MALAYSIA: ECONOMIC &                                     POLITICAL OULOOK 2013                                  AZRUL AZWA...
2
STILL LANGUISHING GLOBAL ACTIVITIES65                        GLOBAL PURCHASING MANAGERS INDICES (PMI)60                   ...
LIMITED IMPROVEMENT TO GLOBAL TRADE14                          ANNUAL WORLD MERCHANDISE TRADE GROWTH                      ...
SLOW AND UNEVEN RECOVERY IN SIGHT65             EU MANUFACTURING PURCHASING MANAGERS INDICES (PMI)                        ...
SLOW AND UNEVEN RECOVERY IN SIGHT (continued)  o The 11th hour compromised deal only averted the immediate pain of the “fi...
SLOW AND UNEVEN RECOVERY IN SIGHT (continued)  15                   QUARTERLY REAL OR CHAINED GDP GROWTH OF SELECTED BRIC ...
8
GRAVITY-DEFYING FIRST 3QS OF 2012                                                                                         ...
GRAVITY-DEFYING FIRST 3QS OF 2012 (continued)             YoY GROWTH (3-MONTH MOVING AVERAGE BASIS)30.00                  ...
GRAVITY-DEFYING FIRST 3QS OF 2012 (continued)  o Growth moderation across almost all sectors:       Construction sector r...
MALAYSIA: 2013, YEAR OF 2 HALVES?                                                                                        ...
PROSPECTS IN 2013             GROWTH (%)                2008 2009 2010 2011 1H2012 2012 BI 2012 MoF 2013 BI 2013 MoF      ...
PROSPECTS IN 2013 (continued)       investment revival, both private and public       consumer spending notwithstanding ...
PROSPECTS IN 2013 (continued) Direct measures to further boost foreign and domestic direct investments  (FDIs and DDIs), ...
PROSPECTS IN 2013 (continued) Notwithstanding the marginal 0.6% YoY increase in exports during the first  3Qs of 2012 of ...
PROSPECTS IN 2013 (continued)       A 10-trillion yen extension, announced in Sep 2012 to Bank of Japan’s asset-buying   ...
DOMESTIC AREAS OF VULNERABILITY? Some domestic-driven risk factors that could potentially constrain growth  potential in ...
TAME INFLATION OUTLOOK                   ANNUAL HEADLINE CPI GROWTH                                                       ...
TAME INFLATION OUTLOOK (continued) However, remain cautious of the upside risks to inflation emanating from both  externa...
TAME INFLATION OUTLOOK (continued) Notwithstanding these upside risks to inflation and the relative strength in  domestic...
OPR PAUSE TO CONTINUE WITH A SLIGHT UPSIDE RISK                 ACTUAL AND FORECAST REAL SHORT-TERM INTEREST RATES8.0     ...
RATHER BULLISH MYR OUTLOOK                                                            Although we can expect some volatil...
RATHER BULLISH MYR OUTLOOK (continued)                                                                                    ...
25
GE13: D-DAY IS A GUESSING GAME The Gap Period Between Two Consecutive Election Dates           Polling Date             In...
GE13: FREE & FAIR ELECTION?SEAT DISTRIBUTION AT HOUSE OF REPRESENTATIVES AND STATE LEGISLATIVE ASSEMBLIESPerlis           ...
GE13: FREE & FAIR ELECTION? (continued) Although there are still about 3.2 million unregistered eligible voters (out of  ...
GE13: CHALLENGES OF PREDICTING The unprecedented Opposition’s victory on 8 March 2008 at the GE12 and  continued close co...
GE13: CHALLENGES OF PREDICTING (continued)        results of all 16 by-elections where both BN and PR secured an equal sh...
GE13: GREATER POLITICAL TSUNAMI Based on the analysis of selected factors that we think could affect the  election outcom...
GE13: GREATER POLITICAL TSUNAMI? (continued)                                                                             G...
GE13: GREATER POLITICAL TSUNAMI? (continued)                                    FBMKLCI PERFORMANCE PRE-AND-POST GENERAL E...
GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA In the medium-to-long term, after this mild political “revolution” or the so- ...
GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA(continued) Given the anticipated narrow PR win, the presence of relatively str...
GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA(continued)  Increased well-being of the rakyat and strengthening of the democr...
GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA(continued)    o Higher quality debates in the Parliament and State Assemblies  ...
THANK YOU                           Email: azrulazwar@bankislam.com.my                           Phone: +603-20888075Origi...
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Regional outlook forum 2013 10 january 2013

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Presentation by Azrul Azwer, Chief Economist of Bank Islam which caused his suspension for predicting an opposition victory in the coming Malaysian elections.

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Regional outlook forum 2013 10 january 2013

  1. 1. MALAYSIA: ECONOMIC & POLITICAL OULOOK 2013 AZRUL AZWAR AHMAD TAJUDIN CHIEF ECONOMISTStrictly Private & Confidential
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  3. 3. STILL LANGUISHING GLOBAL ACTIVITIES65 GLOBAL PURCHASING MANAGERS INDICES (PMI)60  Spots of deterioration in the global5550 economy since 3Q2012 with45 heightened downside risks – part of40 sluggish and bumpy recovery OR3530 beginning of a more prolonged downturn? Global economic Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Composite PMI Manufacturing PMI Services PMI challenges: Sources: JP Morgan & Markit, Bank Islam o Short-term : Proactive response to short- OECD LEADING INDICATORS (12-MONTH ANNUALISED GROWTH)30 run slowdown o Medium-term: The global economy is252015 operating in a world of high public debt10 and/or budget deficits in particular rising 5 doubts over: 0 the viability of the Euro zone as Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 May-96 May-97 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 -5 weaknesses in the periphery appears to-10 have spread to core economies-15 China India Brazil Russia Japan Euro US UK Total capability of peripheral Euro countries to deliver the required fiscal and structural Sources: OECD, Bank Islam adjustments 3
  4. 4. LIMITED IMPROVEMENT TO GLOBAL TRADE14 ANNUAL WORLD MERCHANDISE TRADE GROWTH  The World Trade Organisation (WTO) cut its global trade growth forecasts to1210 8 6 2.5% for 2012 from 3.7% and to 4.5% 4 2 for 2013 from 5.6%: 0 o given heightened risks on the downside 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013F 2012 F 2014 F 2015 F 2016 F 2017 F -2 -4 due largely to the prolonged Euro zone crisis, sub-trend US growth, China’s -6 -8-10-12 slowdown (after expanding by 7.7% Sources: IMF, Bank Islam during the first 3Qs of 2012, official GDP30.0 GLOBAL CHIP INDUSTRY growth targets of 7.5% in 2012 and 7.0%-7.5% in 2013) and Japan’s 1.425.0 1.220.0 1.0 subdued growth 0.8 o Improving trade growth outlook in15.0 0.6 developing economies given tentative10.0 0.4 signs of a pick-up in recent export 5.0 0.2 performance could be limited mainly to 0.0 0.0 Asian economies whose supply chain Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 May-95 May-96 May-97 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 networks closely integrated with China Global Semiconductor Sales (US billion, LHS) US Book-to-Bill Ratio (RHS) and could only partially fill up the global Sources: SIA, SEMI, Bank Islam slack
  5. 5. SLOW AND UNEVEN RECOVERY IN SIGHT65 EU MANUFACTURING PURCHASING MANAGERS INDICES (PMI)  Potential major causes of60 disappointing global growth in5550 2H2012 and 1H2013:45 o No let-up in the intensity of the Euro zone40 sovereign debt crisis35 o Short-term contractionary effects on30 growth due to austerity measures and Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 May-06 May-07 May-08 May-09 May-10 May-11 May-12 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Eurozone Germany France Italy UK fiscal cutbacks worldwide especially in Sources: JP Morgan & Markit, Bank Islam Europe in particular peripheral Euro30 OECD LEADING INDICATORS (12-MONTH ANNUALISED GROWTH) zone, the US and UK and spillovers on25 developing countries20 o Weak financial institutions and15 inadequate policy responses in key10 advanced economies o Tail-off in Japan’s disaster reconstruction 5 0 spending Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 May-96 May-97 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 -5-10 o Downshift in prospects for China, India-15 China India Brazil Russia Japan Euro US UK Total and Brazil Sources: OECD, Bank Islam 5
  6. 6. SLOW AND UNEVEN RECOVERY IN SIGHT (continued) o The 11th 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 Govt’s 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 o Possibility of waning momentum in domestic demand in developing economies due to fiscal constraints (Malaysia), overheating concerns (Indonesia) and a host of other factors o Stalled E&E turnaround?  US SEMI book-to-bill ratio, a forward-looking indicator for the global chip industry remained below parity for the 6th 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 6 billion respectively vs. a 3.2% decline in 2012 to US$290 billion .
  7. 7. SLOW AND UNEVEN RECOVERY IN SIGHT (continued) 15 QUARTERLY REAL OR CHAINED GDP GROWTH OF SELECTED BRIC & OECD COUNTRIES (YoY %)  On 9 October 2012, the IMF downgraded 10 its global growth forecasts to 3.3% (from 3.5%) for 2012 and 3.6% (from 3.9%) for 5 2013 – global slowdown to persist 0 especially in the earlier part of 2013 on: 1Q95 3Q95 1Q96 3Q96 1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 -5 o Lacklustre US recovery o Flimsy turnaround from recession in the -10 US UK EU Japan China India Brazil Euro zone and the UK Sources: IMF, national authorities, Bank Islam o Stalled recovery in Japan International Monetary Funds Forecasts o Sub-par growth in China, India and Brazil 17-Apr-12 16-Jul-12 9-Oct-12 Selected EconomiesWorld Output 2008 2.8 2009 -0.6 2010 5.3 2011 3.9 2012 F 2013 F 3.5 4.1 2012 F 2013 F 3.5 3.9 2012 F 2013 F 3.3 3.6  Asia will continue to power the globalAdvanced Economies 0.0 -3.6 3.2 1.6 1.4 2.0 1.4 1.9 1.3 1.5 growth at a faster clip than the global* United States -0.3 -3.5 3.0 1.7 2.1 2.4 2.0 2.3 2.2 2.1* Euro Zone 0.4 -4.3 1.9 1.5 -0.3 0.9 -0.3 0.7 -0.4 0.2 economy despite risks of the Asian growth* Japan -1.0 -5.5 4.4 -0.7 2.0 1.7 2.4 1.5 2.2 1.2* United Kingdom -1.1 -4.4 2.1 0.7 0.8 2.0 0.2 1.4 -0.4 1.1 slowing to levels last seen during the 2009* Canada* Newly Industrialized Asia 0.7 1.8 -2.8 -0.7 3.2 8.5 2.4 4.0 2.1 3.4 2.2 4.2 2.1 2.7 2.2 4.2 1.9 2.1 2.0 3.6 global financial crisis.* Malaysia 4.8 -1.6 7.2 5.1 4.4 4.7 4.0 4.7 4.4 4.7* China 9.6 9.2 10.4 9.2 8.2 8.8 8.0 8.5 7.8 8.2* India 6.2 6.6 10.6 7.1 6.9 7.3 6.1 6.5 4.9 6.0 Sources: IMF, Bank Islam 7
  8. 8. 8
  9. 9. GRAVITY-DEFYING FIRST 3QS OF 2012  Stronger-than-expected GDP showing in QUARTERLY DEMAND SIDE PERFORMANCE (% YoY)40.0 the first 3Qs of 2012 in particular the30.020.0 surprise 5.2% YoY pace in 3Q2012 and10.0 0.0 the upgrade in 2Q2012 reading to 5.6% YoY from 5.4% YoY. Key takeaways in 1Q2006 2Q2006 3Q2006 4Q2006 1Q2007 2Q2007 3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012-10.0-20.0 3Q2012:-30.0 o 3.0% YoY contraction in exports, the first Overall GDP Private Consumption Public Consumption Private Investment Public Investment Exports Imports decline on a quarterly basis since 3Q2009 Sources: BNM, Bank Islam after decelerating for 2 consecutive Qs25.0 QUARTERLY SECTORAL PERFORMANCE (% YoY) (2Q2012:+2.1% YoY, 1Q2012:+2.8% YoY)20.0 – external demand to remain a major drag15.010.0 on the Malaysian economy at least until 5.0 1H2013 0.0 o Very robust domestic demand, sustaining 1Q2006 2Q2006 3Q2006 4Q2006 1Q2007 2Q2007 3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 -5.0 double-digit growth of 11.4% YoY-10.0 (2Q2012:+14.0% YoY, 1Q2012:+10.0%-15.0 YoY), led by both public and private-20.0 Overall GDP Manufacturing Agriculture Construction Mining & Quarrying Services sectors in particular: Sources: BNM, Bank Islam
  10. 10. GRAVITY-DEFYING FIRST 3QS OF 2012 (continued) YoY GROWTH (3-MONTH MOVING AVERAGE BASIS)30.00  22.7% YoY spike in GFCF (2Q2012:+26.1% YoY, 1Q2012:+16.1%20.00 YoY), supported by both domestic and10.00 foreign investments of which public investment was up by +22.4% YoY 0.00 (2Q2012:+28.9% YoY, 1Q2012:+10.3% Feb-08 Apr-08 Feb-09 Apr-09 Feb-10 Apr-10 Feb-11 Apr-11 Feb-12 Apr-12 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Nov-08 Nov-09 Nov-10 Nov-11 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 May-08 May-09 May-10 May-11 May-12-10.00 YoY) and private investment by +22.9%-20.00 YoY (2Q2012:+24.6% YoY, 1Q2012:+19.8% YoY)-30.00 IPI Gross Exports  8.5% YoY jump in household spending Sources: Department of Statistics, MATRADE, Bank Islam (2Q2012:+8.8% YoY, 1Q2012: +7.4%130 MIER INDICATORS YoY), lifted by Govt cash transfers and120 assistance benefits while public110 consumption was up by 2.3%100 YoY(2Q2012:+10.9% YoY, 1Q2012: 90 +9.1% YoY) 80 70 60 50 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 Consumer Sentiment Index Business Conditions Index Sources: MIER, Bank Islam
  11. 11. GRAVITY-DEFYING FIRST 3QS OF 2012 (continued) o 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
  12. 12. MALAYSIA: 2013, YEAR OF 2 HALVES?  The progress of economic rebalancing YoY GROWTH RATES OF LEADING, COINCIDENT & LAGGING INDICATORS12.00 7.00 and transformation, on a journey to become a developed, high-income 2.00 nation by 2020 to gain traction. Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 -3.00  Pockets of weakness in the 1H2013 with -8.00 o erratic export performance given the still tentative global recovery-13.00 Leading Index Coincident Index Lagging Index o uncertainties related to GE13 Sources: Department of Statistics, MATRADE, Bank Islam  A pick-up in Malaysia’s growth130 MIER INDICATORS momentum in 2H2013 with significant120110 export recovery on the widely expected100 global turnaround thanks to: 90 o Clarity about resolution to the Euro zone 80 70 crisis - resumption of recovery by mid- 60 2013 particularly for core countries and 50 return to growth for all nations by 2014 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 o More conclusive signs of sustainable Consumer Sentiment Index Business Conditions Index bottoming out in the US and China Sources: MIER, Bank Islam
  13. 13. PROSPECTS IN 2013 GROWTH (%) 2008 2009 2010 2011 1H2012 2012 BI 2012 MoF 2013 BI 2013 MoF  Notwithstanding a multitude ofGDP (constant prices, 2000=100) 4.8 -1.5 7.2 5.1 5.1 5.1 4.5-5.0 5.3 4.5-5.5 uncertainties in the global economy andDemand Side financial environment, the latest officialFinal Consumption Expenditure 8.4 1.4 5.8 8.9 8.1 7.8 7.9 5.2 4.2 GDP growth guidance of between 4.5%-* Private Consumption 8.7 0.6 6.6 7.1 8.1 8.0 7.0 6.2 5.7 5.0% for 2012 and 4.5%-5.5% for 2013* Public Consumption 6.9 4.9 2.9 16.1 8.4 7.2 11.3 1.2 -1.2 seems reasonably realistic - In-houseGross Fixed Capital Formation (GFCF) 2.4 -2.7 10.4 6.5 21.3 19.9 13.5 10.2 9.3 GDP growth forecasts of 5.1% for 2012* Private Investment 0.1 -7.4 15.5 12.2 22.4 19.7 11.7 11.7 13.3* Public Investment 5.2 2.9 5.0 -0.3 19.5 20.1 15.9 8.3 4.2 and 5.3% for 2013 respectively exceedDomestic Demand 6.6 0.3 7.0 8.2 11.8 11.1 9.4 6.6 5.6 or at the upper-end of official targetedExports 1.6 -10.9 11.3 4.2 2.5 1.4 1.6 4.2 2.8 ranges:Imports 2.3 -12.7 15.6 6.2 7.5 6.5 5.1 5.7 3.6 o Domestic demand (+11.8% YoY duringSupply Side the first 3Qs of 2012), proven so far toAgriculture, Fishing & Forestry 3.8 0.05 2.4 5.9 -1.5 -0.6 0.6 1.8 2.4 be more than adequate to withstandMining & Quarrying -2.4 -6.5 -0.4 -5.7 1.3 1.0 1.5 2.5 2.7 external headwinds and absorb externalManufacturing 0.8 -9.0 11.9 4.7 5.0 4.3 4.2 5.1 4.9 shocks, will continue to anchor growthConstruction 4.4 6.2 6.0 4.6 18.9 18.1 15.5 11.0 11.2 on disposable income enhancementServices 8.6 2.9 7.2 7.0 5.8 6.0 5.5 5.9 5.6 measures and other domestic demand supportive incentives under BudgetSources: BNM, Economic Report 2012/2013, Bank Islam 2013, particularly led by: 13
  14. 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 o 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 14
  15. 15. PROSPECTS IN 2013 (continued) Direct measures to further boost foreign and domestic direct investments (FDIs and DDIs), private or public sector led: o 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 o 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 people’s well-being while spurring investment activities 15
  16. 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: o 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 world’s 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  China’s 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 Bank’s (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. 16
  17. 17. PROSPECTS IN 2013 (continued)  A 10-trillion yen extension, announced in Sep 2012 to Bank of Japan’s 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 o 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 sector’s 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 o 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 17
  18. 18. DOMESTIC AREAS OF VULNERABILITY? Some domestic-driven risk factors that could potentially constrain growth potential in 2013:o Delay in holding the 13th 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 Govt’s finances if the ruling party continues dishing out more generous handoutso Delay in the full start-up of Malaysia’s Gumusut-Kakap deep-sea oilfield (2nd 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.o Limitations of domestic demand after 4 straight quarters of beyond expectations - concerns whether it has further leg to hold up and provide support to Malaysia’s 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 18
  19. 19. TAME INFLATION OUTLOOK ANNUAL HEADLINE CPI GROWTH  Very subdued inflationary pressures as18.016.014.0 headline CPI growth in Nov 2012 remained12.010.0 stuck at 1.3% for 3 months in a row, the 8.0 slowest pace since March 2010, reflecting: 6.0 4.0 o high base effects 2.0 o price declines for communications; 0.0 recreation services & culture and clothing & 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 BI 2013 BI footwear Sources: Department of Statistics, Bank Islam o slowdown in price gains for food & non-20.0 CPI vs. PPI (YoY Growth) alcoholic beverages; transport; alcoholic15.0 beverages & tobacco and housing, utilities10.0 & fuels 5.0 0.0  Continued easing in core inflation to below 1.0% YoY since July 2012 and Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 May-06 May-07 May-08 May-09 May-10 May-11 May-12 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 -5.0 negative PPI growth since June 2012, an-10.0 indication of cooling price pressures or-15.0 Headline CPI Headline PPI limited pass-through effects on the ground. Sources: Department of Statistics, Bank Islam 19
  20. 20. TAME INFLATION OUTLOOK (continued) However, remain cautious of the upside risks to inflation emanating from both external and domestic factors such as:o 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 changeo Strict implementation of the PEMANDU’s 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 economyo Sticky food inflation could bump up the overall CPI as the Food & Non-Alcoholic Beverages is the largest CPI component (30.3%)o 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 20
  21. 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: o Significant excess capacity in the economy that should help contain inflationary pressures despite robust domestic demand o 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 o 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 o 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: o may have hit bottom at 1.3% YoY in November 2012 o may gain some ground in December 2012 but still to average around 1.7% in 2012 (way below the BNM’s targeted range of 2.0%-3.0%) vs. 3.2% in 2011 o 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 21 mid-2013 and an uptick in demand-pull inflation
  22. 22. OPR PAUSE TO CONTINUE WITH A SLIGHT UPSIDE RISK ACTUAL AND FORECAST REAL SHORT-TERM INTEREST RATES8.0  The outlook for both growth and inflation6.0 should be carefully assessed to avoid4.0 over or under adjustment of monetary2.0 policy.  While rather benign inflation outlook in0.0 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Apr-04 Feb-05 Apr-05 Feb-06 Apr-06 Feb-07 Apr-07 Feb-08 Apr-08 Feb-09 Apr-09 Feb-10 Apr-10 Feb-11 Apr-11 Feb-12 Apr-12 Feb-13 Apr-13 Dec-04 Dec-05 Dec-06 Dec-07 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Dec-11 Jun-11 Dec-12 Dec-13 Jun-12 Jun-13-2.0-4.0 2013 provides the scope for OPR cuts or-6.0 CPI OPR Real OPR at least extended rate-pause, there is a Sources: Department of Statistics, Bank Islam minor tightening risk to OPR towards the later part of 2013 especially if growth 25 YoY GROWTH OF SELECTED CPI COMPONENTS 20 turns out much stronger than expected, 15 10 exerting a strain on inflation. 5  Deemed accommodative and adequate to 0 support domestic demand while Jan-06 Jan-07 Jan-09 Jan-10 Jan-12 Sep-06 Jan-08 Nov-06 Sep-07 Nov-07 Sep-08 Nov-08 Sep-09 Nov-09 Sep-10 Nov-10 Jan-11 Sep-11 Nov-11 Sep-12 Nov-12 May-06 May-07 May-08 May-09 May-10 May-11 May-12 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 -5-10 preventing a build-up of financial-15-20 imbalances, OPR should remain at-25 Headline CPI Food CPI Adjusted or Non-Food CPI Housing, Utilities & Fuel CPI normalised levels of 3% throughout 2013. Transport CPI  Stable OPR outlook in 2013 while the Sources: Bank Negara Malaysia, Bank Islam earliest rate-hike delayed to 1H2014? 22
  23. 23. RATHER BULLISH MYR OUTLOOK  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-à-vis its regional MYR PERFORMANCE VS. USD & EUR peers. Asian currencies should draw strength from: o Capital inflows particularly portfolio fundsSources: Bloomberg, Bank Islam 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-à-vis other regions: COMPARATIVE NORMALISED PERFORMANCE : MYR, SGD, KRW, TWD  is projected to be the world’s fastest- growing region with the most reliable and exciting growth storySources: Bloomberg, Bank Islam  has solid underlying fundamentals 23
  24. 24. RATHER BULLISH MYR OUTLOOK (continued) o 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 world’s largest economies to stem the slowdown – improving export outlook for trade- COMPARATIVE NORMALISED PERFORMANCE : MYR, CNY, THB, IDR dependent economies hence widening current account surpluses Sources: Bloomberg, Bank Islam o Reduced safe-heaven appeal of USD due 8.88 SPOT PERFORMANCE OF SELECTED ASIAN CURRENCIES VS. USD (%) -1 JAN 2012 TO DATE to QE3 in favour of other currencies with 7.64 7.00 5.68 better economic growth potential and more 4.50 4.33 3.82 favourable yield prospects such as Asian 2.00 1.20 0.20 currencies KRW PHP SGD TWD MYR THB CNY HKD INR IDR JPY -3.00 -2.76  Asian currencies may gain significant -8.00 -6.03 grounds towards year-end and hence, MYR may end at a RM2.97-3.02-13.00 -12.17 range from RM3.052 as at end-2012. Sources: Bloomberg, Bank Islam 24
  25. 25. 25
  26. 26. GE13: D-DAY IS A GUESSING GAME The Gap Period Between Two Consecutive Election Dates Polling Date Interval Period  The constitutional ParliamentaryGE1: Wednesday, 19 August 1959GE2: Saturday, 25 April 1964 4 years 8 months term is valid from 29 April 2008, theGE3: Saturday, 10 May 1969GE4: Saturday, 24 August 1974 5 years 5 years 3 months date of the Parliament’s first sitting afterGE5: Saturday, 8 July 1978 3 years 10 monthsGE6: Thursday, 22 April 1982 3 years 9 months the 12th General Election (GE12). AsGE7: Sunday, 3 August 1986 4 years 3 monthsGE8: Sunday, 21 October 1990 4 years 3 months such, the Parliament must be dissolvedGE9: Tuesday, 25 April 1995 4 years 6 monthsGE10: Monday, 29 November 1999GE11: Sunday, 21 March 2004 4 years 7 months 4 years 4 months by 28 April 2013. From the dissolutionGE12: Saturday, 8 March 2008GE13: March 2013? 3 years 11 months 5 years? date, the GE13 must be held within 60 days. Historically, Malaysia has neverSources: Election Commission, Bank Islam come close to the full term of 5 years except for the GE3 in 1969 and GE4 in 1974.  Given deep changes in Malaysia’s political landscape since 8 March 2008, it’s difficult for the PM to arrive at a perfect time to dissolve the Parliament and to hold the GE13. Sources: Election Commission, Bank Islam 26
  27. 27. GE13: FREE & FAIR ELECTION?SEAT DISTRIBUTION AT HOUSE OF REPRESENTATIVES AND STATE LEGISLATIVE ASSEMBLIESPerlis Dewan Rakyat 3 Dewan Undangan Negeri 15  As at 16 August 2012, explosion in theKedah 15 36PenangPerak 13 24 40 59 number of registered voters, crossingSelangorNegeri Sembilan 22 8 56 36 the 13 million mark to 13.05 millionMelaka 6 28Johor 26 56 people and surging by 19.5%:Pahang 14 42TerengganuKelantan 8 14 32 45 o compared to a very mild growth of ONLYSarawakSabah 31 25 71 60 between 6%-7% as at GE10, GE11 andFT Kuala LumpurFT Putrajaya 11 1 N/A N/A GE12FT LabuanTOTAL 1 222 N/A 576 o from just 10.92 million at GE12, equivalent Sources: Election Commission, Bank Islam to 2.13 million increase, the biggest in VOTER BASE Malaysia’s history Year No of Registered Voters Growth (in number) Growth (%) 1959 2,171,097 o out of whom 274,247 people or 2.1% are 1964 1969 2,763,077 3,843,782 591,980 1,080,705 27.27 39.11 absent voters comprising armed forces, 1974 4,132,032 288,250 7.50 police and overseas voters – Top 3 states 1978 5,059,689 927,657 22.45 1982 6,081,628 1,021,939 20.20 with most absent voters are Federal 1986 6,964,960 883,332 14.52 1990 7,968,640 1,003,680 14.41 Territory of KL (40,543 people), Perak 1995 9,012,173 1,043,533 13.10 (38,367) and Johor (25,058) while Selangor 1999 9,564,071 551,898 6.12 2004 10,284,591 720,520 7.53 has the highest number of overseas voters 2008 10,922,139 637,548 6.20 2012* 13,052,374 2,130,235 19.50 with 579 people Sources: Election Commission, Bank Islam 27
  28. 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: o speed up the clean-up of the electoral roll from dubious entries o address the 8 demands by BERSIH especially related to free and fair electoral system and election process 28
  29. 29. GE13: CHALLENGES OF PREDICTING The unprecedented Opposition’s 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: o Analysing:  current voter profile (age groups, gender, ethnic groups, urban-rural, income brackets, etc), etc  past voting trends in all GEs in particular GE12 29
  30. 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 o Taking stock of the feedback from our ground visits to selected areas nationwide to gauge the underlying voter sentiment o Identifying election issues, local or national that could affect voters’ decisions o 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) 30
  31. 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: o 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 o 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 o 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 31
  32. 32. GE13: GREATER POLITICAL TSUNAMI? (continued) GE RESULTS FOR PARLIAMENTARY SEATS ALLIANCE/BN OPPOSITION TOTAL Year No. of Seats Won Change from % of Total Seats % of Popular Votes No of Seats Won Change from % of Total Seats % of Popular Votes No of Seats Registered Voters Voter Turnout Previous GE Previous GE (million) (%) 1959 74 71.2 51.7 30 28.9 48.3 104 2.17 73.3 1964 89 15 85.6 58.5 15 -15 14.4 41.5 104 2.76 78.9 1969 95 6 66 49.3 49 34 34.0 50.7 144 3.84 73.6 1974 135 40 87.7 60.7 19 -30 12.3 39.3 154 4.13 75.1 1978 130 -5 84.4 57.2 24 5 15.6 42.8 154 5.06 75.3 1982 132 2 85.7 60.5 22 -2 14.3 39.5 154 6.08 74.4 1986 148 16 83.6 57.3 29 7 16.4 42.7 177 6.96 70.0 1990 127 -21 70.6 53.4 53 24 29.5 46.6 180 7.97 72.6 1995 162 35 84.4 65.2 30 -23 15.6 34.8 192 9.01 71.4 1999 148 -14 76.6 56.3 45 15 23.3 43.5 193 9.60 71.1 2004 199 51 90.8 63.9 20 -25 9.2 36.1 219 10.28 73.5 2008 140 -59 63.1 50.4 82 62 36.9 49.6 222 10.92 76.0 2012? 97 to 107? (33) to (43)? 43.7 to 48.2 ? 115 to 125? 33 to 43? 51.8 to 56.3? ? 222 13,052,374* 75 to 80?* as last gazetted on 16 August 2012 out of whom 12,778,127 ordinary voters and 274,247 absent voters  Assumptions for the base-case scenario (no 2/3 majority but enough for PR to form the Federal Govt): o 2-cornered fights o 75%-80% in overall national voter turnout o 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 o Electoral fraud cases such as phantom voters, vote rigging, ballot stuffing, etc 32 make up less than 5% of total voter turnout
  33. 33. GE13: GREATER POLITICAL TSUNAMI? (continued) FBMKLCI PERFORMANCE PRE-AND-POST GENERAL ELECTIONSNumber of days before or after GE -180 -90 -30 -7 -1 1 7 30 90 180GE8 -9.1% -23.8% -6.0% 1.6% 1.6% 4.0% 4.9% 0.2% 2.2% 24.9%GE9 -11.5% 12.0% 1.8% 1.3% -0.3% -1.7% -2.5% 6.6% 7.2% -1.6%GE10 -0.5% -2.8% 0.4% 1.7% 1.0% -1.5% -2.6% 7.9% 34.4% 18.6%GE11 22.7% 16.7% 5.0% 2.3% 0.3% 0.5% -1.0% -4.8% -9.1% -5.0%GE12 0.4% -9.6% -8.4% -4.5% -0.3% -9.5% -7.8% -5.8% -3.7% -16.3%Sources: Bloomberg, Bank Islam 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 Malaysia’s political risk, among others: o 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 o 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 33
  34. 34. GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA 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 what’s 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? 34
  35. 35. GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA(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: o a well functioning and genuine check-and-balance system to protect the rights of all citizens, consistent with the Federal Constitution o the reformist agenda acceleration - economic, structural, institutional, political, social and law reforms, required to raise Malaysia’s long-term competitiveness o 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 o promotion of business-friendly and free-market policies without imposing hardship on the rakyat o 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 o lower long-term risk premium assigned to Malaysia 35
  36. 36. GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA(continued)  Increased well-being of the rakyat and strengthening of the democratic process: o 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 o 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 o 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 o Positive changes in policy-making process with policies that serve the interest of the masses especially the “small people” rather than enriching the politically 36 connected elite group (within the inner circle of people in power)
  37. 37. GE13: MID-AND-LONG TERM POSITIVE FOR M’SIA(continued) o Higher quality debates in the Parliament and State Assemblies o 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: o “Economic sabotage”, resistance and non-cooperation by those in the business community and civil service who are aligned to the losing coalition o 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 PR’s reform policies especially the needs-based affirmative action to correct socio-economic imbalances o No assurance of continuity of Govt policies and guarantee of the sanctity of contracts in particular related to lopsided concession agreements o No introduction of GST, much needed to diversify the Govt’s revenue base 37
  38. 38. THANK YOU Email: azrulazwar@bankislam.com.my Phone: +603-20888075Originating Department 38

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