PP 7767/09/2011(028730)

Malaysia
Economic Highlights
•
MARKET DATELINE

20 October 2010

Business Conditions Weakened But Consumer

Sentiment Improved In The 3Q

◆ The Malaysian Institute of Economic Research’s (MIER) business conditions index (BCI) fell by 14.7 percentage
points to 104.9 in the 3Q, after falling by 4.4 percentage points in the 2Q (see Chart 1). This was the second
consecutive quarter of decline after reaching the peak in the 1Q, suggesting that businesses have become less
upbeat, in view of prospects of a slowdown in the global economy that could affect business activities in the months
ahead. As it stands, the slowing global economic growth has become more wide spread since the 2Q. Also,
Malaysia’s exports slowed down for the fifth consecutive month in August, while industrial production slackened to
the slowest pace in eight months in July, before bouncing back slightly in August. As a result, businesses indicated
that their production, new local and export orders were significantly lower. Similarly, their expected production and
export sales would be significantly lower. Consequently, manufacturers have turned cautious in the recruitment of
workers during the month. As a whole, the drop in BCI index suggests that private investment will likely ease
in the months ahead, after showing signs of improvement in the 1H of the year. We expect private investment
to moderate to 7.8% in 2011, from an estimate of +8.6% in 2010.

◆ The MIER’s consumer Sentiments Index (CSI), however, rebounded to increase by 5.4 percentage points to 115.8
in the 3Q, after falling by 3.8 percentage points in the 2Q (see Chart 2). This was the highest level in 2 ½ year,
suggesting that consumers have turned more optimistic, as their present income were firm, while job and income
outlook has turned the corner. Perhaps, consumers also felt more comfortable given that fuel prices had been raised
only slightly in July. As a result, inflationary jitters among consumers have ebbed somewhat. Besides, the
Government has launched several plans to help improving the economy and income level in the country. However,
it remains to be seen whether the improvement in consumer sentiment is sustainable. This is because despite the
improvement in sentiment, consumers indicate that they plan to delay their spending in the near future. As a whole,
we expect the growth of consumer spending to ease to 5.4% in 2011, from +5.6% estimated for 2010.

Chart 1 : Business Conditions Index Chart 2: Consumer Sentiments Index

(BCI) (CSI)
Index Index
140 140

120 120

100 100

80 80

60 60

40 40

20 20

0 0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Source: MIER Source: MIER

Peck Boon Soon

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

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 20 October 2010

◆ Although the Government projected that private

Chart 3 : Household Debt Rising
consumption will remain the key driver in the country’s
economic growth in 2011, concerns have been raised
over the sharp rise in household debt. Household 600 80

debt rose significantly to 76.6% of GDP in 2009, from 550

75
63.9% in 2008 and it inched up further to 77.9% of 500 (RHS)

GDP at end-July 2010 (see Chart 3). This was reflected 450
70
in a strong pick-up in household loans with the banking

% of GDP
400 (LHS)

RMbn
system, which accelerated to 13.2% yoy in July, from 350 65
+9.8% at end-December 2009. As a result, we believe 300
60
there is a need for the authorities to introduce 250
some form of controls to manage the sharp rise 200
55
in household debt, as pushing consumer spending 150
to drive the economy, on the back of a build-up in 100 50
household debt, is not likely to be sustainable over the 02 03 04 05 06 07 08 09 Jul'10
long term. This could include measures such as the
cap on margin financing for housing loans at, say, 70-
80% of a house value and raising the thresholds for credit card eligibility. Indeed, MIER also felt disappointed that
the 2011 Budget did not provide measures to address high household leverage.

◆ As a whole, MIER maintained its real GDP forecast for 2010 at 6.5% and it expects the growth to ease
to +5.2% in 2011. Meanwhile, MIER expects inflation to rise to an average of 2.5% in 2011, from an average
of 2.2% in 2010. It expects the overnight policy rate (OPR) to be raised by another 50 basis points to 3.25% in
2011 even though the economy is likely to expand at a more moderate pace. This is broadly in line with our
expectation. We expect real GDP to rebound to moderate to 5.0% in 2011, from an estimate of +7.3% in 2010.
In the same vein, we believe Bank Negara Malaysia has already done with its interest rate hike this year and the
OPR will likely stay at 2.75% for the rest of this year. However, we expect the Central Bank to raise its key policy
rate again by a total of 50-75 basis points in 2011. The timing, however, depends on how soon the global economy
stabilises.

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