Malaysia Economic & Monetary Trend
Malaysia Economic Indicators Monetary Policy Bank Negara Malaysia has forecast the economy would grow between 5% and 6% in 2008, a slower pace than the 6.3% in 2007, dragged down by external factors including the US financial crisis. In 2008, the external environment is expected to deteriorate with the continued unfolding of the financial crisis that has erupted in the United States," said Bank Negara Malaysia governor Tan Sri Zeti Akhtar Aziz. With no signs of the crisis abating, she said there had been increased uncertainty and risk aversion in the financial markets. She expected the economic slowdown in the crisis-affected economies would be more pronounced and protracted than anticipated earlier. This is not only arising from the large scale liquidity strains and the consequent constraints on credit conditions, but also due to the impact of declining asset prices and higher inflation on consumer spending. On the Malaysian economy, she expected growth of 5%-6% in 2008, underpinned by sustained domestic demand. Rising incomes, strong labour market conditions and increased access to financing were expected to support continued consumption spending. Zeti expected strong domestic investment activity and foreign direct investment to continue in 2008. With ample liquidity in the financial system, financing to support the increased activity is expected to continue. She said the extent of rising producer prices and the extent to which they would be passed on to consumers would determine the inflation trend in 2008 and into 2009, adding that "the average headline inflation is expected to increase from 2% in 2007 to 2.5%-3% in 2008." She said in Malaysia, the risks to inflation and to economic growth were assessed to be about in balance, as inflation had been largely due to rising costs rather than demand pressures. Due to the nature of these inflationary pressures, Zeti said the private and public sectors had to enhance efficiency levels to reduce costs … March 2008 ---------------------------------------------------------------------------------------------- BNM will likely maintain its overnight policy rate (OPR) even if the US Federal Reserve further announces a reduction in interest rates as the domestic economy is more resilient with continuing growth prospects. The US Federal Reserve reduced its short-term interest rates for the sixth time in six months by 75 basis points to 2.25% while leaving its options open for further reductions in the coming months. RAM Holdings Bhd said there was room for BNM to cut rates, but RAM did not foresee any rate cut in the near and medium term. There is no sign of domestic demand slackening. However, inflationary pressures still remain unabated with the high commodity prices. While the slower economy in the US might result in a decline of demand for commodities, the weakening US dollar was helping to keep commodity prices high. MIMB Investment Bank Bhd said BNM would find it difficult to cut rates for now, as the primary duty of the institution was to keep inflation in check. Also, there is the ongoing government development spending that helps boost the economy. The strength of the ringgit is also helpful to fight inflation. Kenanga Investment Bank Bhd in a report Wednesday said BNM needed to strike a balance between appeasing the economic pain against a need to keep inflation in check. Furthermore, cutting interest rates may also hurt local depositors who may see negative real rate of returns. Hence, BNM is expected to maintain the overnight policy rate at 3.5% in 2008. It reiterated that BNM was unlikely to change its monetary stance unless there were signs that the domestic economy was deteriorating sharply, and that while there was a correlation between the Malaysian and US economies, these are gradually diminishing. … March 2008 Economic Outlook The outlook for the Malaysian economy remains favourable and is projected to expand between 5% and 6% in 2008 supported by resilient domestic demand, said Bank Negara Malaysia. Bank Negara has no specific target level for the ringgit or to manage it in any pre-determined trading band against any currency, but wants to ensure an orderly market for the local currency. The appreciation reflected the broad trend affecting most Asian currencies. On another note, Zeti said Bank Negara had no immediate plans to remove the ban on offshore trading in the ringgit currency. Bank Negara will not internationalise the local currency in an environment of great uncertainties. "We are not there yet, but we are seeing progress achieved in terms of trading volume, the pricing and so on,'' she said. On the property market Zeti said it was healthy, with demand holding up well despite growing concerns over speculative purchases and over-building, especially in the higher-end segment of the market. She said so far there were no signs of a property bubble developing. The banking system's exposure in this sector had also been reduced and, even if there was a significant drop in property demand in the near future, the it was expected to remain resilience. --------------------------------------------------------------------------------------------------- Economists are generally cautious about the impact of the high crude oil price on Malaysia, which despite being a net oil exporter, could enjoy higher revenue in the short term but incur more costs due to its fuel and gas subsidies and imported inflation. The immediate impact on Malaysia would be higher oil revenue although fuel and gas subsidies would be up for review due to the cost. It depends on how much the Government can bear the burden. The immediate implication for the economy was imported inflation via intermediate goods such as building materials. The price rise may have an adverse effect on major oil-dependent economies which will in turn affect export channels in the country should those economies falter. A slowdown in the US economy would not affect oil exports since Malaysia ships most of it to the Asia-Pacific region. The flipside of higher oil price is that it shows up a country's dependency on oil to sustain economic growth although it encourages investment in oil and gas-related industries. Oil and gas contributed 40% to Government revenue while fuel and gas subsidies last year amounted to RM40bil. Investment Theme For 2008 *** UNCERTAIN *** Market Commentaries While some bottoming process has begun, uncertainties, both on the external and domestic fronts, will continue to dominate trading patterns this week. Volumes are still low, and this is an indication of the thin participation of foreign players in the local bourse. Foreigners are less unlikely to take positions until there is more stability on the political scene. While there are signs of value picking in the last few days, many investors anticipate more correction before it is time to go bargain hunting. While the bottoming of the market is a process, investors can start investing slowly as market value is emerging. Equities will recover by the second half of the year (2008). It is the right time to slowly look and buy. Otherwise, do nothing. Don't sell now when levels are so low. The market's recent vigour could be partially attributed to the funds' first-quarter 2008 window-dressing activities. The market was also boosted by Prime Minister Datuk Seri Abdullah Ahmad Badawi's appearance at the Invest Malaysia annual conference, when he announced a merger of Bursa Malaysia's main and second boards, as well as the structure of Mesdaq market. Technical Analysis The oscillator per cent K and the oscillator per cent D of the daily slow-stochastic momentum index were fast reaching the overbought territory after flashing a short-term buy the previous Friday. Similarly, the 14-day relative strength index had improved tremendously over the past week, up from the neutral zone to around the 60 points level. After triggering a buy on Tuesday, the daily moving average convergence/divergence (MACD) indicator extended the steady upward expansion against the daily signal line to stay bullish. Alternatively, weekly indicators were seen improving, with the downward pressure of the weekly MACD easing and the weekly slow-stochastic momentum issuing an unconfirmed buy call. Bursa Malaysia rebounded sharply on persistent bargain hunting activity over the past couple of weeks, which saw the CI leaping nearly 100 points from the 1,166.83 points level on March 18 2008 to a high of 1,258.86 during intra-day on Friday. While trading on Wall Street remains lacklustre amid lingering worries about the US economy, the local bourse bucked the trend with a remarkable performance, leading us to the conviction that the underlying tone of the market is turning upbeat. Whether the current trend is sustainable or not, we shall know when we step into the month of April 2008, a new quarter. Based on the daily chart, the CI is likely to encounter strong resistance inside the huge "downside gap" of 1,243-1,283 points, created on March 10 2008. In the event the gap is successfully filled, target the 1,300 points psychological level, of which a convincing penetration would fuel further upswing to the 200-day simple moving average (SMA) or the 100-day SMA, resting at 1,356 points and 1,377 points respectively. Initial support is envisaged at 1,230 points. The next lower floor is pegged at 1,200 points level, followed by 1,180 points, 1,166.83 points and 1,157.47 points. Technically, the huge recovery in the CI has resulted in more bullish signals emerging and they suggest more climbing in the pipeline, but investors should take be cautious. Series of Catalysts *** UNCERTAIN *** Undermining Factors The Risks Or Factors That Will Change The Momentum Of The KLSE With global markets being so entrenched in a rallying mood, the local bourse will resume its uptrend after the correction But like all things, caution should still be in the minds of investors. When a rally in stocks is driven by foreign liquidity, investors should be mindful of potential external shocks which could see this liquidity exit as fast as it entered the market. Such shocks could include another spike in oil prices or a flaring up of geopolitical tensions. Unpredictable Risks/Surprises Equity Outlook 2008 will be a challenging year for investments. Globally, managers will have a tough times managing their portfolios due to uncertainty about the US economy, which will impact the global economy. The US is already in a housing recession and whether this will evolve into a full blown recession is no longer the major debate. With or without a recession, the truth of the matter is that the US will inevitably face a slowdown in growth and inflationary pressure will increase due to higher energy cost and rising food prices. Meanwhile, China continues to export inflation to the world, especially the US. In terms of macro fundamentals, Malaysia will be more resilient than its neighbors, thanks to stronger domestic demand. However, if exports remain weak, the broader economy will inevitably see a slowdown; consensus is already suggesting 2008 GDP growth to be slower than 6%, with exports being the culprit. The performance of the Malaysian equities market in the first two weeks of 2008 has been amazing. However, decoupling may not hold for long as Malaysia will eventually align itself with the other bourses. The general election euphoria has shrugged off external influences and is providing the momentum for the KLCI's upward movement . When the good feel factor dissipates after the general election, Malaysia will be fundamentally aligned with the other regional bourses. Malaysia is already trading at about 16 times of PER for 2008, premium against most regional markets, with the exception of China and India. Investors are advise to trade carefully over the next two months (Jan-March 2008), and have the exit plan. Equity Strategy: Process Of Bottoming Despite Malaysia Political Uncertainty, High Crude Oil Prices, Uncertain Outcome Of The Credit Crunch And Subprime Loans Crisis, Falling US Dollar & Global Inflation Now that the 12th general election is over and a new political landscape has been shaped, it is timely to discuss the possible implications on the economy and financial markets. Inevitably, some of these political changes will cause disruptions in the economy as selective infrastructure projects and public expenditures announced earlier but which have yet to commence, may be under scrutiny. Surely , the newly appointed chief ministers will reassure the economic viability of certain projects and the awarding of contracts. Hence, several mega projects announced in the states of Selangor and Penang could potentially be delayed. These could involve projects such as water-related infrastructure contracts, monorails, bridges, roads and others. Apart from construction and infrastructure companies, gaming companies will also be affected. The numbers forecast operators, particularly BJtoto, Tanjong and Magnum would have to relocate their premises from Kedah now that PAS is on board. Property players may be affected too, as unapproved property projects and land acquisitions could also be reviewed. Sectors seeking for higher tariffs such as cement, steel, water and electricity could be negatively affected while toll hikes may also be tougher to implement, especially since the opposition parties politicized the issue in the recent elections. It should be noted that Selangor and Penang, both contribute about 30% of Malaysia's GDP and a slowdown in economic activities in these states would affect national economic growth. Malaysia may suffer the same fate as Thailand and trade at a wide discount compared with the region if foreign portfolio managers perceived there could be some political uncertainties arising from the outcome of the election. The Malaysia market is now subject to more volatility as foreign equity bourses are expected to remain turbulent while domestic politics may also affected sentiment. The most notable event that could affect market sentiment would be the forthcoming UMNO general assembly. The market is also eagerly awaiting the appointment of Cabinet members, mentris besar and the revamp of MCA, Gerakan and MIC. Equity investors generally do not like political uncertainties, changes in policies and disruptions in economic activities which could lead to downgrades in earnings. If these domestic issues are not resolved, it could be an overhanging factor clouding the market. Stock Market Leading Performance Indicator 5 (0-3-Bearish 4-6-Neutral 7-10-Bullish)
A trade surplus of RM9.79 billion was recorded in January 2008, the 123rd consecutive month of monthly trade surplus since November 1997. This was an increase of 4.1% from December 2007 and a surge of 28.8% from the previous year. Total trade in January 2008 amounted to RM96.26 billion, an increase of 8.8% from January 2007.
… March 2008
Interest rates cut on 18th Sept 2007 is a very positive move that will help smoothen the liquidity problems in the US but added that the long-term view was still not clear. The subprime loan woes in the United States had real problems that still needed to be resolved and their contagion effect on Asia had been quite strong;
… US Interest Rates Cut
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