March 20, 2013

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

MALAYSIA ECONOMIC UPDATE

BNM 2012 Annual Report - Revving up We concur with Bank Negara Malaysia's (BNM) upbeat assessment of the Malaysian economy’s prospects, with the central bank expecting another year of inspiring growth (GDP growth estimate of 5-6% vs. CIMB's 5.5% and consensus’s 5%). Underpinning this momentum is sturdy consumption and robust investment drivers, supported by measures and initiatives to boost income, consumption and investment. There remain risks, largely external-driven, to the country's growth outlook, in BNM's view. As risks to growth and inflation are roughly balanced, we expect BNM to keep interest rates at 3% in 1H before considering normalising it when economic conditions permit.

Growth momentum intact... We share Bank Negara Malaysia’s (BNM) conviction that the Malaysian economy will record another year of inspiring growth (GDP growth estimate of 5-6% vs. CIMB's 5.5% and consensus’s 5%). While domestic catalysts (consumption and investment) will continue to anchor growth, the cyclical upturn in exports should improve economic prospects.

...anchored by firm domestic demand Malaysia's growth rebalancing continues. The contribution of private consumption growth to GDP has increased sharply since 2010 and will remain robust (estimated 7.1% vs. 7.4% p.a. in 2010-12), supported by measures to boost household income and expand the social safety net. Robust private investment growth (estimated 15.6% vs. 22% in 2012), alongside public spending, will continue to fuel total investment growth. More projects under the Economic Transformation Programme (ETP) will be realised this year and have a spill-over effect on the construction, real estate and financial services sectors.

Keeping a balanced monetary stance We expect BNM to maintain the delicate balance between managing the risks of rising prices and ensuring sustained economic growth. Amid improving risk sentiment, global conditions will be keenly watched. The central bank also indicated that policy consideration will be given towards avoiding the build-up of financial imbalances, which will destabilise macroeconomic and financial stability.

Figure 1: Snapshot of Bank Negara Malaysia's and CIMB's estimates for 2013

Indicators Unit 2008 2009 2010 2011 2012

BNM CIMB

Real GDP % 4.8 -1.5 7.2 5.1 5.6 5.0-6.0 5.5

Current account balance RM bn 131.4 110.7 88.1 97.1 60.0 42.7 58.6

% of GDP 17.1 15.5 11.1 11.0 6.4 4.2 5.8

Inflation % 5.4 0.6 1.7 3.2 1.6 2.0-3.0 2.5-3.0

Unemployment rate % 3.3 3.7 3.3 3.1 3.0 3.1 3.1

2013E

SOURCES: BANK NEGARA MALAYSIA (BNM), CIMB RESEARCH

CIMB Analyst

Lee Heng Guie

T (60) 3 20849667 E hengguie.lee@cimb.com

“The Malaysian economy is expected to continue to remain on a solid and steady growth trajectory in 2013. Following the economic restructuring, domestic demand has increasingly been the driver of growth.”

─ Bank Negara Malaysia

Governor's statement, Annual

Report 2012

Sources: CIMB. COMPANY REPORTS

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2

1. Malaysia's economic outlook for 2013

GDP growth momentum remains intact at 5-6% for 2013

Bank Negara Malaysia (BNM) remains upbeat about the country's growth momentum, pegging 2013's GDP growth estimate at 5-6% (5.6% in 2012), a notch higher than the 4.5-5.5% projected by the Treasury during the 2013 Budget in Sep 2012. This is in line with our estimate of 5.5% but higher than consensus’s 5%. Robust domestic demand has been clearly demonstrated since 2012. With the support of income and consumption-boosting measures and initiatives, we anticipate a continued shift towards internal growth rebalancing.

Figure 2: Real GDP is expected to strengthen to 5-6% this year Figure 3: Domestic demand continues to call the shot

Title:

Source:

Please fill in the values above to have them entered in your report

-10

-5

0

5

10

15

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013E*

%

Malaysia's real GDP growth 20-year average growth=5.5%

Severe recession = -7.4% Mild recession = -1.5%

Global GDP growth Developing Asia's GDP growth

Title:

Source:

Please fill in the values above to have them entered in your report

-6

-4

-2

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013E (BNM)

2013E (CIMB)

% pt contribution to GDP growth

Domestic demand Net trade

*Mid-point of BNM's estimate.

SOURCES: BNM, IMF, CIMB RESEARCH

SOURCES: CIMB, COMPANY REPORTS

We concur with BNM's cautious optimism about global economic recovery as downside risks to a sustained recovery remain considerable despite some broad improvement in mature economies. There is no doubt that the resolute actions by major central banks have reduced tail risks in global financial markets but ongoing fiscal issues, high unemployment and tight lending standards still litter the recovery path. Top on the list of external concerns is the potential re-emergence of instability in the euro area. Other risks include the influx of capital flows to emerging markets, causing asset price volatility, and higher inflationary pressures induced by global commodity and food prices. In Asia, growth continues to be supported by domestic demand and a pick-up in intra-regional trade, which bode well for Malaysia's exports.

Growth drivers are broadening

BNM expects domestic demand to hold the economy up, backed by favourable domestic catalysts - improved income growth, stable labour market conditions and an enhanced investment climate. Private sector spending will be leading the charge, although the rate of growth will be more moderate. With the private sector assuming the growth driver seat, public spending growth will be lower as fiscal consolidation continues.

Our growth estimates for demand-side components and supply-side sectors are lower than BNM's estimates. Consumer spending, which was more robust than expected in recent years, is projected to normalise to a more sustainable pace this year (+7.1% and +3.6% pts to GDP vs. +7.7% and +3.8% pts in 2012). Some consumption drivers are 1) cash transfers and financial assistance of RM6.2bn to households, students and individuals, 2) RM2bn for a RM80-320 pay rise for 1.4m civil servants and the lifting of the armed forces' and police's pay scales to parity with other government servants, as well as 3) the implementation of a minimum wage. The BR1M, which gives cash payments of RM500 each to 4.3m households, will be made a yearly programme. Private investment, which recorded the swiftest expansion of 22% in 2012, is expected to be sustained at a

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3

strong double-digit rate of 15.6% this year. This will be largely underpinned by increased capital spending in services (retail trade and restaurants, telecommunication and aviation, business services), oil and gas, manufacturing (mainly in construction-related clusters, petrochemical, electronics and electrical products, food, beverages and motor vehicles) as well as the ETP and 10MP projects. Although the MRT and LRT are public-driven projects, they will have positive spin-off effects on private investment activity on the back of the builders and contractors participating in these projects. Capital spending by public enterprises is expected to remain large, mainly in the energy, transportation and communication sub-sectors.

On the supply side, all sectors are expected to continue to grow, albeit slower, powered by services (5.5% vs. 6.4% in 2012), mainly consumption-related sub-sectors (such as retail trade, accommodation and restaurants), and aided by a revival in trade-related activity. Tourist arrivals rose 1.3% to 25m persons in 2012 (24.7m in 2011) and will rise to 26m persons in 2013. The ASEAN market contributed the highest number of tourists at 75.1% of the total following various competitive offers by low-cost carriers, such as AirAsia, Mandala Airlines, SEAir and Tiger Airways, besides the introduction of new tourism products. Tourism revenue generated increased 3.9% to RM60.6bn or 6.5% of GDP in 2012 (RM58.3bn or 6.6% of GDP in 2011). Looking ahead, we expect the upcoming Visit Malaysia Year 2014 to provide a boost to the tourism industry. The improved manufacturing growth (4.9% vs. 4.8% in 2012) will be firmly driven by the construction-related building materials manufacturing industries in tandem with the arrival of a construction boom. A gradual revival in the exports of electronics and electrical products will also help to sustain the manufacturing sector. The construction sector is expected to record another year of strong growth (15.9% vs. 18.5% in 2012), lifted by the ongoing construction of MRT, LRT extensions, the Second Penang Bridge and oil and gas projects, such as the Janamanjung power plant and the Kebabangan gas field.

Figure 4: Real GDP by demand-side component

2011 2012

BNM CIMB BNM CIMB BNM CIMB

% yoy % yoy % yoy % yoy

Real GDP 5.1 5.6 5.0-6.0 5.5 5.0-6.0 5.5 100.0 100.0

Private consumption 7.1 7.7 7.1 6.5 3.6 3.3 51.5 51.3

Public consumption 16.1 5.0 3.6 -1.0 0.5 -0.1 12.9 12.4

Private investment 12.2 22.0 15.6 15.1 2.4 2.3 17.0 16.9

Public investment -0.3 17.1 7.5 5.4 0.8 0.6 11.4 11.2

Exports 4.2 0.1 1.8 3.0 1.7 2.8 92.0 93.0

Imports 6.2 4.5 3.9 5.8 3.4 5.0 85.3 86.9

◄------- 2013E -------► ◄------- 2013E -------► ◄------ 2013E -----►

% pt contribution % of GDP

SOURCES: BNM, CIMB RESEARCH

Figure 5: Real GDP by supply-side sector

2011 2012

BNM CIMB BNM CIMB BNM CIMB

% yoy % yoy % yoy % yoy

Real GDP 5.1 5.6 5.0-6.0 5.5 5.0-6.0 5.5 100.0 100.0

Agriculture 5.9 0.8 4.0 3.0 0.3 0.2 7.2 7.1

Mining -5.7 1.4 5.0 2.5 0.4 0.2 8.4 8.1

Construction 4.6 18.5 15.9 14.0 0.5 0.5 3.7 3.7

Manufaturing 4.7 4.8 4.9 4.3 1.2 1.1 24.8 24.7

Services 7.0 6.4 5.5 6.1 3.0 3.3 54.6 55.0

◄------- 2013E -------► ◄------- 2013E -------► ◄------- 2013E -------►

% pt contribution % of GDP

SOURCES: BNM, CIMB RESEARCH

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Figure 6: Private investments continue to drive total investments this year

Figure 7: Investment to GDP share rises to 28.4% in 2013

Title:

Source:

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-4

-2

0

2

4

6

8

10

-10

-5

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013E (BNM)

% pt. contribution to GDP growth% yoy

Total investments (% pt contr.) (RHS) Priv. investments (% pt contr.) (RHS)

Pub. investments (% pt contr.) (RHS) Total investment growth

Priv. investment growth Pub. investment growth

Title:

Source:

Please fill in the values above to have them entered in your report

12.1 13.0 12.4 11.6 12.5 13.415.5

17.0

10.310.3 10.4 10.9

10.6 10.1

11.211.4

22.423.3 22.8 22.5

23.2 23.5

26.7

28.4

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012 2013E (BNM)

% of GDP

Private investment Public investmnt Total investment

SOURCES: BNM, CIMB RESEARCH SOURCES: BNM, CIMB RESEARCH

Current account surplus will narrow in the near term

In the annual report (pages 28-31), BNM presented a detailed analysis of the narrowing current account surplus in the balance of payments, identifying the reasons as well as the policy challenges faced. Malaysia's current account surplus has been on a narrowing trajectory in recent years; the surplus shrank substantially to RM60bn or 6.4% of GDP in 2012 from RM97.1bn or 11% of GDP in 2011, weighed down by weaker merchandise trade (due to subdued export growth relative to imports as well as larger investment income outflows). For 2013, BNM expects a moderate current surplus of RM42.7bn or 4.2% of GDP (vs. CIMB's RM58.6bn or 5.8% of GDP) due mainly to strong investment-related imports amid a modest export recovery (+1.4% vs. CIMB's +4-5%). BNM's analysis concluded that the ongoing structural changes in the economy will be key factors in determining the future path of Malaysia's current account balance. In the near term, the expansion in investment activity will contribute to a further narrowing in the current account surplus. Nevertheless, the continued investment in new growth areas should expand the country's export earnings capacity and, hence, help to shore up the current account surplus over time. BNM's implicit views that a narrowed current account surplus is not a concern is in line with our analysis in our published report dated 7 Mar 2013 (Macro Pulse : Does it matter? ).

Figure 8: Current account surplus will narrow to RM42.7bn or 4.2% of GDP in 2013

Title:

Source:

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0

3

6

9

12

15

18

21

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E (BNM)

% of GDPRM bn

Current account balance % of GDP (RHS)

BNM RM42.7bn (4.2% of GDP)

CIMBRM58.6bn (5.8% of GDP)

SOURCES: BNM, CIMB RESEARCH

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Higher inflation in 2013 but still manageable

After a benign inflation environment in 2012, BNM estimates headline inflation to average 2-3% this year (1.6% in 2012), matching our expectation of 2.5-3.0%. The drivers of inflation in 2013 are expected to come from 1) higher global prices of selected food commodities due to adverse weather conditions and low stockpiles of corn and wheat, as projected by the Food and Agriculture Organisation of the United Nations (FAO) in its Nov 2012 edition of the Food Outlook, 2) the adjustments to domestic administered prices as the government resumes its subsidy rationalisation, and 3) the moderate impact of the minimum wage policy on companies’ total costs. BNM downplays concerns about the presence of demand-driven price pressures as it believes these will be contained, in line with the moderate growth in domestic demand. That said, the output gap is expected to narrow as the economy expands at a rate close to its potential growth (5.0-5.5% currently), suggesting higher inflation pressures.

Figure 9: Inflation is projected to rise to 2-3% in 2013 Figure 10: Narrowing output gap

Title:

Source:

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-8

-4

0

4

8

12

2001 2003 2005 2007 2009 2011 2013E (BNM)*

%

Headline inflation Core inflation Producer price index growth

*Mid-point of BNM's estimate.

SOURCES: BNM, CIMB RESEARCH

SOURCES: BNM

2. Monetary policy

BNM will extend its rate pause

Notwithstanding some improvement in the global economy and still-strong domestic growth momentum, we believe it will be a challenge for the central bank to strike a balance between supporting steady growth and managing the spillover from very easy global monetary conditions. A prolonged low interest rate environment could harm returns for savers and investors as well as fuel asset price bubbles. BNM indicated that the focus of monetary policy in 2013 will be on managing the risk of rising prices whilst supporting domestic economic conditions. The central bank also touched on the interplay between external and domestic drivers that will shape the monetary course through the year. These include the uneven global recovery, the high global liquidity-induced volatile capital flows into emerging markets and the higher expected domestic inflation.

BNM has kept the overnight policy rate (OPR) at 3% for a record 11th straight meeting since July 2011. As risks to growth and inflation are roughly balanced for now, we expect the central bank to remain on the sidelines for a while longer and keep a keen eye on external developments. We anticipate rate normalisation in 2H13 if economic conditions permit. We keep our end-2013 policy rate at 3.00-3.25%.

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Figure 11: Policy rate to be held unchanged for a longer while

Title:

Source:

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0

3

6

9

12

15

Jan-98 May-99 Sep-00 Jan-02 May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10 May-11 Sep-12

% p.a.

Malaysia Overnight policy rate US Fed funds rate SRR ratio

SOURCES: BNM, BLOOMBERG, CIMB RESEARCH

3. Continued two-way flows of capital

FDI and portfolio flows remain solid

Malaysia remains attractive to private capital inflows, buoyed by the high global liquidity conditions and favourable domestic pull factors. Foreign direct investment (FDI) inflows have maintained their momentum since rebounding from a slump of RM5.1bn (US$1.5bn) in 2009. Between 2010 and 2012, FDI inflows amounted to RM95bn (US$30.5bn) or RM31.7bn (US$10.2bn) a year, aided by a recovery in global FDI, improved domestic economic conditions and investment prospects as well as predictable investment policies. Various global benchmarks and surveys show that Malaysia has fared reasonably well in terms of 1) AT Kearney’s FDI confidence (10th in 2012 vs. 21st in 2010), the World Bank’s ease of doing business (12th in 2013 vs. 18th in 2012) and the IMD World’s competitiveness ranking (14th in 2012 vs. 16th in 2011). While progress is being made with reforms to boost Malaysia's standing among investors, we believe a more lasting impact will require accelerated market and economic reforms, including improving broad-based productivity and enhancing its investment climate. In 2012, FDI inflows were mainly to manufacturing (58.2% of total), oil and gas (12.8%), non-financial services (19.1%), financial services (8.9%) and others, mainly agriculture and construction (0.9%).

We expect gross FDI inflows to rise RM30bn-40bn (US$9.8bn-13bn) in 2013-14 as there are positive drivers to counteract the negatives: stable economic fundamentals, ETP projects and Malaysia’s regional integration via bilateral FTAs and the ASEAN Economic Community. In 2011-12, Malaysia also intensified its investment liberalisation with respect to foreign equity ownership in the service sector in 15 out of the 18 service subsectors, covering professional services, wholesale and retail services, education, telecommunications, healthcare, courier services and incineration services. Three more subsectors, namely architectural, engineering and quantity surveyor services, will be liberalised this year.

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Figure 12: FDI inflow is expected to increase to RM30bn-40bn in 2013-14

Figure 13: More than half of gross FDIs went into manufacturing in 2012

Title:

Source:

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0

1

2

3

4

5

0

10

20

30

40

50

2006 2007 2008 2009 2010 2011 2012 2013E (CIMB)

2014F (CIMB)

% of GDPRM bn

Foreign direct investments % of GDP (RHS)

Title:

Source:

Please fill in the values above to have them entered in your report

AgricultureRM0.3bn

(0.3%)Mining

RM13.2bn

(12.8%)

ManufacturingRM59.9bn

(58.2%)

ConstructionRM0.6bn

(0.6%)

Wholesale & retail trade

RM10.3bn(10.0%)

Information & communication

RM4.2bn(4.1%)

Financial & insurance

RM9.1bn(8.9%)

Other servicesRM5.2bn

(5.0%)

ServicesRM28.8bn

(28.0%)

Gross FDI by sector in 2012(RM102.9bn)

SOURCES: DOS, BNM, CIMB RESEARCH Numbers in parentheses refer to % share of total gross FDI.

SOURCES: BNM, CIMB RESEARCH

It is noteworthy that direct investment abroad (DIA) by Malaysian companies also remained robust, accelerating from RM6.8bn per year in 2000-05 to RM39.8bn per year in 2006-2012, as companies continued to explore business opportunities abroad. We expect this positive trend to continue, in tandem with rising investment prospects and wider market accessibility. These investments were largely channelled into the services (led by domestic financial institutions, utilities and telecommunication equipment), oil and gas (primarily in the exploration and production business and downstream processing activities) and manufacturing sectors.

Figure 14: Direct investment abroad by Malaysian companies rose for the fourth year

Figure 15: About 60% of Malaysian overseas investment channelled into services sector in 2012

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Source:

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1

2

3

4

5

6

7

0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011 2012

% of GDPRM bn

Direct investment abroad % of GDP (RHS)

Title:

Source:

Please fill in the values above to have them entered in your report

AgricultureRM1.6bn

(1.7%)

MiningRM28.5bn

(31.5%)

ManufacturingRM5.4bn

(6.0%)

ConstructionRM1.1bn

(1.3%)

Wholesale & retail trade

RM20.8bn(23.0%)

Information & communication

RM2.0bn(2.2%)

Financial & insurance

RM21.7bn(24.0%)

Other servicesRM9.4bn

(10.3%)

ServicesRM53.9bn

(59.5%)

Gross DIA by sector in 2012(RM90.5bn)

SOURCES: DOS, BNM, CIMB RESEARCH Numbers in parentheses refer to % share of total gross DIA.

SOURCES: BNM, CIMB RESEARCH

Portfolio investment inflows were unabated, averaging RM44.5bn per year in 2010-12 after slumping to net outflows of RM85.2bn in 2008 during the global financial crisis. Both the push factors (the very easy global monetary conditions in mature economies) and pull drivers (the favourable growth prospects and high yield differentials) lured capital into domestic debt and equity securities. Foreigners were net buyers of Malaysian equities for the third straight month in Feb, pumping in RM1.7bn (RM2.5bn in Jan 2013 and RM0.8bn in Dec 2012). Foreign-owned Malaysian debt securities surged to RM229bn at end-Jan 2013

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(RM225.4bn at end-2012) and foreign shareholdings of Malaysian Government Securities hit a new high of 44.6% as at end-Jan. Looking ahead, we expect domestic companies' earnings momentum to remain positive, sustained by the ETP, higher economic growth prospects as well as potential currency gains, which will draw the interest of portfolio investors.

Figure 16: Strong portfolio investment inflows, partly fuelled by high global liquidity conditions

Figure 17: Foreign holdings of Malaysian debt securities amounted to RM229bn at end-Jan 2013…

Title:

Source:

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0

60

120

180

240

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 As of Jan

2013

RM bn

Others Malaysian Government Securities Bank Negara Monetary Note

SOURCES: BNM SOURCES: BNM, CIMB RESEARCH

Figure 18: Regional economies' foreign holdings of government bonds

Figure 19: Foreigners were net buyer of RM1.7bn Malaysian equities in Feb 2013

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Source:

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0

10

20

30

40

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13

% of total government bond

Malaysia Indonesia Thailand

Title:

Source:

Please fill in the values above to have them entered in your report

20

21

22

23

24

25

-4

-2

0

2

4

6

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

% RM bn

Net change in foreign holdings of Malaysian equities

% of total Malaysian equities (RHS)

SOURCES: BNM, CIMB TREASURY, CIMB RESEARCH SOURCES: BURSA MALAYSIA, CIMB RESEARCH

4. Managing risks arising from household indebtedness

Higher household debt ratio of 80.5% at end-2012

Although household loan growth moderated for the second year to 13% in 2012 from 13.4% in 2011, the level of household debt rose to 80.5% of GDP in 2012 (75.8% in 2011) due to slower economic growth. It is noteworthy that indicators of aggregate household resilience remain sound, buffered by solid financial and liquid assets: 1) household financial assets are 2.24x that of household debt (vs. 2.24x in 2011), 2) household liquid financial assets to household debt improved to 145.8 in 2012 vs. 144.7 in 2011, 3) the debt repayment ratio fell to 43.9 from 45.2 in 2011, and 4) the impaired loans ratio of the household sector improved to 1.5 in 2012 (1.8 in 2011).

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Figure 20: Household debt to GDP ratio stood at 80.5% at end-2012

Figure 21: Lower debt repayment ratio and impaired loan ratio

Title:

Source:

Please fill in the values above to have them entered in your report

64.1

80.5

160.3

180.0

0

40

80

120

160

200

0

400

800

1,200

1,600

2,000

2004 2005 2006 2007 2008 2009 2010 2011 2012

% of GDPRM bn

Household (HH) debt HH financial assets

HH debt-to-GDP ratio (RHS) HH financial asset-to-GDP ratio (RHS)

Title:

Source:

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0

2

4

6

8

38

40

42

44

46

2006 2007 2008 2009 2010 2011 2012

%%

Debt repayment ratio Impaired loans ratio (RHS)

SOURCES: BNM, CIMB RESEARCH SOURCES: BNM, CIMB RESEARCH

Non-bank financial institutions (NBFI), including development financial institutions (DFI) which are regulated by the central bank, contributed about 12% of total credit to the household sector. These institutions provided a large share of personal financial credit to households, registering 57% of the total. In 2012, total credit on all facilities extended by the three largest NBFIs (comprising a DFI, a large cooperative and a building society) expanded at a faster rate of 23.1% (vs. 17.1% in 2011). This was driven primarily by a jump in personal financing activity, which has expanded 30% to date (25.1% in 2o11, 28.7% in 2010). NDFIs approved more than 600,000 new personal financing facilities worth RM43bn. About 80% of the personal financing was extended to salaried civil servants based on an automatic salary deduction scheme administered by Biro Perkhidmatan Angkasa (BPA). By income category, the majority of the borrowers earns a monthly income of less than RM3,000. The BPA scheme prescribes an aggregate deduction threshold of 60% of a borrower's total income net of statutory and other direct deductions from his salary. This lending practice helps to reduce credit risk and preserve the loan quality of the NBFI, which resulted in an impaired loan ratio of 1.6 for personal loans financing. Notwithstanding this, BNM indicated that it will continue to monitor the lending activities of other NBFI in order to contain its potentially wide spillovers to the household sector.

Figure 22: Composition of credit providers to household sector Figure 23: Household financing by purpose

Title:

Source:

Please fill in the values above to have them entered in your report

Banking system81.7%

Development financial

institutions8.5%

Treasury Housing Loan Division

4.8%

Other non-bank lenders

3.4%

Insurance sector1.6%

Title:

Source:

Please fill in the values above to have them entered in your report

Purchase of residential

properties46.8%

Purchase of motor vehicles

20.9%

Purchase of non-residential

properties9.2%

Personal use8.9%

Purchase of securities

6.9%

Credit cards5.3%

Others2.0%

SOURCES: BNM SOURCES: BNM

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BNM also touched on the developments in the property market, which has been a focus of macro surveillance in the context of maintaining financial stability given the financial institutions' exposure to the property sector. As at end-2012, total exposure of financial institutions to the domestic property market amounted to about RM480bn or 51.2% of GDP. Banks' exposure to the property market came up to RM458.9bn or 24% of banking system assets. A significant 66.2% of the total was end-financing for the purchase of residential properties, which made up 27.4% of total outstanding loans of the banking system.

Figure 24: Financial institutions' exposures to the property market

Title:

Source:

Please fill in the values above to have them entered in your report

End-financing for residential property

65.9%

End-financing for shops10.8%

End-financing for office space

4.3%

End-financing for other non-residential property

12.3%

Working capital for construction of properties

2.9%

Bridging financing for construction of properties

1.7%

PDS held by financial institutions

1.6%Investment in properties

0.6%

SOURCES: BNM

It noted that the sustained increase in house prices have reduced home affordability in some locations, especially for those in the lower- to middle-income groups. While the upward trend in residential property prices was partly driven by macroeconomic factors, the element of investment purchases also had an influence on house prices, although they were not fuelled by excessive credit.

While some lending restrictions (LTV cap of 70% was imposed for third properties and above as well as responsible lending guidelines requiring the banks to use net income in assessing borrowers' eligibility for consumer loans) and higher property resales tax (RPGT of 10-15% for property disposed of within the first five years of purchase) have been implemented to stem speculative activity, the central bank stated that it will remain vigilant and continue to monitor the situation closely. In BNM's view, the issues of affordability will need to be addressed through comprehensive measures, including fiscal and supply-side action, whilst it continues to keep tabs on incoming supply in the commercial property space, alluding to the potential risk of oversupply in the commercial property sector. Looking across the region, with asset prices rising to heady levels not seen since the credit boom five years ago, some central banks and regulators in the region have also implemented stricter macroprudential measures, including lending curbs, taxes on quick resales and higher stamp duties on property transactions.

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Figure 25: Growth of Malaysian house price index softened in 3Q12

Figure 26: Rising prices of residential properties warrant a close watch

Title:

Source:

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0

3

6

9

12

1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

% yoy

Malaysian house price index Average 2001-2012 =4.5%

Title:

Source:

Please fill in the values above to have them entered in your report

-3

0

3

6

9

12

15

18

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

% yoy

Terraced house High rise unit

Detached house Semi-Detached house

SOURCES: BNM, CEIC, CIMB RESEARCH The above growth rates were 3 quarters moving average rate.

SOURCES: BNM, CEIC, CIMB RESEARCH

Figure 27: Higher RPGT will have a moderating effect on property prices

Prior Apr 2007 (Individual) Prior Apr 2007 (Corporate) Prior Apr 2007 (Foreigners) Apr 2007 1 Jan 2010 1 Jan 2012 1 Jan 2013

1st year 30 30 30 0 5 10 15

2nd year 30 30 30 0 5 10 15

3rd year 20 20 30 0 5 5 10

4th year 15 15 30 0 5 5 10

5th years 5 5 30 0 5 5 10

After 5th year 0 5 5 0 0 0 0

Real Property Gains Tax (RPGT, %) with effect from:Disposal of

properties

SOURCES: BNM, MOF, CIMB RESEARCH

Overall, BNM’s Financial Stability Committee (FSC) and the Financial Stability Executive Committee (Executive Committee) deliberated about developments in the lending and property markets. Issues discussed include assessing potential risks associated with the exposure of the financial system to the property market, rising property prices and the possible oversupply condition in commercial properties (such as shopping complexes and offices and retail space). It was determined that while the risks remain low, continued vigilance is called for.

Malaysia was assessed for the first time under the Financial Sector Assessment Program (FSAP) in 2012, which is conducted jointly by the International Monetary Fund and the World Bank. The outcome of the assessment reaffirmed the strength and resilience of the country's banking sector, which is backed by a high level of compliance to domestic regulatory and supervisory framework. The robustness of financial market infrastructure, including the international standards of the deposit insurance system, also safeguard the stability of the financial system. The risks identified in the assessment, namely high household indebtedness, rising house prices and rapid credit growth, have long been on BNM's radar. The central bank reiterated that it will continue to monitor the business expansion and lending activities of the NBFIs, the high leverage of the lower-income households and developments in the property market.

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March 20, 2013

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