IMF likely to cut its global GDP growth forecasts for 2016 ... · PDF fileMalaysia- Real GDP...

19 July 2016

Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd)

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Economic Update

Malaysia- Real GDP growth forecast revision

Economic Research (603) 2146 7540

[email protected] [email protected]

External economic uncertainty may slow Malaysia’s GDP IMF likely to cut its global GDP growth forecasts for 2016 and 2017

Going into 2H16 and 2017, apart from China’s economic slowdown and weak commodity prices, the downside risks to the global economic outlook have also risen following the uncertainty over Brexit on 23rd June 2016. We believe the International Monetary Fund (IMF), which will release its updated World Economic Outlook (WEO) report, is likely to cut its global economic forecasts for 2016 and 2017. WTO expects global trade to remain sluggish at 2.8% in 2016

According to the World Trade Organization (WTO), growth in global trade will again be slower at 2.8% in 2016, which will be the fifth consecutive year with less than 3% growth. Global trade volume weakened from flat growth in 2015 to a slight contraction of 0.2% in the first four months of 2016, while growth in world industrial production (IPI) slowed from 1.7% yoy to 1.3% over the same period. Global semiconductor sales projected to decline in 2016

Global semiconductor sales contracted by 6.5% yoy in the first five months of 2016, as sales across the region disappointed. In view of the weak performance, World Semiconductor Trade Statistics (WSTS) expects the global semiconductor sales to decline by 2.4% in 2016 to US$327bn, compared to an earlier forecast of a 1.4% increase. We are lowering Malaysia’s real GDP growth forecast to 4.2% in 2016

In view of its highly open and trade-dependent economy, we believe Malaysia’s main exports of electronic and electrical products, which account for close to 36% of the country’s total exports, will be affected by slower global semiconductor sales and a slowing global economy. For 2016, we are revising our real GDP growth forecast for Malaysia to 4.2%, from our earlier expectation of 4.5% (5.0% in 2015). For 2017, we are projecting real GDP growth to recover slightly to 4.4%. External demand likely to trend in line with exports of E&E

In view of the weaker trade performance in January-May as well as uncertain exports growth in the months ahead, we are also projecting gross export growth to slow from 1.9% in 2015 to 1.5% estimated for 2016. However, growth in imports is projected to increase to 3%, higher than 0.4% in 2015. As a result, we expect trade balance to narrow to RM85.7bn for the year, 9.4% lower than RM94.6bn in 2015. Ringgit to trade at around RM3.95/US$ towards the end of 2016

We expect Malaysia’s current account surplus to remain substantial at about RM25bn (2.1% of GDP) in 2016, compared with RM34.7bn (3% of GDP) in 2015. The country’s budget deficit target is likely to achieve the targeted -3.1% of GDP in 2016 (3.2% of GDP in 2015). With good domestic economic fundamentals and stable international reserves, the Malaysian Ringgit should appreciate gradually against the US$. We see Ringgit trading at RM3.95/US$ by end-2016 (RM3.97/US$ currently). BNM is likely to maintain its accommodative monetary policy

In the first five months of 2016, the inflation rate averaged around 2.9% yoy, and we are projecting inflation to remain manageable at 2.5% for 2016 (2.1% in 2015). Recently, Bank Negara Malaysia (BNM) lowered its overnight policy rate (OPR) by 25bps to 3.0%, the first rate reduction since February 2009, taking pre-emptive action to ensure sustainability of economic growth. We believe BNM will likely maintain its policy rate at 3.0% in 2016, with a possible cut to the statutory reserve requirement (SRR), if the external environment deteriorates.

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IMF likely to cut its global GDP growth forecasts for 2016 and 2017

Going into 2H16 and 2017, apart from China’s economic slowdown and weak commodity prices, the downside risks to global economic outlook have also risen following the uncertainty over Brexit on 23rd June 2016, where the United Kingdom’s (UK) decision to leave the European Union (EU) is expected to have an impact on economic growth, especially in UK’s external trade and investment. We believe the International Monetary Fund (IMF), which will release its updated World Economic Outlook (WEO) report on 19th July 2016, is likely to cut its global economic forecasts for 2016 and 2017. Brexit to have an impact on global GDP growth in 2016 and 2017

In April, the IMF had reduced its 2016 global GDP growth forecast by 0.2 percentage points from 3.4% to 3.2%, and it may lower the forecast further to 3.1% in the upcoming report (3.1% in 2015). If so, this would be the fifth time the IMF would have cut its global GDP growth forecast for 2016. Similarly, we believe the IMF will also be revising downward its forecast for the global economy for 2017, likely by 0.1 percentage point to 3.3%, from 3.4% projected in April. However, as global growth should remain above 3%, this will alleviate concerns that the world economy could be heading into a recession due to the Brexit referendum. Balance of risks to global GDP growth still tilted to the downside

Going forward, there remain some global uncertainties from the repercussion of the UK’s EU referendum, which has also led the IMF to forecast a slower Eurozone economic growth, from 1.6% in 2016 to 1.4% in 2017, citing the negative impact of Brexit. Whilst risks have somewhat subsided following the appointment of the new UK Prime Minister, great uncertainties still lie with the timeline and process of negotiating a new relationship with the EU. The new relationship will likely reflect a trade-off between access to the single EU market and independence in the UK in setting its own regulations. Regardless of the arrangement, we believe the impact on UK’s output and income will likely be negative and substantial. Fig 1: UK trade with EU Fig 2: UK FDI from EU

Source: CEIC

IMF presented a cautious view of the UK’s economy

The new relationship with the EU will likely transform the UK economy through various macroeconomic channels such as trade and investment, the labour market and productivity, and public finances. While it is currently difficult to quantify the impact, most studies have suggested that leaving the EU would likely leave the UK worse off economically in the long run. In the adverse scenario, the IMF forecasted that the UK economy is likely to be in recession in 2017 with a 0.8% contraction, and the GDP level 5.6% below the baseline by 2019 before uncertainty and risk effects ebb away.

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Fig 3: IMF projection of UK real GDP growth Fig 4: IMF projection of GDP deviation from baseline

Source: IMF

US economy to grow at 2.2% in 2016 but with downside risks

On the US front, in its latest 2016 Article IV, the IMF had slashed its economic growth forecast by 0.2 percentage point for 2016, from 2.4% to 2.2% currently, in view of the uncertainty in the external environment. However, the IMF kept the US real GDP forecast for 2017 unchanged at 2.5%. However, with recent indicators showing US housing sector activity, employment, and consumption remaining healthy, there is a good chance that the US Federal Reserve may still raise its Federal Funds rate in the coming months, which will likely complicate China’s currency movement and capital flows. China’s economy may be exacerbated by capital outflows

The IMF has maintained China’s economic growth forecasts at 6.5% for 2016 and 6.2% for 2017, and we do not expect any sharp downward revisions in the coming WEO report. China’s real GDP growth was sustained at 6.7% yoy in 2Q16 (6.5% in 1Q16), supported by higher retail sales, as well as a housing recovery fueled by credit growth; aggregate financing and new yuan loans also rose stronger than expected. However, we believe risks of capital outflows remain, and the Chinese Yuan may come under some downward pressure from external developments, such as the US Fed raising interest rates, despite the IMF approving the addition of the Chinese Yuan to its benchmark basket of reserve currencies, i.e Special Drawing Rights (SDR). In Japan, in addition to the delay in the second sales tax hike from 8% to 10% by 2.5 years to October 2019, Prime Minister Shinzo Abe has also indicated more fiscal stimulus measures to stave off deflation. While the latest Tankan survey showed that big manufacturers’ sentiment remained unchanged at +6 in 2Q16, weak external demand and the strong Yen have hurt exports, while consumer prices fell at the fastest pace in three years in May. This may prompt Bank of Japan (BOJ) to further ease monetary policy in the near term. The IMF is projecting Japan’s economy to expand at a more moderate pace of 0.5% in 2016, before slowing down further to 0.3% in 2017. Slower ASEAN region GDP growth from external uncertainties

In view of the slower global GDP growth, we believe IMF will likely lower its ASEAN region GDP growth forecast by 0.1 percentage point to 4.7% in 2016 and 5.0% for 2017, as compared with the respective 4.8% and 5.1% estimated earlier in April. However, uncertainties in the region will likely prevail, and ongoing concerns in the financial markets from Brexit, China’s slowdown, the US monetary policy and weak commodity prices, would all likely reduce domestic demand in the advanced economies and create some spillovers into emerging market and developing economies.

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Fig 5: IMF forecasts for global growth (*AffinHwang’s estimates) IMF Forecast

2016 2017

2013 2014 2015 Jan-16 Apr-16 Jul-16 Jan-16 Apr-16 Jul-16

Global 3.3 3.4 3.1 3.4 3.2 *3.0 3.6 3.5 *3.3

Advanced economies 1.1 1.8 1.9 2.1 1.9 *1.8 2.1 2.0 *1.7

US 1.5 2.4 2.4 2.6 2.4 2.2 2.6 2.5 2.5

Euro Area -0.3 0.9 1.6 1.7 1.7 1.6 1.7 1.7 1.4

Japan 1.6 0.0 0.5 1.0 0.5 0.5 0.3 -0.1 -0.1

China 7.7 7.3 6.9 6.3 6.5 6.5 6.0 6.2 6.2

Asean-5 5.1 4.6 4.7 4.8 4.8 *5.1 5.1 5.1 *5.0

Source: IMF

The Composite Leading Indicator (CLI) of the Organization for Economic Co-operation and Development (OECD), an index designed to anticipate turning points in economic activity relative to trend, was flat at 99.6 in April 2016, signalling a mild loss of growth momentum in most major economies. Similarly, we believe the level in the monthly global Purchasing Managers Index (PMI), a measure of business confidence in the expansion of production, sales and employment, has supported the OECD’s cautious view on global growth in recent months. Based on the world trade statistics published by CPB Netherlands Bureau for Economic Policy Analysis, global trade volume slowed from flat growth in 2015 to a slight contraction of 0.2% in the first four months of 2016, while growth in the world industrial production (IPI) moderated from 1.7% yoy to 1.3% over the same period. Figure 6: Global trade and Global IPI Figure 7: Changes in WTOI and components indices

Source: CPB Netherlands World Trade Monitor Source: World Trade Organization

WTO expects global trade to remain sluggish at 2.8% in 2016

According to the World Trade Organization (WTO), in its latest report, growth in global trade will again be slower at 2.8%, which would be the fifth consecutive year with less than 3% growth. The WTO Indicator (WTOI), which is designed to provide "real time" information on the trajectory of world trade relative to recent trends, fell further to 99 in 2Q16. The current reading of WTOI of 99 is slightly below trend, signaling continued sluggish trade growth in 2Q16 and likely in 2H16. Given the euro area’s substantial weight in world trade, this slowdown would have spillovers to many other economies, including emerging markets although the impact is expected to be limited. Given the changes in the WTOI and component indices, in which the weakest link to world trade was the electronics subcomponent, declining sharply by -4.3% yoy in April, and consistent with the trends in global semiconductor sales, we believe manufacturers are turning slightly more cautious on new orders and international trade in electronics, dampened by weaker global economic conditions, especially seen in China.

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%yoy Global Indusrial production

World trade%yo y

F eb-16 M ar-16 A pr-16 A pr-16

WTOI -0.3 -0.4 -0.4 -1.3

Export orders 0.9 0.9 0.8 2.1

Air freight -0.4 -0.4 -0.4 -3.2

Container shipping -0.2 -0.3 -0.3 -4

Automobiles -1.3 -1.3 -1.2 -1.2

Electronics -1.4 -1.3 -1.3 -4.3

Raw materials 1.3 1 0.6 9.5

%mo m

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Global semiconductor sales projected to decline in 2016

Global semiconductor sales contracted by 6.5% yoy in the first five months of 2016, as sales across the region disappointed. In view of the weak performance, World Semiconductor Trade Statistics (WSTS) expects the world semiconductor sales to decline 2.4% in 2016 to US$327bn, compared to an earlier forecast of a 1.4% increase. Contraction is projected for the whole region, with growth returning to positive territory in 2017. Fig 8: World Semiconductor Trade forecast

Source: World Semiconductor Trade Statistics (WSTS)

Lower global growth to affect Malaysia’s GDP in 2016 and 2017

In view of its highly open and trade-dependent economy, we believe Malaysia’s main exports of electronic and electrical products, which account for close to 36% of the country’s total exports, will be affected significantly by slower global semiconductor sales. We expect growth in Malaysia’s output of radio, television & communication equipment and office, accounting and computing machinery products, which include ICT products such as semiconductors and integrated circuits (ICs), to slow from uncertain overseas demand. For 2016, in view of likely lower global growth, we are revising downward our real GDP growth forecast for Malaysia to 4.2%, from our earlier expectation of 4.5% (5.0% in 2015). Fig 9: Malaysia’s real GDP forecasts

%yoy % of GDP Ppt contribtution to growth

2015 2016F

old 2016F

new 2017F 2015 2016F

new 2017F 2015 2016F

new 2017F

GDP by Expenditure Components

Total Consumption 5.6 5.0 4.9 4.8 65.8 66.3 66.6 3.7 3.2 3.2

Private consumption expenditure 6.0 5.8 5.5 5.4 52.4 53.0 53.5 3.1 2.9 2.9

Public consumption expenditure 4.3 2.0 2.5 2.5 13.5 13.3 13.0 0.6 0.3 0.3

Total Investment 3.7 3.8 2.3 3.7 25.8 25.3 25.1 1.0 0.6 0.9

Private investment expenditure 6.4 6.0 3.0 4.0 16.9 16.7 16.6 1.1 0.5 0.7

Public investment expenditure -1.0 -0.5 1.0 3.0 8.9 8.6 8.5 -0.1 0.1 0.3

Domestic Demand 5.1 4.7 4.2 4.5 91.6 91.6 91.7 4.7 3.8 4.1

Exports 0.7 3.0 2.0 2.5 73.0 71.4 70.1 0.5 1.5 1.8

Imports 1.3 3.1 1.7 2.4 64.4 62.8 61.6 0.8 1.1 1.5

GDP (2010 real prices) 5.0 4.5 4.2 4.4 100.0 100.0 100.0 5.0 4.2 4.4

GDP By Kind of Economic Activity

Agriculture, Forestry and Fishing 1.0 0.5 -0.3 1.0 8.8 8.5 8.2 0.1 0.0 0.1

Mining and Quarrying 4.7 3.5 2.0 2.5 8.9 8.8 8.6 0.4 0.2 0.2

Manufacturing 4.9 5.0 4.5 4.6 23.0 23.1 23.1 1.1 1.0 1.1

Construction 8.2 6.5 6.3 6.5 4.4 4.5 4.6 0.3 0.3 0.3

Services 5.1 5.0 5.0 5.1 53.5 54.0 54.3 2.8 2.7 2.7

GDP (2010 real prices) 5.0 4.5 4.2 4.4 100.0 100.0 100.0 5.0 4.2 4.4

Source: BNM, Affin Hwang estimates

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For 2017, we are projecting real GDP growth to recover slightly to 4.4%, with downside risks likely to be influenced by external economic conditions, including the strength of the US economy. Domestic demand to be supportive of economic growth but slower

We expect Malaysia’s aggregate domestic demand to slow from 5.1% in 2015 to 4.2% estimated for 2016, driven largely by a relatively healthy expansion in private sector activities. Consumer spending, which accounts for about 53% of GDP, continued to be supported by healthy growth in income and employment. However, slower domestic demand has been reflected in lower production in the domestic-oriented manufacturing industries. We expect private consumption growth to slow from 6% in 2015 to 5.5% in 2016 and 5.4% in 2017. Similarly, while private investment has been supported by investments in the services and manufacturing sectors, there are also some downside risks. Growth in Malaysia’s private investment, which is highly correlated with external conditions, remains uncertain from the short-term external uncertainties, which may lead to some postponement and delay in the actual implementation, as evident in the lower oil & gas (O&G) investment (due to falling oil prices) in 2016. We project private investment to grow at a slower pace of 3% in 2016, compared with an annual growth of 6.4% in 2015. On the supply side, key growth drivers of the economy will be driven by services sectors, but in tandem with the slower domestic demand, growth in the sector is expected to slow slightly from 5.1% yoy in 2015 to 5% estimated for 2016. On a quarterly trend basis, we expect Malaysia’s real GDP growth to expand at a slightly slower pace of around 4% yoy in 2Q16, before recovering to around the 4.2-4.3% range in 2H16. Inventory likely to drag on 2Q16 and 3Q16 GDP growth

In 1Q16, Malaysia’s real GDP growth rose by 4.2% yoy (4.5% in 4Q15), where the expansion was partly supported by an inventory accumulation of RM2.4bn, which contributed 2.0 percentage points to GDP growth. This was the second inventory buildup since 3Q13, with the first in 2Q15 when the Goods and Services Tax (GST) was introduced, see Fig 10. Changes in the inventory level have contributed positively to GDP growth in the last four quarters (2Q15-1Q16), when the stock accumulation (in 2Q15 and 1Q16) was driven by weaker external demand and domestic demand. We believe businesses may have started lowering production to clear some inventory stocks. The inventory drawdown is likely to result in some drag on the country’s real GDP growth, especially in 2Q16.

Fig 10: Changes in inventories, domestic demand and GDP

Source: CEIC

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Budget deficit of 3.1% of GDP is achievable with current oil prices

The country’s budget deficit target is likely to achieve the -3.1% of GDP in

2016 (3.2% of GDP in 2015). As announced in the revised 2016 Budget in

January 2016, with the low oil price assumption, operating expenditure

was lowered by RM4.5bn and development expenditure by RM5bn.

However, with oil prices having recovered to an average of US$41 per

barrel currently, compared to the government’s revised target of US30-35

per barrel, on the public expenditure, we believe there is the possibility of

some reinstatement of development expenditure to support the domestic

economy, if the external environment deteriorates significantly.

Fig 11: Original and recalibrated Budget 2016

RM bn, unless stated

otherwise

Original

(Oct-15)

Recalibrated

(Jan-16)

Projected average

change per US$1/bbl

Oil price (US$ per barrel) 48.0 35.0 30.0 48-35 35-30

Revenue 225.7 217.9 216.3 0.6 0.3

Total expenditure 264.4 256.4 254.9 0.6 0.3

Opex 215.2 211.2 210.7 0.3 0.1

Net DE 49.2 45.2 44.2 0.3 0.2

Gross DE 50.0 46.0 45.0 0.3 0.2

Loan recoveries -0.8 -0.8 -0.8 0.0 0.0

Fiscal balance -38.8 -38.5 -38.7 0.0 0.0

Fiscal balance (% of GDP) -3.1 -3.1 -3.1 0.0 0.0 Source: Ministry of Finance (MOF)

Government underspent DE budget in the past five years

However, we do not expect a strong pick-up in development expenditure,

where the government has consistently underspent the DE allocation in

the past five years, with the utilisation rate ranging between 84-95%, see

Fig 12. The underutilisation of DE allocation primarily comes from

economic services, especially within trade and industry, as well as the

transport segment. Economic services account for more than 60% of gross

DE. Furthermore, the room for higher development expenditure will be

limited by the need to accommodate operating expenditure, see Fig 13.

As such, we expect DE allocation to be under-utilised in 2016, although it

should be higher than the RM40.8bn in 2015.

Fig 12: Development expenditure Fig 13: Operating expenditure

Source: Ministry of Finance (MOF)

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Current account to remain in surplus, price of LNG likely to recover

Malaysia has recorded an uninterrupted monthly trade surplus for the 223rd consecutive month. The persistent episodes of current account surpluses (i.e reflecting an increasing excess of savings over investment) will continue to be an economic fundamental in Malaysia. However, in tandem with subdued external demand as well as weak commodity prices, Malaysia’s exports have not staged a strong rebound despite a low base in 1H15. This was partly due to weakness in the exports of commodity-related products, as a result of low commodity prices. In particular, exports of liquefied natural gas (LNG) have contracted continually since January 2015, with the average export unit value falling from RM2,546 per tonne in January 2015 to RM950 per tonne in May 2016, the lowest level in six years. This has resulted in the share of LNG to total exports falling from around 8.3% in 2014 to 4.4% in 2016 YTD. Nevertheless, as LNG prices track crude oil prices with a lag of 3-6 months, and with the recovery in oil prices, it is likely that LNG prices will start to recover in 2H16. Fig 14: LNG trade surplus and export unit value Fig 15: Petroleum related trade surplus

Source: BNM

In view of the weaker trade performance in January-May as well as uncertain exports growth in the months ahead, we are projecting gross export growth to slow from 1.9% in 2015 to 1.5% in 2016. However, growth in imports is projected to increase to 3%, higher than 0.4% in 2015, due to stronger demand for consumption goods and capital goods, with the possible kick-off of some construction projects. As a result, we expect the trade balance to narrow to RM85.7bn for the year, 9.4% lower than RM94.6bn in 2015. We also expect Malaysia’s current account surplus to remain substantial at about RM25bn (2.1% of GDP) in 2016, compared with RM34.7bn (3% of GDP) in 2015. Fig 16: Malaysia’s exports to the UK accounts for only 1.2%

Source: Department of Statistics Malaysia

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Net export - crude & petroleum products

Crude oil export unit value

China13.0%

Japan9.5%

Asean 28.1%

US9.4%

Others 29.8%

Netherlands3.0%

Germany 2.5%

UK 1.2%France 0.7%

Italy 0.5%

Others 2.2%

EU10.1%

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Exchange rate, inflation and interest rate assumptions Ringgit likely to trade at RM3.95/US$ towards the end of 2016

Since early 2016, in tandem with the recovery in global oil prices, the Malaysian Ringgit has appreciated by close to 7.5% from RM4.29 against the US$ as at end-2015 to RM3.97/US$ currently. Since early 2016, the country’s international reserves of Bank Negara Malaysia (BNM) rose by US$1.9bn to US$97.2bn as at end-June 2016 (US$95.3bn as at end-2015). Going forward, the country’s sustained current account surplus (from monthly trade surpluses) should provide some buffer to the reserve level. With good domestic economic fundamentals and stable international reserves, the Ringgit should appreciate gradually against the US$, based on the real effective exchange rate (REER) that reflects an undervalued exchange rate. We see the Ringgit trading at RM3.95/US$ by end-2016 (RM3.97/US$ currently). Inflation likely to remain manageable at 2.5-3.0% in 2016

Malaysia’s headline inflation improved further from 3.4% yoy in 1Q16 to 2.1% in April-May 2016 (2.6% in 4Q15), attributed mainly to the improvement in cost of transport, reflecting lower petrol prices (RON95 and diesel). In the first five months of 2016, the inflation rate averaged around 2.9% yoy, and we are projecting an inflation rate of 2.5% for 2016 (2.1% in 2015). The impact from the 6% GST on headline inflation has normalised from April 2016, one year after its introduction. BNM is likely to maintain its accommodative monetary policy

Bank Negara Malaysia (BNM) lowered its overnight policy rate (OPR) by 25bps to 3.0% recently, the first rate reduction since February 2009. The historical low of the OPR was 2.0% during Feb 2009 – Feb 2010. As BNM has a dual mandate of supporting economic growth and maintaining price stability, we believe the focus of the latest monetary policy decision and statement are now heavily shifted towards the concerns about the country’s macroeconomic prospects and stability, in view of the external headwinds. We believe BNM is taking pre-emptive action with the latest move to ensure sustainability of economic growth. As stated in the MPC, after the 25bps OPR cut, BNM also signals that the stance of the country’s monetary policy remains accommodative. The domestic economy continues on a steady growth path amid stable inflation, supported by continued healthy financial intermediation in the economy. We believe BNM will likely maintain its policy rate at 3.0% in 2016, with a possible cut to the SRR, if the external environment deteriorates. Fig 17: OPR and US Fed Funds rate

Source: US Fed, BNM

-3

-2

-1

0

1

2

3

4

5

6

Ju

l-0

6

Mar-

07

No

v-0

7

Ju

l-0

8

Mar-

09

No

v-0

9

Ju

l-1

0

Mar-

11

No

v-1

1

Ju

l-1

2

Mar-

13

No

v-1

3

Ju

l-1

4

Mar-

15

No

v-1

5

Ju

l-1

6

%

US Fed funds rate

BNM OPR

Interest rate spread

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Appendix: Asean key macro indicators

2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Real GDP (%) Singapore -0.6 15.2 6.2 3.7 4.7 3.3 2.0 1.6 2.3 Indonesia 4.6 6.2 6.5 6.3 5.7 5.0 4.8 5.1 5.2 Malaysia -1.5 7.4 5.2 5.6 4.7 6.0 5.0 4.2 4.4 Philippines 1.1 7.6 3.7 6.7 7.1 6.1 5.8 4.9 4.5 Thailand -2.3 7.8 0.1 6.5 2.9 0.7 2.8 3.3 4.2 CPI (%) Singapore 0.6 2.8 5.3 4.5 2.4 1.0 -0.5 0.6 1.8 Indonesia 4.9 5.1 5.4 4.3 6.4 6.4 6.4 3.9 4.5 Malaysia 0.6 1.7 3.2 1.6 2.1 3.1 2.1 2.5 2.7 Philippines 3.2 3.8 4.7 3.1 2.9 4.2 1.4 1.5 2.0 Thailand -0.9 3.3 3.8 3.0 2.2 1.9 -0.9 0.8 2.0 Export (%yoy) Singapore -20.2 30.6 16.5 -0.2 0.4 -0.2 -14.5 3.2 2.8 Indonesia -15.0 35.5 28.9 -6.6 -3.9 -3.4 -14.6 -7.9 0.6 Malaysia -16.7 15.6 9.2 0.7 2.5 6.4 1.9 1.5 2.5 Philippines -21.7 34.0 -6.2 7.9 8.8 9.0 -5.2 3.7 4.5 Thailand -14.3 28.1 14.0 3.0 -0.3 -0.4 -5.8 2.0 3.3 Import (%yoy) Singapore -23.1 26.8 17.7 3.9 -1.8 -1.9 -19.0 3.9 3.0 Indonesia -24.9 40.1 30.8 8.0 -2.6 -4.5 -19.9 -8.3 3.8 Malaysia -16.4 21.7 8.5 5.8 7.0 5.3 0.4 3.0 2.2 Philippines -24.1 27.5 10.1 2.7 0.5 2.4 4.5 2.5 5.3 Thailand -25.4 36.8 25.1 9.3 0.3 -9.0 -11.0 3.1 4.8 Trade balance (USD bn) Singapore 23.9 40.8 44.3 27.6 33.9 43.5 49.8 49.0 56.0 Indonesia 25.8 22.2 26.1 -1.7 -4.1 -1.9 7.1 7.5 3.4 Malaysia 33.4 34.1 40.6 31.1 22.6 25.4 24.1 21.4 22.9 Philippines -4.7 -3.4 -12.2 -10.0 -5.7 -2.1 -9.4 -12.0 -8.0 Thailand 18.7 12.4 -6.2 -20.8 -22.2 -0.4 6.9 4.6 1.6 Policy rate (%) Indonesia 6.50 6.50 6.00 5.75 7.50 7.75 7.50 5.75 5.75 Malaysia 2.00 2.75 3.00 3.00 3.00 3.25 3.25 3.00 3.00 Philippines 4.00 4.00 4.50 3.50 3.50 4.00 4.00 3.75 3.75 Thailand 1.25 2.00 3.25 2.75 2.25 2.00 1.50 1.50 2.00 Fiscal balance as % of GDP Singapore -0.9 0.2 1.2 1.9 1.2 1.3 -1.2 0.7 0.9 Indonesia -1.6 -0.7 -1.1 -1.9 -2.5 -2.3 -2.6 -2.7 -2.5 Malaysia -6.7 -5.3 -4.7 -4.3 -3.8 -3.4 -3.2 -3.1 -3.0 Philippines -3.7 -3.5 -2.0 -2.3 -1.4 -0.6 -0.9 -1.4 -1.5 Thailand -4.4 -2.6 -0.9 -4.1 -2.0 -1.8 -1.9 3.3 4.2 CA balance as % of GDP Singapore 16.8 23.7 22.0 17.2 18.0 17.4 19.7 24.1 24.5 Indonesia 2.0 0.7 0.2 -2.8 -3.4 -3.1 -2.1 -2.3 -2.3 Malaysia 15.5 10.9 11.6 5.8 4.0 4.6 2.9 2.1 2.5 Philippines 5.0 3.6 2.5 2.8 4.2 3.8 2.9 3.8 3.8 Thailand 8.3 3.1 1.2 -0.4 -0.7 3.8 8.8 7.2 5.5 Exchange rate vs USD1 Singapore 1.40 1.29 1.30 1.22 1.27 1.33 1.42 1.58 1.59 Indonesia 9,400 8,991 9,068 9,670 12,189 12,385 13,788 14,000 13,500 Malaysia 3.42 3.08 3.18 3.06 3.28 3.50 4.29 3.95 3.90 Philippines 46.4 43.9 43.9 41.2 44.4 44.6 46.9 49.8 50.2 Thailand 33.3 30.2 31.7 30.6 30.7 33.0 36.0 35.5 36.5

Source: Daiwa, Bahana, Thanacharts and Affin Hwang forecasts

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Focus charts: Asean comparison Chart 1: Asean-5 countries 2016YTD GDP growth Chart 2: 2016 IMF growth forecast

Chart 3: PMI in Asean countries Chart 4: Asean-5 2016YTD GDP manufacturing growth

Chart 5: Monetary policy rate Chart 6: Real effective exchange rates

Source: All data for charts sourced from IMF, CEIC, Bloomberg

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Focus charts: Malaysia

Chart 7: Private investment trend Chart 8: Approved investment in serv. and manufacturing

Chart 9: Current account surplus Chart 10: Goods balance vs services & income

Chart 11: Services account on current account balance Chart 12: Money supply and loan growth


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Focus charts: Global Chart 13: WSJ Survey for the next hike by Fed

Chart 14: Fed fund rate vs GDP growth Chart 15: US inflation vs earning growth

Chart 16: Eurozone, EU and UK GDP growth Chart 17: Growth in Eurozone IPI vs export


31.4

21.4

31.4

10.0

4.31.4

6.3

52.4

30.2

7.9

3.2 1.7

23.3

1.7

50.0

10.011.7

1.6

0

10

20

30

40

50

60

Ju

n-1

6

Ju

l-16

Sep

-16

De

c-1

6

20

17

/late

r

Ra

te c

ut

Ju

n-1

6

Ju

l-16

Sep

-16

De

c-1

6

20

17

/late

r

Ju

l-16

Sep

-16

No

v-1

6

De

c-1

6

1Q

17

2Q

17

/late

r

Ra

te c

ut

May-16 Jun-16 Jul-16

%

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Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a

recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affinhwang.com Email : [email protected] Tel : + 603 2143 8668

Fax : + 603 2145 3005

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