malaysia economic outlook - euler · pdf filemalaysia economic outlook grow smart, grow strong...

Malaysia economic

outlook Grow smart, grow strong

Mahamoud Islam, Senior Economist for Asia at

Euler Hermes-Allianz Research

Kuala Lumpur, 8 May 2017

2

Bridging the gap

3

Economic growth is set to edge up slightly in

2017 supported by higher global demand and

resilient domestic demand.

High-income status: bridging the gap gradually

High income status: To achieve the target

of US$15,000 in 2020, gross national income

per capita should grow by +13% per year.

GNI per capita simulation (USD)

Sources: National data, Euler Hermes

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

06 08 10 12 14 16 18 20 22 24 26 28 30

Gross national income per capita (Trend, 6%growth p.a.)

Gross national income per capita (Path totarget)

Target

Real GDP growth 2016 2017 2018

World 2.5 2.9 2.9

United States 1.6 2.3 2.3

China 6.7 6.7 6.3

Key forecasts for Malaysia 2016 2017 2018

Real GDP 4.2 4.5 4.5

Consumer Spending 6.1 5.8 6.0

Government Spending 1.0 1.2 0.6

Investment 2.7 3.5 3.8

Exports 0.1 2.6 3.0

Imports 0.4 2.0 3.0

Net Export** -0.2 0.6 0.2

Unemployment rate 3.5 3.5 3.4

Inflation 2.1 3.9 2.5

Current Balance (% of GDP) 2.0 2.4 2.4

Nominal GDP*** 1229 1335 1430

MYR per USD 4.1 4.4 4.3

* growth unless specified

**contribution to GDP growth

*** in MYR bn

Sources: IHS, Euler Hermes

4

Agenda

1 What does 2017 mean for Malaysia?

2 What to expect in the longer term?

5

Stars are

aligning

6

Commodity prices are slowly improving.

Downward pressures on the currency are

easing gradually

Brent prices and MYR per USD

Exports: stars are aligning


Global trade is showing signs of revival. We

expect global trade value to increase by +3.6%

Global exports of goods and services

2.0

2.5

3.0

3.5

4.0

4.5

5.00

20

40

60

80

100

120

140

160

05 06 07 08 09 10 11 12 13 14 15 16 17 18

Brent price (lhs) MYR per USD (rhs)

F


Assumptions:

Brent prices expected at USD57 per barrel in 2017;

USD59 in 2018

Forecast

7

Exports partner #1: China

8

Exports partner #1: China. Deflation has ended

and investment is back

Source: Euler Hermes

The investment (industrial) cycle is showing

signs of revival – at a high cost.

Investment and Industrial production Producer prices (y/y)

Manufacturing deflation has ended


5

6

7

8

9

10

11

12

0

5

10

15

20

25

30

12 13 14 15 16 17

Urban Investment (YTD y/y, left)

Industrial production (YTD y/y, right)

-10

-5

0

5

10

15

12 13 14 15 16 17

9

Exports partner #2: United States.

10

Our base case is a domestic demand-led

acceleration.

Source: Allianz Research

10

Exports partner #2: United States. Trumponomics

could create an expansionary cycle

Fiscal

stimulus &

infrastructure

Infrastructure: half of announced

(~USD 500bn over ten years)

Income and corporate tax cuts |

no border tax adjustment

Higher budget deficits: (1.75%-2% of

GDP)

Trade policy

Stalled trade liberalization

Renegotiation/termination of NAFTA

Higher import tariffs (China, Mexico)

no broad-based tariff hikes/non-

tariff barriers

Immigration

policy

Reduction (cheap) labor supply,

higher wages low-skilled US

workers

Deportation (reduced domestic

demand)

Regulation &

Energy

In bold our policy assumptions for computing the base case

Lifting restrictions on production

Reversing environmental priorities

Less financial regulation

Higher competition in tech sector?

Policy building blocks: Tax reform,

trade and immigration policies seem to

be the top priority.

*Contribution to growth (percentage points)

2017 2018 2019 2020

Real GDP growth 2.3 2.3 2.0 1.8

Consumer spending 2.8 2.8 2.4 2

Private investment 3 4.8 4.0 3

Public spending 0.7 1.5 2.5 1.5

Net exports* -0.5 -0.5 -0.3 -0.2

Unemployment rate 4.6 4.5 4.5 4.6

Consumer price

inflation 2.6 2.5 2.5 2.5

Policy rate 1.25-1.50 2 2.5 3

Current account (%

of GDP) -3.1 -3.6 -4 -4.3

12

Better revenues provide some leeway for

increased capital expenditures

Investment: better revenues and improving

demand suggest a progressive improvement

Business sentiment is improving supported

by rising output and new orders

Nikkei Manufacturing PMI (3m rolling average)

-30

-20

-10

0

10

20

30

09 10 11 12 13 14 15 16 17

Industrial revenues (3m rolling average,

y/y)

45

46

47

48

49

50

51

52

16 17

Manufacturing PMI

Subcomponent - Output

Subcomponent - New Export Orders

Sources: IHS, Euler Hermes Sources: IHS, Euler Hermes

13

Confidence and employment growth are

improving…

Private consumption to prove resilient but no

acceleration is expected in 2017

… but weak income growth and higher

inflation point to a limited momentum

Wages and prices Employment growth

-2%

0%

2%

4%

6%

8%

10%

15 16 17

Monthly wages for the manufacturing sector(y/y)

Consumer prices (y/y)


0.0

0.5

1.0

1.5

2.0

2.5

3.0

60

65

70

75

80

85

90

95

100

15 16 17

Consumer confidence (left)

Employment growth (y/y)

N.B. Estimate for Q1 Employment growth


14

Agenda

1 What does 2017 mean for Malaysia?

2 What to expect in the longer term?

16

High debt burden calls for caution. Policy

makers to maintain prudent policy stance

Issue #1: Financial capabilities are limited

Debt metrics (% GDP)

Saving and Investment: reduced national

buffers give little room for a strong rise in

investment

Saving- Investment


Sources: BIS, IMF WEO, Euler Hermes

0

10

20

30

40

50

60

70

80

90

100

Malaysia Thailand Philippines Indonesia

Public debt

Households debt

0

5

10

15

20

25

30

35

40

45

02 04 06 08 10 12 14 16 18

Saving-Investment Gap

Gross national saving (% Gross national Income)

Domestic Investment (% Gross national Income)

Forecast

17

Regional manufacturing powerhouses are

becoming very aggressive to grab market

share (Vietnam, Thailand)

Similar specialization adds further pressure

Exports market share

Country’s exports (% global exports)

Issue #2: Competition from neighboring

countries is intensifying

0% 10% 20% 30% 40% 50%

Philippines

Taiwan

Singapore

Malaysia

Vietnam

China

South Korea

Electrical machinery and equipment (% total exports)

Sources: UNCTAD, Euler Hermes Sources: IHS, Euler Hermes

1.3% 1.3%

1.2%

0.9%

0.4%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

Thailand Viet Nam Malaysia Indonesia Philippines

2012

2016

18

When in peril, retrench: the world is addicted

to protectionism as World GDP growth is

subdued since 2011

New protectionist measures

Issue #3: Protectionism and Politics

Sources: GTA, Euler Hermes

288

178165

10794

87

71

5650 50

0

50

100

150

200

250

300

350

US

Russia

India

Arg

entin

a

Bra

zil

Indonesia

Jap

an

Chin

a

UK

Tu

rkey

2016. World=596

2015. World=821

2014. World=888

Busy political agenda everywhere and

geopolitical tensions create a vast array of

uncertainties for companies

Political watch list (2017-18)

• General elections in Malaysia

• Chinese Communist Party Congress

• Geopolitical tensions due to North Korea

Asia

• US monetary policy

• US Midterm Elections US

• Brexit developments

• French Presidential elections

• German Federal elections

• Russian Presidential elections

Europe

20

This includes continued efforts to improve: the regulatory framework to enforce contracts; the

tax environment; and insolvency related procedures

Game changer #1: A more supportive business

environment to become a capital magnet

Doing Business 2017 and sub-components

(ranking out of 190 markets, 1=best)

Economy

Ease of Doing

Business

Rank

Resolving

Insolvency

Enforcing

Contracts

Protecting

Minority

Investors

Paying Taxes

New Zealand 1 34 13 1 11

Singapore 2 29 2 1 8

Denmark 3 8 24 19 7

Hong Kong 4 28 21 3 3

South Korea 5 4 1 13 23

United Kingdom 7 13 31 6 10

United States 8 5 20 41 36

Taiwan 11 22 14 22 30

Australia 15 21 3 63 25

Malaysia 23 46 42 3 61

0 20 40 60 80 100

Saudi_Arabia

UAE

Russia

China

Malaysia

Indonesia

Mexico

Slovak_Republic

Argentina

Thailand

Colombia

Morocco

India

Czech_Republic

Brazil

Hungary

Poland

Italy

Turkey

USA

EH Collection Complexity Index

(100: highest complexity)


Sources: World Bank, Euler Hermes

21

Driver #1: Innovation. Spending and R&D are

low (1.3% GDP) compared to trade leading

markets

Game changer #2: Competiveness is not just

about prices

Driver #2: Infrastructure. Hard (physical) and

soft (quality service, e.g.) infrastructure matter

High value added exports and R&D expenditures Sub-components of the World Bank Logistic

Performance Index (ranking out of 160 markets, 1= best)


Quality of

infrastructure

Customs clearance

efficiency

Timeliness

of delivery

Singapore 6 1 6

Hong Kong 10 7 9

South Korea 20 26 23

Taiwan 26 34 12

Malaysia 33 40 47

Thailand 46 46 52

Indonesia 73 69 62

* country’s exports (% global exports)

Sources: World Bank, OECD, UNCTAD Euler Hermes

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0

2

4

6

8

10

12

Market share in high-skill and technology-intensivemanufactures exports (left)*

R&D expenditures (% GDP, right)20

//

22

Digitalization accounts for 9.4% of annual

global economic output. By 2020, it will

account for 16.6% of global economic output.

Game changer #3: New growth drivers

Digitalization & Servitization

Servitization. In Malaysia, services have grown

steadily, relatively immune to previous economic

shocks (commodity crisis, weak global trade)


EH Enabling Digitalization Index Malaysia - Services (% GDP)

40%

45%

50%

55%

60%

05 06 07 08 09 10 11 12 13 14 15 16 17

23


Game changer #4: Selective Partnerships (1)

Deepen Ties with ASEAN members

Merchandise exports to ASEAN account for 28% of Malaysian exports. ASEAN GDP

growth is set to be around 5% over 2017-20 benefitting from strong domestic demand

ASEAN Economic Community: Three clusters for growth

MaSTers: Malaysia, Singapore and Thailand

VIPs: Vietnam, Indonesia

and Philippines

CLiMBers: Cambodia,

Laos, Myanmar and

Brunei

Superior business environment,

logistic infrastructure, access to

financing, FDI inflow.

Diversified economic base with

exporting companies well

positioned in the global value

chain.

Strong positioning in automotive

(Thailand); electronic and electrical

industries (all) and refined energy

(Singapore, Malaysia).

Good mix of favorable

demographics and strong

economic growth, industrialization

hub.

Business environment, trade

infrastructure and access to

financing improving slowly but

surely.

Highly specialized exporters:

Electronics in the Philippines,

primary commodities in ID, light

Electronics and Electric products

and Textiles in Vietnam.

Less integrated in global supply

chains, not globalized yet, weak

domestic banking system

Still challenging business

environment, trade infrastructure is

lagging behind

Strong competitive advantage for

labor intense industries (resource

rich or and cheap labor costs)

24

Game changer #4: Selective Partnerships (2)

Leverage on China’s Belt and Road Strategy

There are at least two OBORtunities to take for Malaysia: a capital boost as China invests

further in Malaysia; and a demand boost for Malaysian exporters as trade links deepen

Sources: Malaysian Investment Development Authority, Euler

Hermes Source: Euler Hermes

4.7

3.2

2.6 2.6

2.2 2.1

1.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2016 2015

Foreign Direct Investment approved for the

Manufacturing Sector

(MYR, bn)

12.6%

13.0%

12.3%

12.4%

12.5%

12.6%

12.7%

12.8%

12.9%

13.0%

13.1%

10 15

Merchandise exports to China (% total merchandise

exports)

25

Appendix

26

In the second half of 2016, growth recovered

to slightly above +3%. Weakness in the US

is over

World: Lifting the lid on the global economy

Fragile-4 are Brazil, Russia, Turkey and South Africa


World GDP growth q/q annualized rate

-1%

0%

1%

2%

3%

4%

5%

13Q1 14Q1 15Q1 16Q1

Others Fragile Four

APAC ex China ex Japan India

Japan Europe

China US

World aggregate 3%

Surveys also show some acceleration and

some kind of overly optimistic bets


World: composite PMI per region

46

48

50

52

54

56

58

60

62

14 15 16 17

US Japan

China Eurozone

27

Despite the recent recovery, global GDP

growth will not exceed the +3% threshold

unless US growth accelerates further by 0.5pp

GDP growth, %,

World: Global uptick starts improving country risk

profile


Country risk shows timid improvement: a

matter of growth revival (Brazil, Russia), and

better FX reserves (Argentina, Egypt)


Changes in ratings – ME, FFI, CRI by quarter

-3

-4

-2

6

8

2

-6

-4

-2

0

2

4

6

8

10

Q4 16

Q1 17

FFI CRI ME

Note:

n Q4 2016 = 15

n Q1 2017 = 18

FFI = financial flows

CRI = business cycle

ME = macroeconomic imbalances

2016 2017 2018

Global GDP 2.5 2.9 2.9

United States 1.6 2.3 2.3

United Kingdom 1.8 1.4 1.0

Eurozone 1.7 1.7 1.6

Germany 1.8 1.7 1.7

Russia -0.2 1.3 1.6

Turkey 2.9 2.0 2.5

China 6.7 6.7 6.3

Japan 1.0 1.2 0.9

India 7.1 7.3 7.3

ASEAN-6* 4.6 4.6 4.7

Saudi Arabia 1.4 1.5 2.0

South Africa 0.3 1.0 1.5

* Singapore, Malaysia, Thailand, Philippines, Indonesia and Vietnam

Weights in global GDP at market price, 2016

28

World: Global risk appetite is up, and financial

risk-taking strikes back

A bridge too far? In the US, equity prices

factored in many good news. Probably too

many. Beware the roller coaster.

US: ratio equity index (S&P) to bond index (Barclays)

detrended, +/- means equity over/under(valuation)

Sources: Bloomberg, Euler Hermes

As nominal growth recovers, corporates

(equities) and commodities should benefit, as

shown by market impacts

Financial markets, performance in %

Sources: Bloomberg, Euler Hermes

1%

1%

-6%

-13%

-18%

-2%

-4%

-2%

-3%

-4%

13%

14%

13%

10%

2%

0%

-25% -15% -5% 5% 15%

Barclays Euro-Aggregate

Barclays U.S. Aggregate

S&P 500

Euro Stoxx 50

Oil (Brent, $ per bbl)

Bloomberg Industrial Metals

S&P GSCI Agricultural

EM Currencies

Bonds

Equitie

sC

om

moditie

s &

Curr

encie

s

1-year ago nov-16 to mar-17 -2%

-1%

0%

1%

2%

90 92 94 96 98 00 02 04 06 08 10 12 14 16

US GDP Growth q/q

-1

-0.5

0

0.5

1Nasdaq bubble:

Strongerovervaluation

ever

2009 crisis:

Strongerundervaluation ever

Pr. Trump

election

29

Trade is showing some signs of revival with

improving new orders in China, the US, and

the EU

World trade growth and Euler Hermes Trade Momentum Index (TMI)

Global trade to increase by +3.6% in 2017.

Volume growth to accelerate. Positive price

effect to be offset by a stronger dollar

Global exports of goods and services

World: Trade. No disruption in sight, despite tough

words

Sources: IHS, Euler Hermes Source: CPB, Official sources, ISM, Eurostat, Euler Hermes

30

After a sharp deceleration from previous

years the declining trend in worldwide

insolvencies will end in 2017

Euler Hermes Global Insolvency Index (basis 100 in 2000)

In 2017, insolvencies will decrease only in

Europe, while rising in Latin America (+7%),

in Asia-Pacific (+4%) and North America (+4%)

Change in the number of insolvencies,

selected countries, y/y %

World: Insolvencies. The decline is coming to an

end but mind the nuances

Source: Euler Hermes Source: Euler Hermes

31

GDP growth to prove firm in 2017 and 2018.

Reflation to contribute to stronger nominal

GDP growth.

China: Rebalancing priorities


Key forecasts

Policymakers to focus on addressing

economic fragilities

5 Challenges for Chinese policy makers

• Consistent and reasonable targets needed

• GDP growth to be around +6.5% in 2016

Promote Credibility

• Downward pressures to prevail: (i) hawk Fed, (ii) lower economic growth and lower (iii) ROI in China

• RMB to depreciate and stabilize around 7RMB/USD in 2017 and 2018

Manage the Currency

• Increased producer prices was supported by last year stimulus

• Supply side adjustment is needed (with SOEs reform, more selective government support)

Reduce excess Capacities

• Corporate debt at 170% of GDP. Credit growth above GDP growth

• Corporate insolvencies to grow by +10% in 2017(+11% in 2016)

Contain Credit risk

• USD denominated Goods exports decreased by -7.7% in 2016

• Outlook is hindered by potential protectionist policies taken by the US

Focus on Commerce

Growth if not specified 2017f 2018f

Real GDP growth 6.7 6.3

Total domestic demand 7.0 6.7

Final consumption expenditure 7.9 7.8

Gross capital formation 5.8 5.2

Gross fixed capital formation 6.6 5.0

Change in inventories (contribution) -0.4 0.1

Net exports(contribution) -0.1 -0.2

Exports of goods and services 3.1 3.8

Imports of goods and services 3.9 5.5

In % GDP 2017f 2018f

Current Account Balance 1.8 1.5

For reference 2017f 2018f

Consumer Inflation (year average) 1.8 2.2

RMB denominated GDP growth (y/y) 9.6 9.0

USD denominated nominal GDP growth 5.2 8.4

RMB/USD (year average) 6.9 6.9

Policy rate (year average) 4.4 5.0

Fiscal balance (% GDP) -4.2 -4.0

32

In the short-term, lower yen, improved

corporate profits and stronger credit growth

point to a positive investment cycle

Japan: Patience and Tenacity are paying off

Sources: national statistics, Euler Hermes

In the longer term, foster private

consumption through higher wages will

be key to overcome deflation definitively

Corporate profit (q/q)

Bank lending (y/y)

Wages and inflation

-10

-5

0

5

10

15

15 16

0

1

2

3

4

5

12 13 14 15 16 17

-4

-3

-2

-1

0

1

2

3

4

05 06 07 08 09 10 11 12 13 14 15 16 17

Nominal wages(12m/12m)

Inflation (12m/12m)

f


33

Emerging ASEAN: A broad based improvement


Improved external demand provide a boost for

exports. A positive rise in commodity prices

strengthen prospects for commodity exporters

USD denominated Export (3m rolling average

y/y)

Apart from Thailand (hampered by political

uncertainties), domestic demand growth is well

oriented underpinned by a positive rise in

investment

Real investment growth (y/y)


-30%

-20%

-10%

0%

10%

20%

30%

16 17

Indonesia

Malaysia

Philippines

Thailand

Vietnam

0%

15%

30%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

13 14 15 16

Malaysia

Thailand

Indonesia

Philippines (right axis)

34

Disclaimer

© Copyright

Euler Hermes

09/05/2017

These assessments are, as always, subject to the disclaimer provided below.

Cautionary Note Regarding Forward-Looking Statements

The statements contained herein may include statements of future

expectations and other forward-looking statements that are based on

management’s current views and assumptions and involve known and

unknown risks and uncertainties that could cause actual results, performance

or events to differ materially from those expressed or implied in such

statements. In addition to statements which are forward-looking by reason of

context, the words "may", "will", "should", "expects", "plans", "intends",

"anticipates", "believes", "estimates", "predicts", "potential", or "continue" and

similar expressions identify forward-looking statements. Actual results,

performance or events may differ materially from those in such statements

due to, without limitation, (i) general economic conditions, including in

particular economic conditions in the Euler Hermes Group’s core business

and core markets, (ii) performance of financial markets, including emerging

markets, and including market volatility, liquidity and credit events (iii) the

frequency and severity of insured loss events, including from natural

catastrophes and including the development of loss expenses, (iv)

persistency levels, (v) the extent of credit defaults, (vi) interest rate levels,

(vii) currency exchange rates including the Euro/U.S. Dollar exchange rate,

(viii) changing levels of competition, (ix) changes in laws and regulations,

including monetary convergence and the European Monetary Union, (x)

changes in the policies of central banks and/or foreign governments, (xi) the

impact of acquisitions, including related integration issues, (xii) reorganization

measures, and (xiii) general competitive factors, in each case on a local,

regional, national and/or global basis. Many of these factors may be more

likely to occur, or more pronounced, as a result of terrorist activities and their

consequences.

No duty to update.

The company assumes no obligation to update any

information contained herein.

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