 I 2013 I 2012 I 2013 I
World CuLpuL 2.8 -0.6 3.3 3.9 3.3 4.1 3.3 3.9 3.3 3.6
Advanced Lconomles 0.0 -3.6 3.2 1.6 1.4 2.0 1.4 1.9 1.3 1.3
* unlLed SLaLes -0.3 -3.3 3.0 1.7 2.1 2.4 2.0 2.3 2.2 2.1
* Luro Zone 0.4 -4.3 1.9 1.3 -0.3 0.9 -0.3 0.7 -0.4 0.2
* !apan -1.0 -3.3 4.4 -0.7 2.0 1.7 2.4 1.3 2.2 1.2
* unlLed klngdom -1.1 -4.4 2.1 0.7 0.8 2.0 0.2 1.4 -0.4 1.1
* Canada 0.7 -2.8 3.2 2.4 2.1 2.2 2.1 2.2 1.9 2.0
* newly lndusLrlallzed Asla 1.8 -0.7 8.3 4.0 3.4 4.2 2.7 4.2 2.1 3.6
* Malaysla 4.8 -1.6 7.2 3.1 4.4 4.7 4.0 4.7 4.4 4.7
* Chlna 9.6 9.2 10.4 9.2 8.2 8.8 8.0 8.3 7.8 8.2
* lndla 6.2 6.6 10.6 7.1 6.9 7.3 6.1 6.3 4.9 6.0
9-Cct-12
Internat|ona| Monetary Iund's Iorecasts
16-Iu|-12
Se|ected Lconom|es
17-Apr-12
-10
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UAk1LkL kLAL Ck CnAINLDGD GkCW1n CI SLLLC1LD 8kIC & CLCDCCUN1kILS (o )
US Uk LU Iapan Ch|na Ind|a 8raz||
8
GRAVITY-DEFYING FIRST 3QS OF 2012
Stronger-than-expected GDP showing in
the first 3Qs of 2012 in particular the
surprise 5.2% YoY pace in 3Q2012 and
the upgrade in 2Q2012 reading to 5.6%
YoY from 5.4% YoY. Key takeaways in
3Q2012:
! 3.0% YoY contraction in exports, the first
decline on a quarterly basis since 3Q2009
after decelerating for 2 consecutive Qs
(2Q2012:+2.1% YoY, 1Q2012:+2.8% YoY)
external demand to remain a major drag
on the Malaysian economy at least until
1H2013
! Very robust domestic demand, sustaining
double-digit growth of 11.4% YoY
(2Q2012:+14.0% YoY, 1Q2012:+10.0%
YoY), led by both public and private
sectors in particular:
Sources: BNM, Bank Islam
Sources: BNM, Bank Islam
-30.0
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1
1
1

2
0
1
2
2

2
0
1
2
3

2
0
1
2
UAk1LkLDLMAND SIDL LkICkMANCL ( o)
Cvera|| GD r|vate Consumpt|on ub||c Consumpt|on r|vate Investment
ub||c Investment Lxports Imports
-20.0
-1S.0
-10.0
-S.0
0.0
S.0
10.0
1S.0
20.0
2S.0
1

2
0
0
6
2

2
0
0
6
3

2
0
0
6
4

2
0
0
6
1

2
0
0
7
2

2
0
0
7
3

2
0
0
7
4

2
0
0
7
1

2
0
0
8
2

2
0
0
8
3

2
0
0
8
4

2
0
0
8
1

2
0
0
9
2

2
0
0
9
3

2
0
0
9
4

2
0
0
9
1

2
0
1
0
2

2
0
1
0
3

2
0
1
0
4

2
0
1
0
1

2
0
1
1
2

2
0
1
1
3

2
0
1
1
4

2
0
1
1
1

2
0
1
2
2

2
0
1
2
3

2
0
1
2
UAk1LkL SLC1CkAL LkICkMANCL ( o)
Cvera|| GD Agr|cu|ture M|n|ng & uarry|ng
Manufactur|ng Construct|on Serv|ces
GRAVITY-DEFYING FIRST 3QS OF 2012 (continued)
22.7% YoY spike in GFCF
(2Q2012:+26.1% YoY, 1Q2012:+16.1%
YoY), supported by both domestic and
foreign investments of which public
investment was up by +22.4% YoY
(2Q2012:+28.9% YoY, 1Q2012:+10.3%
YoY) and private investment by +22.9%
YoY (2Q2012:+24.6% YoY,
1Q2012:+19.8% YoY)
8.5% YoY jump in household spending
(2Q2012:+8.8% YoY, 1Q2012: +7.4%
YoY), lifted by Govt cash transfers and
assistance benefits while public
consumption was up by 2.3%
YoY(2Q2012:+10.9% YoY, 1Q2012:
+9.1% YoY)

Sources: Department of Statistics, MATRADE, Bank Islam
Sources: MIER, Bank Islam
S0
60
70
80
90
100
110
120
130
1

9
8
3

9
8
1

9
9
3

9
9
1

0
0
3

0
0
1

0
1
3

0
1
1

0
2
3

0
2
1

0
3
3

0
3
1

0
4
3

0
4
1

0
S
3

0
S
1

0
6
3

0
6
1

0
7
3

0
7
1

0
8
3

0
8
1

0
9
3

0
9
1

1
0
3

1
0
1

1
1
3

1
1
1

1
2
MILk INDICA1CkS
Consumer Sent|ment Index 8us|ness Cond|t|ons Index
-30.00
-20.00
-10.00
0.00
10.00
20.00
30.00
I
a
n
-
0
8
I
e
b
-
0
8
M
a
r
-
0
8
A
p
r
-
0
8
M
a
y
-
0
8
I
u
n
-
0
8
I
u
|-
0
8
A
u
g
-
0
8
S
e
p
-
0
8
C
c
t
-
0
8
N
o
v
-
0
8
D
e
c
-
0
8
I
a
n
-
0
9
I
e
b
-
0
9
M
a
r
-
0
9
A
p
r
-
0
9
M
a
y
-
0
9
I
u
n
-
0
9
I
u
|-
0
9
A
u
g
-
0
9
S
e
p
-
0
9
C
c
t
-
0
9
N
o
v
-
0
9
D
e
c
-
0
9
I
a
n
-
1
0
I
e
b
-
1
0
M
a
r
-
1
0
A
p
r
-
1
0
M
a
y
-
1
0
I
u
n
-
1
0
I
u
|-
1
0
A
u
g
-
1
0
S
e
p
-
1
0
C
c
t
-
1
0
N
o
v
-
1
0
D
e
c
-
1
0
I
a
n
-
1
1
I
e
b
-
1
1
M
a
r
-
1
1
A
p
r
-
1
1
M
a
y
-
1
1
I
u
n
-
1
1
I
u
|-
1
1
A
u
g
-
1
1
S
e
p
-
1
1
C
c
t
-
1
1
N
o
v
-
1
1
D
e
c
-
1
1
I
a
n
-
1
2
I
e
b
-
1
2
M
a
r
-
1
2
A
p
r
-
1
2
M
a
y
-
1
2
I
u
n
-
1
2
I
u
|-
1
2
A
u
g
-
1
2
S
e
p
-
1
2
C
c
t
-
1
2
o GkCW1n (3-MCN1n MCVING AVLkAGL 8ASIS)
II Gross Lxports
GRAVITY-DEFYING FIRST 3QS OF 2012 (continued)
! Growth moderation across almost all sectors:
Construction sector remained the major growth leader: +18.3% YoY (2Q2012:+22.2%
YoY, 1Q2012: +15.5% YoY), led by the civil engineering sub-sector spanning across
various industries/sub-sectors in particular roads/highways/bridges, transportation,
utilities, oil & gas and services related as well as residential sub-sector
Pick-up in services output growth to 7.0% YoY (2Q2012:+6.6% YoY, 1Q2012:+5.7% YoY),
underpinned domestic-oriented activities
Apparent slowdown in manufacturing activities, increasing by just 3.3% YoY
(2Q2012:+5.6% YoY, 1Q2012:+4.4% YoY) on moderation in export-oriented and
domestic-oriented industries
Return to the positive territory for the agriculture sector despite a marginal 0.5% YoY
growth (2Q2012:-4.7% YoY, 1Q2012:+2.1% YoY) thanks to a turnaround in CPO output
Unexpected slump in mining activities with a 1.2% YoY drop (2Q2012:+2.3% YoY,
1Q2012:+0.3% YoY) as a result of lower natural gas production due to planned facility
shutdowns

MALAYSIA: 2013, YEAR OF 2 HALVES?
The progress of economic rebalancing
and transformation, on a journey to
become a developed, high-income
nation by 2020 to gain traction.
Pockets of weakness in the 1H2013 with
! erratic export performance given the still
tentative global recovery
! uncertainties related to GE13
A pick-up in Malaysias growth
momentum in 2H2013 with significant
export recovery on the widely expected
global turnaround thanks to:
! Clarity about resolution to the Euro zone
crisis - resumption of recovery by mid-
2013 particularly for core countries and
return to growth for all nations by 2014
! More conclusive signs of sustainable
bottoming out in the US and China
Sources: Department of Statistics, MATRADE, Bank Islam
Sources: MIER, Bank Islam
S0
60
70
80
90
100
110
120
130
1

9
8
3

9
8
1

9
9
3

9
9
1

0
0
3

0
0
1

0
1
3

0
1
1

0
2
3

0
2
1

0
3
3

0
3
1

0
4
3

0
4
1

0
S
3

0
S
1

0
6
3

0
6
1

0
7
3

0
7
1

0
8
3

0
8
1

0
9
3

0
9
1

1
0
3

1
0
1

1
1
3

1
1
1

1
2
MILk INDICA1CkS
Consumer Sent|ment Index 8us|ness Cond|t|ons Index
-13.00
-8.00
-3.00
2.00
7.00
12.00
I
a
n
-
9
7
A
p
r
-
9
7
I
u
|-
9
7
C
c
t
-
9
7
I
a
n
-
9
8
A
p
r
-
9
8
I
u
|-
9
8
C
c
t
-
9
8
I
a
n
-
9
9
A
p
r
-
9
9
I
u
|-
9
9
C
c
t
-
9
9
I
a
n
-
0
0
A
p
r
-
0
0
I
u
|-
0
0
C
c
t
-
0
0
I
a
n
-
0
1
A
p
r
-
0
1
I
u
|-
0
1
C
c
t
-
0
1
I
a
n
-
0
2
A
p
r
-
0
2
I
u
|-
0
2
C
c
t
-
0
2
I
a
n
-
0
3
A
p
r
-
0
3
I
u
|-
0
3
C
c
t
-
0
3
I
a
n
-
0
4
A
p
r
-
0
4
I
u
|-
0
4
C
c
t
-
0
4
I
a
n
-
0
S
A
p
r
-
0
S
I
u
|-
0
S
C
c
t
-
0
S
I
a
n
-
0
6
A
p
r
-
0
6
I
u
|-
0
6
C
c
t
-
0
6
I
a
n
-
0
7
A
p
r
-
0
7
I
u
|-
0
7
C
c
t
-
0
7
I
a
n
-
0
8
A
p
r
-
0
8
I
u
|-
0
8
C
c
t
-
0
8
I
a
n
-
0
9
A
p
r
-
0
9
I
u
|-
0
9
C
c
t
-
0
9
I
a
n
-
1
0
A
p
r
-
1
0
I
u
|-
1
0
C
c
t
-
1
0
I
a
n
-
1
1
A
p
r
-
1
1
I
u
|-
1
1
C
c
t
-
1
1
I
a
n
-
1
2
A
p
r
-
1
2
I
u
|-
1
2
C
c
t
-
1
2
o GkCW1n kA1LS CI LLADING, CCINCIDLN1 & LAGGING INDICA1CkS
Lead|ng Index Co|nc|dent Index Lagg|ng Index
13
PROSPECTS IN 2013
Notwithstanding a multitude of
uncertainties in the global economy and
financial environment, the latest official
GDP growth guidance of between 4.5%-
5.0% for 2012 and 4.5%-5.5% for 2013
seems reasonably realistic - In-house
GDP growth forecasts of 5.1% for 2012
and 5.3% for 2013 respectively exceed
or at the upper-end of official targeted
ranges:
! Domestic demand (+11.8% YoY during
the first 3Qs of 2012), proven so far to
be more than adequate to withstand
external headwinds and absorb external
shocks, will continue to anchor growth
on disposable income enhancement
measures and other domestic demand
supportive incentives under Budget
2013, particularly led by:
Sources: BNM, Economic Report 2012/2013, Bank Islam
GkCW1n() 2008 2009 2010 2011 1n2012 2012 8I 2012 MoI 2013 8I 2013 MoI
GD (constant pr|ces, 2000=100) 4.8 -1.5 7.2 5.1 5.1 5.1 4.5-5.0 5.3 4.5-5.5
Demand S|de
I|na| Consumpt|on Lxpend|ture 8.4 1.4 5.8 8.9 8.1 7.8 7.9 5.2 4.2
* rlvaLe ConsumpLlon 8.7 0.6 6.6 7.1 8.1 8.0 7.0 6.2 5.7
* ubllc ConsumpLlon 6.9 4.9 2.9 16.1 8.4 7.2 11.3 1.2 -1.2
Gross I|xed Cap|ta| Iormat|on (GICI) 2.4 -2.7 10.4 6.5 21.3 19.9 13.5 10.2 9.3
* rlvaLe lnvesLmenL 0.1 -7.4 15.5 12.2 22.4 19.7 11.7 11.7 13.3
* ubllc lnvesLmenL 5.2 2.9 5.0 -0.3 19.5 20.1 15.9 8.3 4.2
Domest|c Demand 6.6 0.3 7.0 8.2 11.8 11.1 9.4 6.6 5.6
Lxports 1.6 -10.9 11.3 4.2 2.5 1.4 1.6 4.2 2.8
Imports 2.3 -12.7 15.6 6.2 7.5 6.5 5.1 5.7 3.6
Supp|y S|de
Agr|cu|ture, I|sh|ng & Iorestry 3.8 0.05 2.4 5.9 -1.5 -0.6 0.6 1.8 2.4
M|n|ng & uarry|ng -2.4 -6.5 -0.4 -5.7 1.3 1.0 1.5 2.5 2.7
Manufactur|ng 0.8 -9.0 11.9 4.7 5.0 4.3 4.2 5.1 4.9
Construct|on 4.4 6.2 6.0 4.6 18.9 18.1 15.5 11.0 11.2
Serv|ces 8.6 2.9 7.2 7.0 5.8 6.0 5.5 5.9 5.6
14
PROSPECTS IN 2013 (continued)
investment revival, both private and public
consumer spending notwithstanding expectations of public consumption slowdown given
limited room for further fiscal stimulus

! Across-the-board expansion in all sectors in 2013 with construction, services
and manufacturing sectors as growth leaders:
double-digit growth rates for construction activities, anticipated to persist in 2012 and
2013 with huge multiplier effects on the overall economy
increase in services activities to sustain above 5.5% underpinned particularly by robust
activities in financial, real estate, communications segments
respectable manufacturing output growth, driven by both export-oriented and domestic-
oriented industries

13
PROSPECTS IN 2013 (continued)
Direct measures to further boost foreign and domestic direct investments
(FDIs and DDIs), private or public sector led:
! RM3 billion allocation to accelerate the implementation of the Entry Point Projects
(EPPs) under the 12 National Key Economic Areas (NKEAs) including the RM1
billion Domestic Investment Strategic Fund under the Malaysian Investment
Development Authority (MIDA) announced in July 2012 to promote DDIs and
accelerate the participation of Malaysian companies in the global supply chain
while leveraging on outsourcing activities and acquisition of technology by
Malaysian companies
! RM6 billion allocation under the Private Finance Initiatives (PFI 2) to implement
various projects such as refurbishment and maintenance of schools & health
clinics, housing development, water tanks, flood mitigation plans and sport facility
building to ensure the peoples well-being while spurring investment activities

16
PROSPECTS IN 2013 (continued)
Notwithstanding the marginal 0.6% YoY increase in exports during the first
3Qs of 2012 of which the 3Q2012 suffered a 3% contraction as evidence of
the impact of global slowdown, the baseline scenario points to improving
prospects towards 1H2013, paving the way for a commendable acceleration
especially towards 2H2013 and in 2014 due to:
! Optimism from stimulus measures such as aggressive monetary easing and/or
reflationary fiscal policy or other pro-growth macroeconomic policies already or will
be undertaken by the worlds major economies, coordinated or otherwise
After spending US$2.3 trillion in QE1 and QE2, the US QE3 was announced in mid-Sep
2012, comprising a monthly programme to purchase mortgage-backed bonds worth
US$40 billion until a sustained turnaround in the job market, most probably after the
unemployment rate dips to way below 7% (although still above the desired 5%-6% range)
while helping to nurse the housing market to recovery
Chinas CNY1 trillion infrastructure stimulus package over 3 to 8 years to build subway
lines, railways, roads, highways, ports, etc announced in early Sep 2012
Launch of the Outright Monetary Transactions (OMT) in September 2012 (but ready to
activate from Day 1), the European Central Banks (ECB) new bond buying programme to
calm financial markets and bring down sovereign bond spreads of troubled countries (with
high borrowing costs) sterilised purchase of unlimited amounts of sovereign bonds of
Euro zone countries that seek assistance and agree to fiscal adjustment programmes and
sound economic policies
.


17
PROSPECTS IN 2013 (continued)
A 10-trillion yen extension, announced in Sep 2012 to Bank of Japans asset-buying
programme amounting to 80 trillion yen in total 5 trillion yen on short-term bills by June
2013 and another 5 trillion yen on long-term bonds by end-Dec 2013

! Tentative signs of a shift in US household borrowing patterns in 2Q2012 and
3Q2012, indication of the beginning of an end to the long private sectors
deleveraging process in particular households who may demonstrate greater
willingness to loosen their purse strings despite muted income growth as debt has
increasingly become less of a burden if corporate deleveraging subsides at the
same time, then deleveraging will no longer be a big drag on the economy

! Rather stable commodity prices in particular related to energy and food could to a
certain extent cushion the downside risks to global growth although it may not be
able to spur a meaningful economic recovery. Lower commodity prices:
help boost domestic demand to partially make up for sluggish exports thanks to improved
capacity to spend with better consumers purchasing power and businesses balance
sheets
provide the scope for monetary policy support as central banks should be able to maintain
or even lower interest rates if necessary
come as a relief for Governments struggling to pay national subsidy bills





18
DOMESTIC AREAS OF VULNERABILITY?
Some domestic-driven risk factors that could potentially constrain growth
potential in 2013:
! Delay in holding the 13
th
General Election (GE13) - negative for the economy given the
inclination among both businesses and consumers to adopt a wait-and-see attitude,
deferring their spending decisions as well as a potential burden on the Federal Govts
finances if the ruling party continues dishing out more generous handouts
! Delay in the full start-up of Malaysias Gumusut-Kakap deep-sea oilfield (2
nd
deepwater
development after Kikeh field offshore Sabah) with a full production capacity of up to
135,000 bpd to the 2H2013 (instead of the 2H2012) due the longer-than-expected time
needed to construct the floating production facility - protracted modest growth for the
mining sector. However, its maiden production was made possible since Nov 2012 via an
interim crude evacuation system (ICES) by tying back or linking its 2 wells to the existing
Kikeh field and is expected to hit the maximum of 25,000 bpd.
! Limitations of domestic demand after 4 straight quarters of beyond expectations -
concerns whether it has further leg to hold up and provide support to Malaysias economic
growth if the global slowdown prolongs; sudden upturn in inflationary pressures especially
from food and fuel prices; escalating household and Govt indebtedness which may
require some macroeconomic policy tightening and pending potential policy shift in
general in particular post-GE13



19
TAME INFLATION OUTLOOK
Very subdued inflationary pressures as
headline CPI growth in Nov 2012 remained
stuck at 1.3% for 3 months in a row, the
slowest pace since March 2010, reflecting:
! high base effects
! price declines for communications;
recreation services & culture and clothing &
footwear
! slowdown in price gains for food & non-
alcoholic beverages; transport; alcoholic
beverages & tobacco and housing, utilities
& fuels

Continued easing in core inflation to
below 1.0% YoY since July 2012 and
negative PPI growth since June 2012, an
indication of cooling price pressures or
limited pass-through effects on the ground.
Sources: Department of Statistics, Bank Islam
Sources: Department of Statistics, Bank Islam
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
1
9
7
2
1
9
7
3
1
9
7
4
1
9
7
S
1
9
7
6
1
9
7
7
1
9
7
8
1
9
7
9
1
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8
0
1
9
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1
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3
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4
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8
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2
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8
I
ANNUAL nLADLINL CI GkCW1n
-1S.0
-10.0
-S.0
0.0
S.0
10.0
1S.0
20.0
I
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-
0
6
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-
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6
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20
TAME INFLATION OUTLOOK (continued)
However, remain cautious of the upside risks to inflation emanating from both
external and domestic factors such as:
! Sudden reversal in global commodity prices particularly related to energy, food and
building materials surge in global surplus liquidity; rising risk premium of global oil
prices due to heightened geopolitical concerns; supply chain disruptions due to natural
catastrophes and adverse weather conditions due to climate change
! Strict implementation of the PEMANDUs Subsidy Rationalisation Programme (SRP)
removal or significant reduction to subsidies (price hikes and upward tariff reviews) that
have shielded somewhat the impact of higher global commodity prices on selling prices of
goods & services in Malaysia and their impact on the Malaysian economy
! Sticky food inflation could bump up the overall CPI as the Food & Non-Alcoholic
Beverages is the largest CPI component (30.3%)
! Income effects from the implementation of minimum wage policy for some 3.2 million
private sector workers and 7%-13% increments for some 1.4 million civil servants
21
TAME INFLATION OUTLOOK (continued)
Notwithstanding these upside risks to inflation and the relative strength in
domestic demand, the current easing cycle in inflation should be able to sustain
thanks to:
! Significant excess capacity in the economy that should help contain inflationary
pressures despite robust domestic demand
! Cost-push and demand-pull inflation dynamics have yet to show signs of a breakout in
the absence of significant price pressures from labour market, credit expansion or
supply bottlenecks
! Moderate pressures from food and energy inflation as global commodity prices in
particular agricultural commodities and oil & gas are expected to stay within
acceptable/manageable ranges despite expectations of much improved global
economic conditions in 2H2013
! Relatively well-anchored inflation expectations
Assuming no upward revision to retail prices of subsidised items in particular
petrol and diesel and barring other unforeseen circumstances, CPI growth:
! may have hit bottom at 1.3% YoY in November 2012
! may gain some ground in December 2012 but still to average around 1.7% in 2012
(way below the BNMs targeted range of 2.0%-3.0%) vs. 3.2% in 2011
! should average below 2.5% in 2013 with a spike nearing the implicit tolerance
levels of 3% in the 2H2013 on base-effect lapses, changes to administrative prices by
mid-2013 and an uptick in demand-pull inflation
22
OPR PAUSE TO CONTINUE WITH A SLIGHT UPSIDE RISK
The outlook for both growth and inflation
should be carefully assessed to avoid
over or under adjustment of monetary
policy.
While rather benign inflation outlook in
2013 provides the scope for OPR cuts or
at least extended rate-pause, there is a
minor tightening risk to OPR towards
the later part of 2013 especially if growth
turns out much stronger than expected,
exerting a strain on inflation.
Deemed accommodative and adequate to
support domestic demand while
preventing a build-up of financial
imbalances, OPR should remain at
normalised levels of 3% throughout 2013.
Stable OPR outlook in 2013 while the
earliest rate-hike delayed to 1H2014?
Sources: Department of Statistics, Bank Islam
Sources: Bank Negara Malaysia, Bank Islam
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23
RATHER BULLISH MYR OUTLOOK
Sources: Bloomberg, Bank Islam
Sources: Bloomberg, Bank Islam
Although we can expect some volatility in
the 1H2013, the general uptrend that MYR
has experienced since August 2012
should persist for much of 2013 without
being out-of-synch vis--vis its regional
peers. Asian currencies should draw
strength from:
! Capital inflows particularly portfolio funds
in search of high-yielding assets. The
Institute of International Finance (IIF)
estimates that private flows into emerging
markets to hit US$1.1 trillion in 2013 trillion
(vs. US$1 trillion in 2012) of which 46.3%
or US$0.51 to reach Asia. By default,
Asian currencies should benefit since Asia
vis--vis other regions:
is projected to be the worlds fastest-
growing region with the most reliable and
exciting growth story
has solid underlying fundamentals




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24
RATHER BULLISH MYR OUTLOOK (continued)
Sources: Bloomberg, Bank Islam
Sources: Bloomberg, Bank Islam
! Boost to risk appetite for emerging
currencies due to rosier economic
prospects especially for Asian economies
thanks to some form of stimulus measures
to be or already undertaken by the worlds
largest economies to stem the slowdown
improving export outlook for trade-
dependent economies hence widening
current account surpluses
! Reduced safe-heaven appeal of USD due
to QE3 in favour of other currencies with
better economic growth potential and more
favourable yield prospects such as Asian
currencies

Asian currencies may gain significant
grounds towards year-end and hence,
MYR may end at a RM2.97-3.02
range from RM3.052 as at end-2012.



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23
26
GE13: D-DAY IS A GUESSING GAME
The constitutional Parliamentary
term is valid from 29 April 2008, the
date of the Parliaments first sitting after
the 12
th
General Election (GE12). As
such, the Parliament must be dissolved
by 28 April 2013. From the dissolution
date, the GE13 must be held within 60
days. Historically, Malaysia has never
come close to the full term of 5 years
except for the GE3 in 1969 and GE4 in
1974.

Given deep changes in Malaysias
political landscape since 8 March 2008,
its difficult for the PM to arrive at a
perfect time to dissolve the Parliament
and to hold the GE13.
Sources: Election Commission, Bank Islam
Sources: Election Commission, Bank Islam
o|||ng Date Interva| er|od
CL1: Wednesday, 19 AugusL 1939
CL2: SaLurday, 23 Aprll 1964 4 years 8 monLhs
CL3: SaLurday, 10 May 1969 3 years
CL4: SaLurday, 24 AugusL 1974 3 years 3 monLhs
CL3: SaLurday, 8 !uly 1978 3 years 10 monLhs
CL6: 1hursday, 22 Aprll 1982 3 years 9 monLhs
CL7: Sunday, 3 AugusL 1986 4 years 3 monLhs
CL8: Sunday, 21 CcLober 1990 4 years 3 monLhs
CL9: 1uesday, 23 Aprll 1993 4 years 6 monLhs
CL10: Monday, 29 november 1999 4 years 7 monLhs
CL11: Sunday, 21 March 2004 4 years 4 monLhs
CL12: SaLurday, 8 March 2008 3 years 11 monLhs
GL13: March 2013? S years?
1he Gap er|od 8etween 1wo Consecut|ve L|ect|on Dates
27
GE13: FREE & FAIR ELECTION?
As at 16 August 2012, explosion in the
number of registered voters, crossing
the 13 million mark to 13.05 million
people and surging by 19.5%:
! compared to a very mild growth of ONLY
between 6%-7% as at GE10, GE11 and
GE12
! from just 10.92 million at GE12, equivalent
to 2.13 million increase, the biggest in
Malaysias history
! out of whom 274,247 people or 2.1% are
absent voters comprising armed forces,
police and overseas voters Top 3 states
with most absent voters are Federal
Territory of KL (40,543 people), Perak
(38,367) and Johor (25,058) while Selangor
has the highest number of overseas voters
with 579 people

Sources: Election Commission, Bank Islam
Sources: Election Commission, Bank Islam
Dewan kakyat Dewan Undangan Neger|
erlls 3 13
kedah 13 36
enang 13 40
erak 24 39
Selangor 22 36
negerl Sembllan 8 36
Melaka 6 28
!ohor 26 36
ahang 14 42
1erengganu 8 32
kelanLan 14 43
Sarawak 31 71
Sabah 23 60
l1 kuala Lumpur 11 n/A
l1 uLra[aya 1 n/A
l1 Labuan 1 n/A
1C1AL 222 S76
SLA1 DIS1kI8U1ICN A1 nCUSL CI kLkLSLN1A1IVLS AND S1A1L LLGISLA1IVL ASSLM8LILS
ear No of keg|stered Voters Growth (|n number) Growth ()
1939 2,171,097
1964 2,763,077 391,980 27.27
1969 3,843,782 1,080,703 39.11
1974 4,132,032 288,230 7.30
1978 3,039,689 927,637 22.43
1982 6,081,628 1,021,939 20.20
1986 6,964,960 883,332 14.32
1990 7,968,640 1,003,680 14.41
1993 9,012,173 1,043,333 13.10
1999 9,364,071 331,898 6.12
2004 10,284,391 720,320 7.33
2008 10,922,139 637,348 6.20
2012* 13,0S2,374 2,130,23S 19.S0
VC1Lk 8ASL
28
GE13: FREE & FAIR ELECTION? (continued)
Although there are still about 3.2 million unregistered eligible voters (out of
16.3 million eligible voters), concerns whether this phenomenon of sharp
increases in voter registry really reflects increased voter awareness, growing
political interest and voter registration efforts by political parties rising
pressures on the Election Commission (EC) to:
! speed up the clean-up of the electoral roll from dubious entries
! address the 8 demands by BERSIH especially related to free and fair electoral
system and election process


29
GE13: CHALLENGES OF PREDICTING
The unprecedented Oppositions victory on 8 March 2008 at the GE12 and
continued close cooperation of Opposition parties even post-GE 12 until the
establishment of Pakatan Rakyat (PR), the first cohesive, credible and viable
alternative coalition in Malaysia since Independence to challenge BN has
fundamentally transformed expectations of what could be the outcome of
future elections.
As no two GEs can provide almost exactly the same reading and in view of the
surprise GE12 results, predicting the outcome of the GE13 could prove very
challenging and a highly speculative attempt. However, we will focus only on
the outcome for Parliamentary seats since that will determine the composition
of the Federal Government.
While acknowledging that economists are in no way political analysts, we will
try to predict the outcome of GE13 and look for clues by:
! Analysing:
current voter profile (age groups, gender, ethnic groups, urban-rural, income brackets,
etc), etc
past voting trends in all GEs in particular GE12

30
GE13: CHALLENGES OF PREDICTING (continued)
results of all 16 by-elections where both BN and PR secured an equal share of 8 seats of
which the final 5 by-elections were captured by BN with bigger majorities compared to
GE12 (Kerdau in Pahang, Merlimau in Melaka, Tenang in Johor, Galas in Kelantan and
Batu Sapi in Sabah)
results of Sarawak state elections in April 2011 where PR made major inroads (securing
16 state seats from 9 previously with 44.6% of popular votes vs. 38.2% previously) could
provide indications of how fierce battles of GE13 will be and voting trends of
Sarawakians and Sabahans

! Taking stock of the feedback from our ground visits to selected areas nationwide to
gauge the underlying voter sentiment

! Identifying election issues, local or national that could affect voters decisions
! Assessing possible voting patterns among wild card groups that could swing
either way, namely:
newly registered voters
young voters
urban voters
voters in Sabah and Sarawak (with 56 Parliamentary seats)
voters in Felda constituencies (54 Parliamentary seats)
17 marginal seats where the winning majority was less than 1,000 votes at GE12 (a
swing of 500 votes in these constituencies may sway the election results either way)



31
GE13: GREATER POLITICAL TSUNAMI
Based on the analysis of selected factors that we think could affect the
election outcome, we have outlined 3 possible scenarios:
! Scenario with moderate probability or best-case scenario: Narrow win for BN,
securing 112-122 Parliamentary seats (narrow loss for PR: 100-110)
Failure to retake Kedah, Penang, Selangor and Kelantan
Lose control of Perak and Negri Sembilan

! Scenario with high probability or base-case scenario: Narrow loss for BN,
securing only 97-107 Parliamentary seats (narrow victory for PR: 115-125)
Failure to retake Kedah, Penang, Selangor and Kelantan
Lose control of Perak, Negri Sembilan, Terengganu and Perlis
Narrowly retain Pahang and Johor
Lose significant grounds in Melaka, Sabah and Sarawak

! Scenario with low probability or worst-case scenario: Big loss for BN, securing
only 82-92 Parliamentary seats (big victory for PR: 130-140)
Failure to retake Kedah, Penang, Selangor and Kelantan
Lose control of Perak, Negri Sembilan, Terengganu, Perlis and Pahang
Narrowly retain Johor and Melaka
Lose significant grounds in Sabah and Sarawak



32
GE13: GREATER POLITICAL TSUNAMI? (continued)
Assumptions for the base-case scenario (no 2/3 majority but enough for PR to
form the Federal Govt):
! 2-cornered fights
! 75%-80% in overall national voter turnout
! Conservative but realistic voting tendency/share of votes for BN by ethnic
breakdown: 55%-60% among Malays, 20%-25% among Chinese, 45%-50%
among Indians and 60%-65% among Others
! Electoral fraud cases such as phantom voters, vote rigging, ballot stuffing, etc
make up less than 5% of total voter turnout


No. of Seats Won Change from of 1ota| Seats of opu|ar Votes No of Seats Won Change from of 1ota| Seats of opu|ar Votes No of Seats keg|stered Voters Voter 1urnout
rev|ous GL rev|ous GL (m||||on) ()
1939 74 71.2 31.7 30 28.9 48.3 104 2.17 73.3
1964 89 13 83.6 38.3 13 -13 14.4 41.3 104 2.76 78.9
1969 93 6 66 49.3 49 34 34.0 30.7 144 3.84 73.6
1974 133 40 87.7 60.7 19 -30 12.3 39.3 134 4.13 73.1
1978 130 -3 84.4 37.2 24 3 13.6 42.8 134 3.06 73.3
1982 132 2 83.7 60.3 22 -2 14.3 39.3 134 6.08 74.4
1986 148 16 83.6 37.3 29 7 16.4 42.7 177 6.96 70.0
1990 127 -21 70.6 33.4 33 24 29.3 46.6 180 7.97 72.6
1993 162 33 84.4 63.2 30 -23 13.6 34.8 192 9.01 71.4
1999 148 -14 76.6 36.3 43 13 23.3 43.3 193 9.60 71.1
2004 199 31 90.8 63.9 20 -23 9.2 36.1 219 10.28 73.3
2008 140 -39 63.1 30.4 82 62 36.9 49.6 222 10.92 76.0
2012? 97 to 107? (33) to (43)? 43.7 to 48.2 ? 11S to 12S? 33 to 43? S1.8 to S6.3? ? 222 13,0S2,374* 7S to 80?
* as lasL gazeLLed on 16 AugusL 2012 ouL of whom 12,778,127 ordlnary voLers and 274,247 absenL voLers
ALLIANCL]8N CCSI1ICN 1C1AL
ear
GL kLSUL1S ICk AkLIAMLN1Ak SLA1S
33
GE13: GREATER POLITICAL TSUNAMI? (continued)
We can expect negative, knee-jerk (over)reaction on the first day of trading
of financial markets post-GE13 on fears over political instability,
administrative uncertainties and policy inconsistency; short-term
nervousness over power handover and transition; perceived up-tick in
Malaysias political risk, among others:
! Sell-down in equity, bond and foreign exchange markets the circuit breaker
could be triggered in Bursa Malaysia i.e. the KLCI is down by more than 10% in a
trading session; sudden spike in bond yields and slide in MYR
! Other factors mostly external such as emergence of more conclusive signs of
resumption of a global recovery; improving global risk appetite, etc to significantly
limit the downside


Number of days before or after GL -180 -90 -30 -7 -1 1 7 30 90 180
GL8 -9.1 -23.8 -6.0 1.6 1.6 4.0 4.9 0.2 2.2 24.9
GL9 -11.3 12.0 1.8 1.3 -0.3 -1.7 -2.3 6.6 7.2 -1.6
GL10 -0.3 -2.8 0.4 1.7 1.0 -1.3 -2.6 7.9 34.4 18.6
GL11 22.7 16.7 3.0 2.3 0.3 0.3 -1.0 -4.8 -9.1 -3.0
GL12 0.4 -9.6 -8.4 -4.3 -0.3 -9.3 -7.8 -3.8 -3.7 -16.3
I8MkLCI LkICkMANCL kL-AND-CS1 GLNLkAL LLLC1ICNS
Sources: Bloomberg, Bank Islam
34
GE13: MID-AND-LONG TERM POSITIVE FOR MSIA
In the medium-to-long term, after this mild political revolution or the so-
called Malaysian spring, the stiff competition for the hearts and minds of
voters will make the PR-led Federal Government always disposed to prove
that it can strike the balancing act between meeting the aspirations of the
people and the needs of the business/investing community i.e. conducive
environment for both the people and businesses not at the expense of the
other within a short period of time by implementing recommended measures
in Buku Jingga.
Success stories of PR states in particular Selangor and Penang and
thumbs-up from the Auditor-General in his annual report should be a clear
indication whats in store with a PR Federal Government.
Malaysia may even emerge as an even more attractive and viable
investment destination as proven by the capability of Penang and Selangor,
2 PR-held states in luring the most approved manufacturing investments in
2010 and 2011.
Faster reduction in budget deficits and public debt levels as proposed in the
PR Alternative Budget 2013 compared to the BN Govt?

33
GE13: MID-AND-LONG TERM POSITIVE FOR MSIA
(continued)
Given the anticipated narrow PR win, the presence of relatively strong
opposition in the Parliament should keep the PR government on its toes at all
times and help push through:
! a well functioning and genuine check-and-balance system to protect the rights of all
citizens, consistent with the Federal Constitution
! the reformist agenda acceleration - economic, structural, institutional, political,
social and law reforms, required to raise Malaysias long-term competitiveness
! greater transparency, accountability, governance and integrity in all aspects in
particular award of Govt contracts (through open tender), procurement process and
other business practices & dealings, necessary to regain and retain investor
confidence
! promotion of business-friendly and free-market policies without imposing hardship
on the rakyat
! zero-tolerance for corruption and rent-seeking culture as well as dismantling of
monopolies/oligopolies and cumbersome regulations should in turn reduce the
overall costs of doing business in Malaysia and create a more conducive business
environment
! lower long-term risk premium assigned to Malaysia


36
GE13: MID-AND-LONG TERM POSITIVE FOR MSIA
(continued)
Increased well-being of the rakyat and strengthening of the democratic
process:
! No amendment to the Constitution at whims and fancies since constitutional
amendments under Articles 159 (3), 159 (5) and 161 E require a supermajority of
2/3
! The emergence of a genuine two-coalition system, mirroring the two-party
system that exists in the UK, the US, etc as well as other changes to the
Governmental system such as limiting to 2 terms a person can hold the position as
PM, limiting to only 1 key cabinet portfolio a minister can hold. For example, the
PM cannot become the Finance Minister to avoid conflict of interest
! Adjustments to the affirmative action such as NEP and other welfare policies that
have deviated from the original objectives; transformation to a needs-based, merit-
based and market-oriented affirmative action for all instead of a race-based
programme to flush out NEP-related shortcomings and abuses in particular
cronyism, corruption and systemic inefficiency while assisting the poor and
marginalized
! Positive changes in policy-making process with policies that serve the interest of
the masses especially the small people rather than enriching the politically
connected elite group (within the inner circle of people in power)


37
GE13: MID-AND-LONG TERM POSITIVE FOR MSIA
(continued)
! Higher quality debates in the Parliament and State Assemblies
! Perhaps, more freedom for MPs to vote in the Parliament based on their wisdom
or the feedback from the people they represent?

Among major concerns if PR unseats BN:
! Economic sabotage, resistance and non-cooperation by those in the business
community and civil service who are aligned to the losing coalition
! Perceptions of political instability especially during the period of power transition
with threats of chaos by some political leaders, simmering ethnic and religious
tensions (delicate race-religion relations), protests against the PRs reform
policies especially the needs-based affirmative action to correct socio-economic
imbalances
! No assurance of continuity of Govt policies and guarantee of the sanctity of
contracts in particular related to lopsided concession agreements
! No introduction of GST, much needed to diversify the Govts revenue base



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