MARKET DATELINE

• PP 7767/09/2010(025354)

11 March 2010
Malaysia

Economic Outlook

A New Economic Model As Recovery Gains Pace

Executive Summary
‹ The Malaysian economy emerged from a recession in the 4Q of last year, underpinned by
a recovery in exports and the Government’s stimulus spending. We expect the export
recovery to be sustained in 2010 despite various challenges that threaten to derail it.
Similarly, we expect domestic demand to gain momentum, and consumer and business
spending will likely take up the slack left by the government stimulus spending when it fizzles
out in 2H 2010. As a whole, we expect the Malaysian economy to bounce back and expand
by 4.5% in 2010, from -1.7% in 2009.

‹ As the Malaysian economic recovery gains pace, the Government is set to unveil its new
economic model (NEM) by end-March. The NEM could contain key initiatives to move the
country towards a high-income economy through innovation, knowledge and R&D as well as
improve efficiency and productivity. It will also entail further liberalisation and a gradual
phasing out of subsidies to bring about a more competitive economy.

‹ Meanwhile, the prospects of a sustainable global economic recovery have improved

significantly in recent months, in our view. As a result, policymakers around the globe have
begun to exit their extremely loose policies. However, these are normalisation measures and
will unlikely have a significant impact on global economic recovery. As a whole, a recovery
in external demand will likely lift Malaysia’s exports in 2010.

‹ Domestic demand is projected to bounce back in 2010, in line with an improvement in

consumer and business confidence. However, public spending will likely fall during the year
in tandem with a fiscal consolidation. Consequently, the fiscal deficit will likely narrow to
5.6% of GDP, as planned, from a deficit of 7.0% estimated for 2009.

◆ The current account in the balance of payments will record a smaller surplus in 2010 but will
remain large to fuel domestic liquidity and provide an underlying support to the ringgit. We
expect the ringgit to fluctuate at between RM3.30 and RM3.40 against the US dollar in the
1H of the year, before settling at around RM3.30/US$ by end-2010.

◆ Inflation will likely trend up but remain manageable at 2.0% in 2010, from +0.6% in 2009.
The Central Bank, however, will continue to normalise monetary conditions and the overnight
policy rate (OPR) will likely be raised by another 25 basis points in July and stay at 2.5%
until the end of the year.
Peck Boon Soon
Please read important disclosures at the end of this report. (603) 9280 2163
bspeck@rhb.com.my

A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
A New Economic Model As Recovery Gains Pace

The Malaysian economy emerged from a recession in the 4Q of last year,

underpinned by the Government’s stimulus spending and a recovery in exports.
We expect the export recovery to be sustained in 2010 despite various
challenges that threaten to derail it. Similarly, we expect domestic demand to
gain momentum, underpinned by a pick-up in consumer spending, on the back
of an improvement in the job market, while businesses will likely resume their
investment during the year. As a whole, we expect the Malaysian economy to
expand by 4.5% in 2010, from -1.7% in 2009. Meanwhile, as the Malaysian
economic recovery gains pace, the Government is set to unveil its new economic
model (NEM), which would chart the direction for the country’s development
towards 2020, by end-March. The current account surplus in the balance of
payments will likely narrow, as the recovery of the economy will suck in more
imports. The surplus, however, will remain large and provide an underlying
support to the ringgit, which is projected to strengthen to around RM3.30/US$
by end-2010. Inflation will likely trend up but remain manageable at 2.0% in
2010. The Central Bank will likely raise the OPR by another 25 basis points to
2.5% in July.

Economic Recovery Strengthening

Like many other countries in this region and the developed economies, the Malaysian We expect the economy
economy emerged from a recession in the 4Q of last year, underpinned by a to expand by 4.5% in
recovery in exports and the Government’s stimulus spending. We expect the export 2010, compared with a
recovery to be sustainable in 2010 despite various challenges that threaten to derail recession in 2009, on the
it, including budget deficit and debt woes in some countries in the Euroland (see back of a pick-up in
Charts 1 & 2), concerns over a double dip in the global economic recovery as exports and strengthening
government spending fizzles out and policy tightening on the back of asset price
domestic demand
inflation in Asia and emerging economies. Similarly, we expect domestic demand to
gain momentum, and consumer and business spending to gradually take up the slack
left by the fiscal stimulus spending when it fizzles out in 2H 2010. This will likely
be underpinned by a pick-up in consumer spending, which is improving steadily in
the last three consecutive quarters, on the back of an improvement in job market.
In the same vein, investors will likely resume their investment given brightening
economic prospects. As a whole, we expect the Malaysian economy to expand
by 4.5% in 2010, from -1.7% in 2009.

Chart 1 Chart 2
High Deficit Levels In Some European High Debt Levels In Some European
Economies Economies
% GDP % GDP
4
160
2
140 Greece
0
120
-2

-4 100 Ireland
-6 80 Portugal
Portugal
-8
60
Spain
-10
Spain 40
-12

-14 Greece 20

-16
Ireland 0
2005 2006 2007 2008 2009 2010f 2011f 2005 2006 2007 2008 2009 2010f 2011f

Source: European Commission Source: European Commission

ECONOMIC 2 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
A New Economic Model To Lead The Country Forward

As the Malaysian economic recovery gains pace, the Government is set to unveil The NEM could contain
its new economic model (NEM), which would chart the direction for the country’s eight key initiatives aimed
development towards 2020, by end-March. The NEM could contain eight key at assisting the country to
initiatives for the country to achieve a high-income economy by the year 2020, achieve a more
according to a recent news report citing certain sources. Among the proposed action competitive and high
plans that are likely to be included in the NEM are strategies to create a more
income economy by the
competitive and high-income economy, the phasing out of subsidies, the continued
year 2020
gradual removal of affirmative action policies and restrict the employment of foreign
workers. Also, the NEM will include measures to promote “green” industry.

We understand that the NEM will likely be based on innovation, knowledge and The NEM will likely be
R&D to improve Malaysia’s productivity and efficiency to bring about a more based on innovation,
competitive economy. At the same time, the country will exploit new sources of knowledge and R&D as
growth in high value-added industries and services through further well as to exploit new
liberalisation to help the nation achieve a balanced and sustainable growth over sources of growth in high
the longer term. The sectors that the Government will likely place more emphasis value-added industries
on are the healthcare, leisure & tourism, creative industry & ICT, biotech & life and services
sciences, new agriculture & herbal and renewable energy industries (see our report
dated 28 January on “New economic model – What To Look For?). Similarly,
emphasis on branding to promote Malaysia’s products and services could be featured
in the NEM. On its part, the Government will embark on a new set of privatisation
initiatives called the Public-Private Partnership (PPP) in helping the Government to
The Government will
implement its development projects. Under the PPP, the public sector will be the
main purchaser of output and funding will be provided by the private sector. The embark on a new set of

Government’s involvement is through enforcement of key performance index (KPI) privatisation initiatives to

to ensure that high quality of output or services are delivered by the private sector. implement its
The move could help the Government to contain its budget deficit and spread the development projects
spending over the concession period as well as promote private investment.

Whilst the NEM will chart new direction for the economy, we believe the impact will The impact of the NEM,
only be felt more significantly over the medium term given the challenges however, will only be felt
that the country is facing. The country is suffering from brain drain and the shortage more significantly over
of skilled manpower for it to move up the value chain and to be transform into a the medium term given
services based economy. Meanwhile, Malaysian companies are venturing abroad in the challenges that the
search for growth and business opportunities, while the country is facing keen country is facing
competition in attracting foreign direct investment (FDI). As a result, the country
suffered a net outflow of direct investment in the last three consecutive years.

Indeed, we believe the successful implementation of the NEM still lies with the The success of the NEM
execution of key policy initiatives and the political will to force through still lies with the execution
changes. Whilst the launching of a Government Transformation Programme on 28 and the political will to
January to improve the Government’s delivery system is a good start, much remains force through changes
to be done to bring about a more competitive high-income economy.

Normalisation Of Extremely Loose Monetary Conditions Has Begun

In Some Countries

Meanwhile, the prospects of a sustainable global economic recovery have Prospects of a sustainable
improved significantly in recent months, in our view, despite various global economic recovery
challenges that threaten to derail it. This is primarily on account of a combination have improved
of factors, including aggressive policy stimulus around the globe where policymakers significantly in recent
are unlikely to roll it back prematurely, significant improvement in financial markets
months and the
and risk appetite of investors and more importantly, asset prices have reached a
normalisation of policies
favourable inflection point. Unlike during the crisis, investors are no longer fearful
has begun in some
of catching a falling knife and more substantial weakness in asset prices will be taken
countries
as investment opportunities. As a result, policymakers around the globe have

ECONOMIC 3 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
begun to exit their extremely loose policy and emergency lending
programmes, but the process remains gradual in our view, suggesting that its
impact on economic activities will unlikely be significant.

In the US, the normalisation of monetary conditions has already started when the Bank Negara Malaysia has
US Federal Reserve stopped buying the US$300bn US Treasury bills in October 2009 begun normalising the
and raised its discount rate by 25 basis points to 0.75% with effect from 19 February. country’s monetary
In Euroland, the European Central Bank (ECB) outlined part of its exit strategy in conditions by raising its
December 2009 and it further phased out some emergency tools in early March. In key policy rate by 25 basis
a number of countries in Asia, such as China, India, Taiwan, Hong Kong, South Korea points to 2.25% on 4
and Singapore, policymakers in these countries have taken measures to tighten March
credit conditions to prevent asset bubbles from building up. In Malaysia, Bank
Negara Malaysia has begun normalising the country’s monetary conditions by raising
its key policy rate by 25 basis points to 2.25% on 4 March.

Global Economic Recovery Picks Up Momentum

Indeed, the global economic recovery is gaining momentum. As it stands, The global economic
global manufacturing activities picked up for the last seven consecutive months, recovery is gaining
albeit at a more moderate pace in February, while services activities strengthened momentum
during the month (see Chart 3). Similarly, the OECD composite leading indicator’s
12-month rate of change strengthened to 9.6% in January, the fifth successive month
of increase and from +8.1% in December and +6.0% in November (see Chart 4).
The improvement was across the board, suggesting that prospects of OECD
countries’ economies are likely to improve in the months ahead.

Chart 3 Chart 4
Global Manufacturing And OECD Composite Leading
Activities Picking Up Indicator Points To Brighter Economic
Prospects
Index
ISM % 12-mth annualised rate of change
65
Services 30

25
60
➤

20
55
15
➤

50 10

5
45
0

40 ISM -5
Manufacturing
-10
35
Total OECD Japan US Euroarea China
-15
30
-20
05 06 07 08 09 10
00 01 02 03 04 05 06 07 08 09 10
Source: Markit Economics Source: OECD

In the US, the economy grew at a stronger pace in the 4Q, underpinned by inventory Improvement in the US
rebuilding and an increase in business spending. Indeed, manufacturing activities economy is gradually
continued to expand in February, albeit at a more moderate pace, while services trickling down to a better
activities picked up during the month. The improvement is gradually trickling job market and a
down to a better job market, as indicated by employment of temporary workers, sustained increase in
which picked up for the last five consecutive months up to February (see Chart 5). consumer spending
As a result, non-farm payrolls recorded a significantly smaller drop of an average
of 31,000 jobs a month in January-February, compared with a loss of 557,000 a
month in 1H 2009, while the unemployment rate was stable at 9.7% in February, the
same level as in January, after hitting a peak of 10.0% in November-December. An
improvement in the job market helped to sustain consumer spending in the country.
As it stands, the personal consumption expenditure (PCE) strengthened to an
annualised rate of 2.1% in January, from +1.7% in December and after hitting a low
of +1.1% in November (see Chart 6). Although an improvement in the housing
sector has weakened somewhat, it will unlikely pose a major drag to the US
economic recovery. As a whole, the US economy will likely recover to around
+3.0% in 2010, from -2.4% in 2009.

ECONOMIC 4 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
 Chart 5 Chart 6
US: Job Market Gradually Improving US: Consumer Spending
Heading Up

(‘000) % %annualised (Personal consumption

600 12 5 expenditure)
4
400
10
3
200

8 2
0
1
-200 6
0

-400 -1
4

-600 Employment in temporary help services (LHS) -2

Non-farm payrolls (LHS) 2

-800 -3
Unemployment rate (RHS)
-4
-1000 0
2005 2006 2007 2008 2009 2010
00 01 02 03 04 05 06 07 08 09 10
Source: US Bureau of Labor Statistics Source: US Bureau of Economic Analysis

Similarly, we expect the Euroland’s economy to gradually recover, despite the The Euroland’s economy
emergence of sovereign debt worries of late. As it stands, manufacturing activities will likely improve, while
continued to expand and at a faster pace in February, although services activities exports recovery will lift
moderated somewhat during the month (see Chart 7). Similarly, business the Japanese economy
confidence continued to improve, while consumer confidence held up at the highest
level in more than a year. Given its export dependency, the Japanese economic
recovery will likely be sustained into 2010 as well, in tandem with a recovery in
exports. Indeed, Japan’s exports surged by 40.9% yoy in January, after recording
a growth of 12.0% in December (see Chart 8), due partly to a lower base effect and
partly to a pick-up in global demand for the country’s exports.

Chart 7 Chart 8
Euroland: Manufacturing And Services Japan: A Strong Turnaround In Exports
Activities On Recovery Path
% yoy
Index PMI 50
65
40

60 30
➤

20
55
10

50 0

-10
45
-20

40 -30

35
PMI Manufacturing ➤ -40

-50
30 -60
00 01 02 03 04 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10

Source: Bloomberg Source: Bloomberg

In the same vein, China’s economy will likely continue to expand in the months China’s economy will likely
ahead, after recording +10.7% yoy in the 4Q. As it stands, manufacturing activities continue to expand in the
continued to expand for the last 12 consecutive months up to February, underpinned months ahead,
by a recovery in exports, which strengthened to 45.7% yoy in February, from underpinned by a
+21.0% in January and +17.6% in December (see Chart 9). Although fixed-asset recovery in exports and
investment in urban areas and money supply eased in January, growth remained an increase in domestic
strong. Meanwhile, the Chinese authorities have stepped up their efforts to control
demand
credit expansion, particularly to local governments, in a move to moderate the pace
of asset price inflation and reduce the potential risks of default.

ECONOMIC 5 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
 Chart 9
China: Exports Picking Up, While Manufacturing Activities Easing
But Likely To Be Temporary
Index % yoy
6 5 6 0

PMI mfg. 5 0
6 0
4 0

3 0

➤
5 5

2 0

5 0 1 0

4 5
-1 0

➤
-2 0
4 0
Exports -3 0

3 5 -4 0
2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0

Source: Bloomberg

The global economic recovery in 2010 will, however, remain gradual and The global economic
uneven, in our view, given sustained high unemployment situation in the key recovery in 2010 will,
developed countries, debt problems in some of the European countries, and deflation however, remain gradual
in Japan. and uneven

Exports On The Path To Recovery

As a whole, we expect a pick-up in global economic activities to translate into higher The country’s real exports
demand for the country’s manufactured goods and commodity products. Already, are projected to record a
worldwide semiconductor sales, one of the Malaysia’s key exports, strengthened to growth of 6.5% in 2010, a
47.1% yoy in January, the third consecutive month of increase and from +28.8% in rebound from -10.1% in
December. Also, the industry experts, the Semiconductor Industry Association and 2009
Gartner, projected worldwide semiconductor sales to a record growth of 10.2% and
10.3% respectively in 2010, a rebound from -9.0% in 2009. As a whole, we expect
the country’s real exports to record a growth of 6.5% in 2010, a rebound from
-10.1% in 2009.

Domestic Demand Will Likely Improve

Domestically, consumer and business confidence will likely improve further and Domestic demand is
translate into stronger spending, on the back of an improvement in economic projected to rise by 3.2%
prospects. As a result, domestic demand is projected to rise by 3.2% in 2010 in 2010, driven by an
(see Table 1), from -0.4% in 2009. This will likely be driven by an increase in increase in consumer
consumer spending, which is envisaged to grow at a stronger pace of 4.8% in spending
2010, after slowing down to +0.8% in 2009. The pick-up in consumer spending will
be underpinned by an improvement in the job market, while firmer commodity prices
will encourage rural households to spend. Also, the Government has put in more
efforts to promote the tourism industry. As it stands, manufacturers have started
to recruit workers for the last seven consecutive months up to December, while
tourist arrivals held up at 1.9 million in January or an increase of 1.4% yoy. These
will be supported by the one percentage point reduction in personal income tax rate
and the increase in personal relief implemented in the 2010 Budget. Similarly, we
believe high savings and rising consumerism as well as pent-up demand will continue
to provide support to consumer spending in the country. Although the imposition of
a service tax on credit and charge cards could impact consumer spending to some
extent, we believe it would unlikely be significant.

ECONOMIC 6 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
Table 1
GDP By Demand Aggregate (2000=100)

2007 2008 2009 2008 2009 2010(f) 2011(f)

4Q 1Q 2Q 3Q 4Q
% Growth in Real Terms

GDP 6.2 4.6 -1.7 0.1 -6.2 -3.9 -1.2 4.5 4.5 5.0
Consumption:
Private 10.4 8.5 0.8 5.3 -0.7 0.5 1.5 1.7 4.8 6.0
Public 6.5 10.9 3.7 12.7 2.1 1.0 10.9 1.3 -2.5 4.5
Total investment 9.6 0.8 -5.5 -10.2 -10.8 -9.6 -7.9 8.2 3.0 8.2
Private 11.8 0.8 -30.4 n.a n.a n.a n.a n.a 10.0 12.7
Pu b lic 7.1 0.7 22.6 n.a n.a n.a n.a n.a -1.5 4.9
Goods & services:
Exports 4.5 1.3 -10.1 -13.3 -15.2 -17.3 -13.4 7.3 6.5 7.7
Imports 6.0 1.9 -12.5 -10.2 -23.5 -19.7 -12.9 6.9 9.9 9.1
Agg.domestic demand 9.6 6.8 -0.4 2.8 -2.9 -2.2 0.4 3.0 3.2 6.3

(f): RHBRI's forecasts

In the same vein, we believe the private investment will likely bounce back in Private investment will
2010, albeit from a low base, as investors resume their investment on the back of also likely bounce back in
an improvement in global economic outlook. Also, a rise in capacity utilisation rate, 2010, albeit from a low
which rose to 74% in the 4Q, from 73% in the 3Q, will encourage some investors base, as investors resume
to increase spending. These will likely be enhanced by an improvement in business their investment on the
confidence as indicated by MIER’s business confidence index, which rose to 118.8 in back of an improvement
the 4Q, the highest level in nearly two years and from 113.7 in the 3Q. Already, in the global economic
businesses have begun spending as reflected in a pick-up in the imports of capital outlook
goods, which turned around to record a growth of 17.4% yoy in the 4Q, the first
increase in six consecutive quarters and from -13.2% in the 3Q. Similarly,
manufacturing investment approvals by the Malaysian Industrial Development
Authority rose by 42.8% yoy in the 4Q, after four consecutive quarters of
contraction. Public investment, however, is projected to contract in 2010, in line
with a cutback in development expenditure by the Federal Government due to fiscal
consolidation. This will likely be made worse by a sharper drop in non-financial
Public spending, however,
public enterprises’ (NFPEs) development spending during the year. Still, fixed
capital formation is envisaged to increase by 3.0% in 2010, a rebound from -5.5% is projected to contract

in 2009, as a pick-up in private investment will mitigate the decline in public during the year, in line

investment. Meanwhile, public consumption will likely contract during the year, in line with a fiscal consolidation
with the government’s efforts to cut its budget deficit.

Fiscal Consolidation Will Hold Back Growth

In its 2010 Budget, the Federal Government has undertaken a bold move to The Federal Government’s
reduce its budget deficit, after rising sharply due to the implementation of two budget deficit is projected
economic stimulus totaling RM67bn to cushion the Malaysian economy from a severe to narrow significantly to
global recession. This will be achieved via the improvement in quality and efficiency
5.6% of GDP or RM40.5bn
of spending on subsidies, supplies & services and in other areas. Indeed, we
in 2010, from a deficit of
understand that the Government’s procurement of goods and services will be based
7.0% of GDP or RM47.4bn
on competitive bidding to ensure transparency and value for money. As a result,
in 2009
the Federal Government’s budget deficit is projected to narrow
significantly to 5.6% of GDP or RM40.5bn in 2010 (see Table 2), from a deficit
of 7.0% of GDP or RM47.4bn in 2009. Indeed, the budget deficit incurred in 2009
was smaller than the initial estimate of 7.4% of GDP or RM51.1bn due partly to a
smaller-than-expected development expenditure.

ECONOMIC 7 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
 Table 2
Federal Government Financial Position

2008 2009(e) 20101(f) 2009(e) 2010(f)

(RM bil) (%, change)

Revenue 159.8 158.6 148.4 -0.7 -6.4

Operating Expenditure 153.5 157.1 138.3 2.3 -12.0
Current balance 6.3 1.5 10.2
Gross development expenditure 42.8 49.5 51.2 15.5 3.5
Less : Loan recoveries 1.0 0.6 0.6 -40.0 0.0
Net development expenditure 41.9 48.9 50.6 16.7 3.6
Overall balance -35.6 -47.4 -40.5
% to GDP -4.8 -7.0 -5.6
1
Budget estimate, excluding 2009 tax measures e : Estimates f : Forecasts
Source : MOF's Economic Report 2009/2010

The bold move to contain its budget deficit, in our view, will prevent the country’s The Government’s move,
sovereign credit rating from deteriorating. This remains a key concern to the together with a cutback in
authorities, after the Fitch Rating Agency downgraded Malaysia’s long-term local development expenditure
currency rating to single-A on 9 June 2009, from single-A-plus, on concerns over the by NFPEs, will contribute
country’s ballooning budget deficit. The Government’s move, together with a to a projected reduction in
cutback in development expenditure by non-financial public enterprises (NFPEs), real GDP growth in 2010
however, will contribute to a projected reduction of 0.8 percentage points from real
GDP growth in 2010.

Manufacturing Sector To Bounce Back And Services Sectors To

Strengthen

On the supply side, we envisage a broad-based recovery in economic activities from Manufacturing sector will
manufacturing to services, construction, agriculture and mining sectors. Value added rebound in 2010, on the
in the manufacturing sector is projected to bounce back and expand by 7.5% in back of a pick-up in
2010, from -9.3% in 2009 (see Table 3). Growth will likely be driven by a pick-up exports and domestic
in output of export-oriented industries, on the back of an improvement in global demand
demand for the country’s exports. As it stands, output of the export-oriented
industries rebounded to increase by 5.0% yoy in the 4Q, the first increase in six
quarters and from -10.0% in the 3Q, on account of a pick-up in the production of
E&E products; chemical products; wood & wood products; rubber and pulp, paper &
board products as well as a smaller decline in the production of textiles, apparel &
footwear. Similarly, output of domestic-oriented industries will likely pick up, on
account of an improvement in consumer spending and private investment. Already,
the production of domestic-oriented industries grew by 5.5% yoy in the 4Q, a
rebound from -5.7% in the 3Q. This was the first increase after four consecutive
quarters of contraction, due to a pick-up in output of consumer-related products such
as food and beverages & tobacco as well as a smaller decline in the production of
transport equipment. A smaller drop in the production of building materials also
helped.

Table 3
GDP By Industrial Origin At 2000 Prices

2007 2008 2009 2008 2009 2010(f) 2011(f)

4Q 1Q 2Q 3Q 4Q

% Growth in Real Terms

GDP 6.2 4.6 -1.7 0.1 -6.2 -3.9 -1.2 4.5 4.5 5.0
Agriculture 1.4 4.0 0.4 0.5 -4.3 0.3 -0.5 6.0 2.3 2.8
Mining 2.0 -0.8 -3.8 -5.7 -5.2 -3.6 -3.5 -2.8 1.2 2.0
Manufacturing 3.1 1.3 -9.3 -8.8 -17.9 -14.5 -8.6 5.3 7.5 8.0
Construction 4.7 2.1 5.7 -1.6 1.1 4.5 7.9 9.2 3.1 2.8
Services 9.6 7.2 2.6 5.7 -0.2 1.6 3.4 5.1 4.5 4.7

(f) : RHBRI's forecasts

ECONOMIC 8 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
In the same vein, the broad services sector is projected to grow at a faster The services sector is
pace of around +4.5% in 2010, compared with +2.6% in 2009, in line with higher projected to grow at a
consumer spending and trade activities. Also, the Government’s efforts to promote faster pace, as consumer
the sector and a sustained increase in tourist arrivals as a result of an improvement spending and trade
in confidence will boost activities in the sector. As a result, we expect activities in activities pick up
transport & storage sub-sector to turn around during the year. At the same time,
activities in communications, wholesale & retail trade and accommodation &
restaurants sub-sectors will likely strengthen. We also expect activities in finance &
insurance and real estate & business sub-sectors as well as output of utilities to pick
up, in tandem with an improvement in business activities during the year.

The agriculture sector is also envisaged to bounce back to +2.3% in 2010, Agriculture sector is
after slowing down to +0.4% in 2009. This is on account of a pick-up in palm oil envisaged to rebound,
production due to the low base effect as well as expanded matured areas. As it mainly on account of a
stands, palm oil production fell by 1.0% in 2009, compared with +12.1% in 2008. pick-up in palm oil
At the same time, the decline in output of saw logs will likely narrow further, after production
falling by a smaller magnitude of around 10.9% in January-November 2009,
compared with -14.8% in 2008. Similarly, the production of rubber will likely bounce
back during the year, given better pricing and after going through three consecutive
years of decline. Meanwhile, the non-commodity sub-sector such as fisheries,
livestock and crops will contribute to growth as well, on the back of the
implementation of various projects by the Government.

Similarly, we expect mining output to record a modest growth of 1.2% in Mining value added is
2010, after two consecutive years of contraction and compared with -3.8% in 2009. projected to increase
This is mainly on account of a pick-up in the production of crude oil and liquefied modestly, mainly on
natural gas (LNG) due to higher demand. Also, several new oil fields are expected account of a pick-up in the
to start production, while the expansion of MLNG Dua is expected to increase production of crude oil and
production of LNG during the year. Meanwhile, crude oil production contracted by LNG
4.1% in 2009, after slowing down to +0.8% in 2008, while LNG output fell by 3.7%,
compared with +0.1% during the same period.

In tandem with a slower increase in the Government’s development expenditure, Construction activities,
construction activities are projected to moderate to 3.1% in 2010, from however, will likely
+5.7% in 2009. As a result, we expect the growth in civil engineering sub-sector moderate due to fiscal
to moderate during the year. This, however, will likely be mitigated by a pick-up in consolidation
construction activities in the residential property sub-sector as demand conditions
have improved and property developers are coming up with more launches, while
construction activities in non-residential property sub-sector are still ongoing. As it
stands, new permits for sales and advertising of houses strengthened for the second
consecutive quarter to +100.8% yoy in the 4Q, after four consecutive quarters of
decline. Similarly, housing approvals by the Ministry of Housing and Local
Government surged by 111.6% yoy in the 4Q, the second consecutive quarter of
increase and after four straight quarters of contraction.

Monetary And Loan Expansion To Remain Supportive Of Economic

Growth

The broader money supply, M3, moderated to +7.9% yoy in January 2010, after Monetary policy to remain
reaching a high of +10.0% in November. Despite the moderation, growth remained supportive of economic
commendable, indicating that the underlying economic activities are still expanding. growth and M3 growth to
The slower growth was reflected in a slowdown in government operations due to a expand at a faster pace
more moderate increase in disbursement of government funds after picking up
strongly in mid-2009. This was, however, mitigated by a pick-up in demand for funds
by the private sector, mainly on account of a stronger loan growth, which was offset
partially by a slowdown in the issuance of securities. An improvement in net
external operations, on account of inflow of foreign portfolio funds, also helped. As
it stands, total holdings in fixed income instruments by foreign investors increased
to RM73.3bn in January 2010, from RM69.2bn in December. This was the seventh
consecutive month of increase and the highest level in 17 months. Going forward,

ECONOMIC 9 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
we expect monetary policy to remain supportive of economic growth and M3 will
likely pick up to around 10.5% in 2010, from +9.1% at end-2009, in line with
a pick-up in economic activities.

Loan growth, however, strengthened to 8.6% yoy in January, from +7.8% in Loans will pick up in 2010,
December and a low of +7.0% in November. This was the strongest growth in eight in tandem with a recovery
months, underpinned by a pick-up in corporate and household borrowings during the in the economy
month. The stronger growth in corporate loans was driven by a pick-up in business
loans, which strengthened to 3.5% yoy in January, from +2.6% in December and
a low of +0.6% in November. This was aided by a smaller drop in loans extended
to small and medium enterprises (SMEs), which fell by 0.1% yoy during the
month, compared with -6.0% in November, suggesting that business activities of the
SMEs are gradually improving. In terms of sector, a faster increase in loans was
due to a pick-up in loans extended to agriculture, utilities, real estate and transport,
storage & communications sectors. These were aided by a smaller decline in loans
given to the manufacturing sector and a turnaround in loans channelled to wholesale
& retail trade and restaurant & hotel sectors. These were, however, offset partially
by a slowdown in loans extended to the mining & quarrying, construction and
finance, insurance & business sectors. Similarly, household loans grew at a faster
pace of 10.4% yoy in January, compared with +9.8% in December and +9.5% in
November. This was reflected in loans extended for the purchase of passenger cars
and houses as well as for credit cards during the month. Going forward, we expect
the banking system’s loans to expand by 9.0% in 2010, from 7.8% in 2009, in
tandem with the pick-up in the economy.

In terms of asset quality, the expansion in loan base, coupled with the recovery in The NPL ratios are likely
non-performing loans (NPLs) and bad debt written-offs, further reduced the banking to improve in 2010
system’s NPL ratios. As a result, the 3-month gross NPL ratio of the banking system
eased to 3.20% of total loans in January, from 3.36% in November and a high of
4.11% in January last year. Similarly, the 3-month net NPL ratio fell to 1.73% of
total loans in January, from 1.92% in November and 2.20% a year ago. Going
forward, NPLs will likely improve in 2010, in line with the recovery in the
economy. As a whole, we expect the banking system’s 3-month gross and net NPL
ratios to ease to around 3.0% and 1.5%, respectively, by end-2010, compared with
3.2% and 1.8%, respectively, at end-2009.

Current Account Surplus To Narrow And Ringgit Will Likely

Appreciate

In tandem with a pick-up in economic activities, imports are expected to rise faster The current account
than that of exports. This will lead to a smaller trade surplus and we expect the surplus of the balance of
merchandise trade account surplus to narrow to RM133.2bn in 2010, from a surplus payments is projected to
of RM141.5bn in 2009. At the same time, we envisage the deficit in the income narrow in 2010
account to widen during the year, as non-resident controlled companies repatriate
higher dividend on the back of improving corporate earnings. These, however, will
likely be mitigated by an improvement in the services account, which is projected
to record a larger surplus during the year, in line with a pick-up in travel receipts.
Similarly, repatriations of salaries and wages by foreign workers are likely to drop,
in line with the Government’s policy of reducing the employment of foreign workers.
As a result, we expect the current account surplus of the balance of payments
to narrow to around RM97.1bn or 13.4% of GNI in 2010, from a surplus of
RM112.7bn or 17.3% of GNI in 2009 (see Table 4). Still, the current account surplus
remains sizeable and will contribute to a build-up in the country’s foreign exchange
reserves and fuel domestic liquidity in the financial system. As at end-February
2010, excess liquidity (including repos) mopped up by the Central Bank from the
banking system remained sizeable at RM220.2bn, albeit marginally lower than
RM236.4bn at end-February last year.

ECONOMIC 10 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
 Table 4
Balance Of Payments
2008 2009 2008 2009 2010(f) 2011(f)
4Q 1Q 2Q 3Q 4Q

(RMbn)

Current account 129.5 112.7 29.6 31.4 28.8 25.3 27.3 97.1 98.5
(% of GNI) (18.1) (17.3) n.a n.a n.a n.a n.a (13.8) (13.0)
Goods 170.6 141.5 38.8 37.0 33.1 33.4 38.0 133.2 132.9
Services 0.2 3.2 0.4 2.5 1.0 0.1 -0.4 1.1 1.7
Income -23.7 -12.6 -5.6 -3.9 -1.5 -1.6 -5.5 -22.2 -23.1
Current transfers -17.5 -19.4 -4.0 -4.2 -3.9 -6.7 -4.7 -15.0 -15.0

Capital account 0.6 -0.2 -0.0 -0.0 -0.0 -0.0 -0.0 0.0 0.0
Financial account -118.5 -82.9 -71.8 -29.8 -24.2 -11.1 -17.9 -35.5 -21.5
Errors & omissions* -29.9 -15.7 -19.6 1.7 -2.4 -2.7 -12.3 -25.0 -20.0
Overall balance -18.3 13.9 -61.9 3.3 2.1 11.5 -3.0 36.6 57.0

Outstanding reserves^ 317.4 331.3 317.4 320.7 322.9 334.4 331.4 367.9 424.9
(US$)^ 91.5 96.7 91.5 87.8 91.5 96.0 96.7 111.5 132.8

(f): RHBRI's forecast ^: As at end-period

* : Reflect mainly revaluation gains/losses from Ringgit depreciation/appreciation and statistical discrepancies

Capital outflow, on the other hand, will likely ease further to RM35.5bn in 2010, Capital outflow, on the
after slowing down to RM82.9bn in 2009. This is on account of a pick-up in portfolio other hand, will likely ease
investment in 2010, after recording a small inflow in 2009, in line with an further in 2010, in line with
improvement in the country’s economic prospects. Similarly, net direct investment an improvement in the
is projected to record a net inflow in 2010 due to higher inward direct investment, country’s economic
as investors resume their investment, in tandem with an improvement in global prospects
economic prospects. These, however, will likely be offset partially by an increase
in Malaysians’ other investments abroad, including loans and trade credits, as
businesses look for new opportunities overseas.

As a whole, the overall balance of payments is projected to record a larger The overall balance of
surplus of around RM36.6bn in 2010, compared with a surplus of RM13.9bn in 2009, payments is projected to
after taking into account a larger deficit in errors & omissions. Consequently, the record a larger surplus
country’s foreign exchange reserves will likely increase to US$111.5bn by end-2010, and foreign exchange
from US$96.7bn at end-2009. reserves will rise in 2010

The build-up in foreign exchange reserves will continue to provide an underlying The ringgit will likely
support to the ringgit. The movement of the ringgit, however, has been volatile in fluctuate at between
recent months, as investors adjusted to changes in policy and the pace of economic RM3.30 and RM3.40
recovery. This was further complicated by concerns over Greece’s deficit problem
against the US dollar,
that had weighed down the euro. Nevertheless, the ringgit has resumed its
before settling at around
appreciation against the US dollar by 1.2% from 1 February to 4 March, after
RM3.30 by end-2010
weakening by 0.5% in the previous two months and compared with a gain of 4.0%
in September-November. The stronger ringgit was partly reflecting of the hike in
interest rate by Bank Negara Malaysia on 4 March. This was also in line with the
appreciation of Singapore dollar, Japanese yen and the euro, which rose by 0.5%,
0.9% and 0.5% respectively against the US dollar from 1 February to 4 March, after
falling by the corresponding rates of 1.6%, 4.3% and 7.3% in the previous two
months. Chinese renminbi, however, remained stable during the period, as it has
been unofficially pegged to the US dollar since July 2008. As a whole, we expect
the ringgit to fluctuate at between RM3.30 and RM3.40 against the US
dollar, before settling at around RM3.30/US$ by end-2010, as Asian
currencies (ex-Japan) strengthen against the US dollar on account of a stronger
economic recovery in Asia and a faster pace of policy normalisation. Based on the
real effective exchange rate (REER) model, the fair value of the ringgit is currently
estimated at around RM3.43/US$.

ECONOMIC 11 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
Higher Price Pressure In 2010, But Manageable

The headline inflation rate picked up to 1.3% yoy in January, compared with Headline inflation rate
+1.1% in December and -0.1% in November (see Chart 10). This was the second picked up in recent
straight month of increase and at a faster pace, as the higher base effect is wearing months
off and food prices as well as the core inflation rate are rising, on the back of rising
demand. Food & non-alcohol beverage prices inched up to 1.2% yoy in January,
from +1.1% in December and +0.9% in November, due to rising commodity prices.
Similarly, the core inflation rate grew at a faster rate of 1.4% yoy in January,
compared with +1.1% in December. This was the second consecutive month of
increase due to a pick-up in the costs of transport, which rebounded to increase by
0.7% yoy in January, from -0.9% in December and -6.8% in November, as the
higher base effect is gradually wearing off. This was made worse by a faster
increase in the costs of recreation services and a smaller drop in the prices of
clothing & footwear. These were, however, mitigated by slower increases in the
prices of furnishing & household products, the costs of healthcare and education as
well as charges at restaurants & hotels.

Chart 10
Inflation Trending Up And Normalisation Of Monetary Conditions
Has Begun

% p.a % yoy
4 .0 10

3 .5 OPR 8

3 .0
6
2 .5
4
➤

2 .0
2
1 .5

1 .0 ➤ 0
Total
0 .5 CPI -2
(RHS)
0 .0 -4
05 06 07 08 09 10
Source: Department of Statistics

Going forward, inflation rate will likely inch up, on the back of stronger domestic Inflation rate will likely
demand. Higher crude oil price, which is projected to fluctuate at between US$80- trend up to 2.0% in 2010,
100/barrel in 2010, compared with an average of US$62/barrel in 2009, and other on the back of stronger
commodity prices will also contribute to a pick-up in consumer prices. In addition, domestic demand
the Government plans to gradually remove some of the subsidies in order to reduce
its financial burden. Already, the Government has allowed sugar price to be
increased by 20 sen and it has removed the subsidy for white bread at the beginning
of the year. At the same time, it is reviewing whether to reduce or remove the
cooking oil subsidy. As a whole, we believe inflation will likely trend up to 2.0%
in 2010, from +0.6% in 2009. Meanwhile, the Government has decided on 4 March
to scrap its petrol subsidy restructuring scheme, following negative feedback from
the public and after postponing its initial rollout plan in May. As a result, the
Domestic Trade, Cooperatives and Consumerism Minister said that the Government
has no plans to raise or reduce petrol pump prices for now.

Normalisation Of Interest Rates Will Continue

While the headline inflation is likely to gradually trend up, we believe it will likely be We expect Bank Negara to
manageable. Nevertheless, following the rate hike by the Central Bank on 4 March, raise its OPR by another
in a move to normalise interest rates from the current unprecedented low levels, we 25 basis points in July
believe it will raise it again, albeit at a measured pace. As a result, we expect Bank 2010 to 2.5% and the OPR
Negara to raise its OPR by another 25 basis points in July 2010 to 2.5% will likely stay at this level
and the OPR will likely stay at this level until the end of the year. We believe the until the end of the year
Central Bank would not raise interest rates at every policy meeting given
expectation of a slow and uneven global economic recovery. Nevertheless, as the

ECONOMIC 12 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
economy has turned around in the 4Q of last year and is expected to improve
further in 2010, there is a need to bring interest rates back to a more neutral level
to prevent financial imbalances from building up. This is considered as
normalisation and not tightening per se, as a mild and gradual increase in interest
rates from an extremely low level would unlikely affect consumer spending and
business activities in a material way. Assuming that the Malaysian economy goes
back to trend growth of around 5-6% in the next few years, a more neutral level
of the OPR will likely be around 3.0-3.5%, in our view.

ECONOMIC 13 OUTLOOK
A comprehensive range of market research reports by award-winning economists and analysts are exclusively available for download from www.rhbinvest.com
 RHB DEALING AND RESEARCH OFFICES
MALAYSIA
RHB Investment Bank Bhd
Level 10, Tower One, RHB Centre,
Jalan Tun Razak
50400 Kuala Lumpur
P.O. Box 12699
50786 Kuala Lumpur, Malaysia
Tel (General) : (603) 9285 2233

Dealing Office
Tel (Dealing) : (603) 9285 2288
Fax (Dealing) : (603) 9284 7467

RHB Research Institute Sdn Bhd

Level 10, Tower One, RHB Centre,
Jalan Tun Razak
50400 Kuala Lumpur
P.O. Box 12699
50786 Kuala Lumpur, Malaysia
Tel (Research) : (603) 9280 2160
Fax (Research) : (603) 9284 8693

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and
RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such
circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available
data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other
business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an
offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated
herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against
RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial
circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors.
RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek
the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual
circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any
loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing
activities as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage,
banking and financing activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect
transactions, for its own account or the accounts of customers, in debt or equity securities or loans of any company that may be
involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company
and the respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons”
are seeking or will seek investment banking or other services from the companies in which the securities have been discussed/covered
by RHBRI in this report or in RHBRI’s previous reports.
This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed
by, and may not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment
banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have
received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive
factors and firm revenues.

◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆

Lim Chee Sing

Director

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation.
Additional information on recommended securities, subject to the duties of confidentiality, will be made available
upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and
RHBRI accepts no liability whatsoever for the actions of third parties in this respect.