Economic Highlights - The Tenth Malaysia Plan, 2011-2015, No Easy Task In Shifting To High Income Economy - 10/6/2010

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Economic Highlights The Tenth Malaysia Plan, 2011-2015

la

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M A M

No Easy Task In Shifting To High Income Economy

Executi Exe cutive ve Sum Sum mary 

The focus of the 10MP will be on shifting the economy to a high value-added and high income economy, via an increase in productivity, which will result in TPF contributing 38.5% of the growth target. Also, to reduce the vulnerabil vulnerability ity of the country to external shock, an important strategy under the plan will be to promote domestic demand to become a major driver of growth. This will be done through energising the private sector as stated in one of the Strategic Reform Initiatives (SRIs) under the New Economic Model (NEM).



Whilst driving domestic demand is important, the domestic market is just not big enough, in our view, to sustain a robust economic growth, implying that it would be a challenge for the Government to achieve the 6.0% per annum real GDP growth target set under the plan. As it stands, Malaysia has not been able to achieve the economic growth target set in the last three Malaysia plans due to economic crises and poor execution of the measures proposed in promoting private investment.



Although Malaysia’s global competitive ranking has improved tremendously in 2010, we believe it will still remain a significant challenge for the country to drive private investment due to keen competition for FDI and rising outward direct investment by local investors. As a result, we view the Government’s target to grow private investment by 12.8% a year as ambitious and optimistic. The Government also expects consumer spending to deliver growth. However However,, we believe we should not push too hard on consumer spending.



The gross development expenditure will be kept at RM230bn in the 10MP, the same level as in the 9MP, 9MP, in line with the Government’s efforts to contain its budget deficit. As a result, the budget deficit will likely narrow to 2.8% of GDP or RM33.4bn in the final year of the 10MP in 2015, from a deficit of 5.3% of of GDP or RM40.3bn estimated estimated for 2010. This will help to improve the Government’s debt level to 49.9% of GDP in 2015 but it will likely cap the Government’s spending going forward.



The services sector will likely be the key driver in the economy, suggesting that greater emphasis will likely be focussed on promoting growth in the sector. sector. As a result, the share of the services sector sector will rise to 61.1% of GDP in 2015, from 58% estimated for for 2010. The manufacturing sector will complement the services sector but growth will be less robust, as it would remain challenging for Malaysia to attract investment into the sector.

Please read important disclosures at the end of this report.

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The Tenth Malaysia P lan, 2011-2015 No Easy Task In Shifting To High I ncome Economy Shifting To High Value-added And High Income Economy The Tenth Malaysia Plan (10MP), which covers the period 2011-2015, represents the first five-year blueprint of the country’s ambition to transform itself into a high income nation by 2020. In this respect, the Government highlighted that it needs to restructure the economy through the various transformation programmes launched recently. These initiatives include the Government Transformation Programme (GTP) launched in January and the New Economic Model (NEM) to transform the economy unveiled in March this year.

T h e 1 0 M P h ig ig h l i g h t e d

Towards this end, the focus of the 10MP will be on shifting the economy to a high value-added and high income economy , via an increase in productivity. As a result, total factor productivity (TFP) is projected to contribute 38.5% or 2.3% of the target real GDP growth in the 10MP, compared with 34.7% or 1.5% in the 9MP (see Table Table 1). This will be achieved through higher levels of input from human capital, adoption of new technologies and development of entrepreneurship to drive innovation and creativity. Nonetheless, this is not going to be an easy task given the lack of skilled manpower in the country and we believe a drop in the country’s education standard will likely be a stumbling block. Efficienc Efficiency y of capital is expected to improve further with increasing efficiency in the production process and productive utilisation of assets. Consequently, the contribution of capital to GDP growth is expected to rise to 37.5% or 2.3% in the 10MP, higher than 34.5% or 1.4% recorded in the 9MP. 9MP. Labour’s contribution to GDP growth is projected to reduce to 24.0% or 1.4% in the 10MP, from 30.8% or 1.3% in the 9MP.

The focus of the 10MP w ill

a

need to restructure the economy various

through

the

transformation

programmes

be on shifting the economy to a high value-added and high income economy, via an increase in productivity

Table 1 Contribution Of Factors Of Production, 2001 - 2015 Facto r

A chieved 8M P % of c o n t ri b u t io n t o GDP

9M P % of GDP

Ta r g et 1 0 M P

% of co n t ri b u ti o n t o GD P

% of GDP

% of c o n t ri b u t io n t o GD P

% of GDP

GDP

4.7

100.0

4.2

100.0

6.0

100.0

La b o ur

1.5

33.2

1.3

30.8

1. 4

24.0

Ca pita l

1.8

37.8

1.4

34.5

2. 3

37.5

TF P

1.4

29.0

1.5

34.7

2.3

38 . 5

1

Source: Economic Planning Unit. Notes:

Total Factor Productivity (TFP) is estimated using the Cobb-Douglas

1

production function by subtracting from output growth, the position of growth which is accounted for by increases in labour and capital.

Malaysia will also focus its economic growth efforts on National Key Economic Areas (NKEA), i.e. oil & gas; palm oil & related products; financial services; wholesale & retail; tourism; information & communications technology; education; electrical & electronics; business services; private healthcare; agriculture; and Greater Kuala Lumpur.

To focus on the 12 NKEA to

At the same time, to reduce the vulnerability of the country to external shock, an important strategy under the plan will be to promote domestic demand to become a major driver of growth . This will be done done through energising energising the private private sector as stated in one of the Strategic Reform Initiatives (SRIs) under the New Economic Model (NEM). (NEM). As a result, the 10MP sought to create an enabling environment environment which encourages productivity, competitiveness and innovation.

An

THE TENTH MALA MALAYSIA YSIA PLAN

2

generate economic growth during the plan

important

strategy

under the plan will be to promote domestic demand to become a major driver of growth

2011-201 5

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Real GDP Target Growth Of 6.0% Is Optimistic Whilst domestic demand is important and more stable in generating growth for the country’s economy, we believe we should give greater emphasis to promote export markets which is far bigger. bigger. The Government expects real exports to grow by 7.2% a year during the plan, compared with +1.8% in the 9MP. 9MP. This is because the domestic market is just not big enough , in our view, to sustain a robust economic growth, implying that it would be a challenge for the Government to achieve the 6.0% 6.0% per annum real GDP growth target set under the plan (see Table 2). The 6.0% growth target is also slightly lower than the NEM’s target of an average growth of 6.2% during the period.

The 6.0% target will be challenging to achieve, as domestic market is just not big enough to sustain a robust economic growth

Table 2 Macroeconomic Achievements & Targets

(%, p.a)

9M P

10M P

R eal GDP

4. 2

6.0

GNI p er c apit a

6.7

8.0

P r iva t e c ons um p t ion

6.5

7.7

P u b l ic c on s um p t i on

4.8

4.8

P ri va t e i nve st me nt

2.0

12.8

P u b l ic i nv es t m en t

6.2

5.0

Exports

1.8

7.2

Im p ort s

2.8

8.6

Inflation rate

2.7*

n. a

R e sou r ce B a la n ce ( %GN I)

16.6

12.3

- Sa vin g s

36.3

34.5

- In ves tm en t

19.7

22.2

Source: Economic Planning Unit. *RHBRI’s estimate

As it stands, Malaysia has not been able to achieve the economic growth targets set in the last three Malaysia plans . Whilst the various economic crises such as the 1997/98 Asian currency crisis, the dotcom bubble in 2001 and the global credit crisis originating from the US subprime credit in 2008/09 (see Table 3) were blamed, the failure to execute its plans to drive private investment was also a major factor,, in our view. As it stands, private investment only grew by a modest 1.2% factor a year in the 8MP (2001-05) and it is estimated to inch up moderately by 2.0% a year in the 9MP (2006-10), after recording a contraction of around 5.0% a year in the 7MP (1996-2000) (see Chart Chart 1). The performance performance paled in comparison comparison to the strong double-digit growth of 13.4% and 20.2% a year in private investment in the 5MP and 6MP, 6MP, respectively. As a result, its share of GDP fell from a high of 36.3% in 1997 to a low of 8.2% in 2002, before rising to 10.1% in 2009.

Malaysia has not been able

Given the challenges in executing the various initiatives under the 10MP and the existence of global imbalances, we are of the view that a more reasonable

We are of the view that a

real GDP growth target for the Malaysian economy for the 10MP could be in the region of 4.5-5.5% p.a. As it stands, stands, the country’s country’s real GDP growth has

growth

been on a downward trend after reaching a peak of 9.5% a year in the 6MP. 6MP. It weakened sharply by almost half to +5.0% a year in the 7MP and further to +4.7% a year in the 8MP and +4.2% a year estimated for the 9MP (see Chart 2) along with the poor performance in private investment. If not because of more expansionary fiscal policy and the introduction of economic stimulus packages to cushion the economy from various crises, real GDP growth achieved could be even lower in the last three Malaysia plans. Despite the increase in Government spending during this


3

to achieve the economic growth targets set in the last three Malaysia plans due

to

the

various

economic crises and poor execution

of

policies

proposed

more reasonable real GDP target

for

the

Malaysian economy for the 10MP could be in the region of 4 .5-5. .5-5.5% 5%

2011-201 5


period, real GDP growth continued to head south, indicating that Government spending would not be enough to reverse a slowing trend but merely provide a cushion, as its spending was perceived as less efficient in deriving economic growth due partly to leakages. Table 3 Comparison Between Target And Actual On Real GDP Growth And Developmen t Expenditure Allocation

5MP

GD P

A ver a ge

Original

A ctual

De vi atio n

grow th

GD P

A llocation

Sp e n d i n g

from

ta r ge t

g r o w th

( De ve lo pm en t

o r ig in a l

achieved

expen diture)

a l l o c a ti o n

%

%

RM bn

RM bn

%

5.0

6.9

40.1

35. 9

-10.4

(1986-1990)

Remarks

Malaysia shifted its strateg y to promote foreign direct investment (FDI) and liberalised its manufacturing sector.

7.5

6MP

9.5

55.0

54.7

-0.5

(1991-1995)

The country benefited from substantial inflow of FDI and privatisation programme.

8.0

7MP

5.0

67.5

99.0

46.7

(1996-2000)

R eg iona l c urr enc y cr is is c au sed a severe recession in the country’ s economy in 1998.

Efforts were

directed to strengthen domestic demand through an expansionary of fiscal policy. 7.5

8MP

4.7

110.0

170.0

54.5

(2001-2005)

The bursting of the dotcom bubble severly imp acted the country’ s electronic exports and real GDP in 2001.

The Government

introduced three economic stimulus packages totalling RM14.6bn and increased its spending by an additional RM60bn. 6.0

9MP

4.2

200.0

223.0

11.5

(2006-2010)

The country’s economy in 2009 was impacted by the severe global recession as a result of the global credit crisis originated from the US subprime credit crisis.

6.0

10MP

-

230.0

-

A sharper than expected slowdown in

(2011-2015)

global economic growth in 2011 may derail the number.

Source : Various Malaysia Plans

Chart 1 Malaysia Failed To Drive Private Investment In The Last 15 years

Chart 2 Malaysia's Real GDP Growth Losing Momentum 10.0

25

9.0

20

) 15 % ( r a e10 y a e 5 g a r e v 0 A

8.0

) % ( r a e y r e p e g a r e v A 5MP

6MP

7MP

8MP

7.0 6.0 5.0 4.0 3.0 2.0

9MP

-5

1.0 0.0

-10

5MP


4

6MP

7MP

8MP

9MP

2011-201 5


Pushing The Private Sector To Do The Job Although Malaysia’s global competitive ranking in 2010 as assessed by the highly regarded Swiss-based Institute for Management Development (IMD) has jumped from 18th to 10th, an unprecedented result, we believe it will remain a significant challenge for the country to drive private investment due to keen competition for foreign direct investment (FDI) and rising outward direct investment by local investors. As a result, we view the Government’s target to grow private investment by 12.8% a year as ambitious and optimistic . A key component of the growth will be from FDI, according to the Government. Priority will be given to improve the business environment, including measures to further liberalise the economy, in order to promote private investment. On its part, the Government will strengthen the ongoing GTP to streamline bureaucratic process and reduce the costs of doing business. Statutory and regulatory reviews will be undertaken to promote entrepreneurship and improve risk-taking profiles of the private sector.

We view the target to to grow

Having said that, we believe the initiatives put in place by the Government could help Malaysia gain some headway in stimulating private investment even though the improvement will unlikely be significan significant. t. Recall that in a move to promote private investment, the Government has liberalised 27 services sub-sectors on 22 April 2009. It had also repealed the Foreign Foreign Investment Committee Committee (FIC) guidelines guidelines and relaxed the 30% Bumiputera equity participation at the point of initial public offer (IPO) on 30 June 2009. In addition, the Government’s Government’s relationship relationship with Singapore Singapore has improved lately that could help generate some investment activities in the Iskandar region, in our view. Also, the implementation implementation of the Public-Private Public-Private Partnership (3P) and the Private Finance Initiative (PFI) is expected to generate some RM62.7bn of investment in the country. Among the large projects to be implemented under the 3P includes seven toll highways, five Universiti Teknologi Mara branch campuses, redevelopment of Angkasapuri Complex Kuala Lumpur as media city, Integrated Transport Terminal in Gombak and privatisation of Penang Port Sdn Bhd.

We believe the initiatives

While these changes together with the initiatives under the GTP and NEM are helpful and encouraging, Malaysia needs to do more and show to investors that it would continue to do it right and deliver what it has promised in order to bring back investors’ confidence. The enormous challenges in pushing private investment and a slowdown in spending by the Government in order to reduce its deficit suggests that consumer spending will likely remain as a key driver of the country’s economic growth. As a result, the Government expects consumer spending to grow at a faster pace of 7.7% 7.7% a year in the 10MP , compared with +6.5% estimated for the 9MP. 9MP. Consequently, its share will rise to 58% of GDP in 2015, from 53.6% estimated for 2010, making Malaysia’s share almost comparable to Japan (58.5%) and higher than Thailand Thailand (51.3%) and Singapore Singapore (39.4%). (39.4%). Indeed, a pick-up pick-up in consumer spending has led to an increase in household debt, which rose from 63.9% of GDP in 2008 to 76.6% in 2009. The sharp jump was due partly to the effect of a lower denominator denominator as GDP contracted contracted in 2009. Although Bank Negara Negara was not alarmed by the sharp rise in household borrowings, we believe we should not push too hard on consumer spending to drive the country’s economic growth.

The Government expects

private

investment

12.8%

a

year

by as

optimistic, as it will remain a significant challenge for the

country

to

drive

private investment due to keen competition

put

in

place

by

the

Government could still help Malaysia

gain

some

h e a d w a y i n s t i m u l a ti ti n g private investment

consumer spending to help deliver growth but we believe believ e w e should not push too hard on consumer spending

Government To Reduce Its Role And Budget Deficit On its part, the Government’s gross development expenditure will be kept at RM230bn in the 10MP , the same level as in the 9MP, in line with the Government’s efforts to contain its budget deficit. Of which, an amount of RM20bn or around 8.7% w ill be used as the the PFI Facilit Facilitation ation Fund . We understand that one of the purposes of the PFI Facilitation Fund is to make certain projects viable for implementation. Also, it could serve as tipping-off for private projects to take off and will generate at least RM62.7bn of private investment investment under the 3P procurem procurement ent model. Under the 3P procurement model, model, the public sector will be the main purchaser of the output. This implies that the Government will have to lease and pay rent for those output and services. Whilst there is no doubt the move could help the THE TENTH MALA MALAYSIA YSIA PLAN

5

The gross development expenditure will be kept at RM230bn in the 10MP , the same level as in the 9MP, in

line

with

the

Government’s efforts to contain its budget deficit

2011-201 5


Government to cut its development expenditure, it will shift the burden to the already stretched operating expenditure as rental or service charge expense increases. We believe this is an area of concern given that the Government’s operating expenditure has risen to as high as 99.0% of its revenue in 2009, before easing to a projected 91.7% in 2010. The 3P procurement model will focus on projects such as education (infrastructure and facility), healthcare (facility & support services) and tourism (including healthcare tourism). Without additional allocation for development expenditure, growth of public investment is projected to moderate to 5.0% a year in the 10MP, from +6.2% estimated for the 9MP.. Public consumption, on the other hand, is envisaged to remain stable at 4.8% 9MP a year in the 10MP, the same rate of increase as in the 9MP.

The 3P w ill shift the burden to the already stretched operating expenditure

Growth

of

public

investment is projected to moderate,

while

consumption to remain stable in the 10MP

The capping of the Government’s gross development expenditure, however, will help to narrow its budget deficit to 2.8% of GDP or RM33.4bn in the final year of the 10MP in 2015 , from a deficit of 5.3% of GDP or RM40.3bn estimated for 2010 (see Table Table 4). This will be aided by a slowdown in the Government’s Government’s operating expenditure, which is projected to slow down to +6.8% a year in the 10MP versus +8.6% estimated for the 9MP. 9MP. The slowdown will be reflected in slower increases in emolument, pensions & gratuities, grants & transfers and other expenditure as well as a 3.1% a year decline decline in subsidies. subsidies. This suggests that that the Government Government will likely cut its subsidies gradually during the plan that could exert some pressure on inflation. These are, however, however, likely to be mitigated by a pick-up in expenditure on supplies & services. The Government’s revenue is also projected to increase at a slower pace of 6.1% a year during the plan, compared with +8.6% estimated for the 9MP. 9MP. This will be attributed to a slowdown in direct taxes and non-tax revenue. These will, however, be mitigated by a pick-up in indirect taxes, as the Government will likely implement the Goods & Services Tax (GST) during the plan to broaden its tax base. A smaller budget deficit projected will help bring down the Government’s debt level to 49.9% of GDP in 2015, from from an estimate estimate of 52.9% in 2010. Despite its moderation, the debt level remains not low, which will likely cap the Government’s spending going forward. Meanwhil Meanwhile, e, the Government expects crude oil price to average US$90/ US$90/ barrel in the 10MP 10MP , about 10% higher than an average of US$81.6/barrel estimated for the 9MP.

The Government’s budget deficit will narrow to 2.8% of GDP in 2015, from a deficit of 5.3% estimated for 2010

The Government will likely cut its subsidies gradually during the plan

Table 4 Federal Government & Consolidated Public Sector Accounts

R M b i ll i o n

% p .a

2010

2015

9M P

1 0M P

Federal Government

-Revenue

160.9

216.7

8.6

6. 1

1

147.5

204.6

8.6

6. 8

- G r os s D e v . e x p .

54.2

46.5

- Ne t De v. e xp .

53.7

45.5

-40. 3

-33.4

-5.3

-2.8

-Revenue

123.0

183.1

-

-

- O p e r a t i n g e xp .

166.0

216.7

-

-

- D ev el op m e nt ex p .

115.5

142.4

-

-

- O ve r a ll b a l a nc e

-14.7

12. 7

-1.9

1. 1

-Operating exp.

- O ve r a ll b a l a nc e (% of GDP) Public Sector

(% of GDP) 1

: Includes tranfer to Development Fund

Source: EPU


6

2011-201 5


Growth In Services To Outpace The Economy And To Be Complemented By The Manufacturing Sector On the supply side, the services sector will likely be the key driver in the economy and its growth of 7.2% a year projected for the 10MP will outpace that of the real GDP growth during the period and faster than +6.8% a year estimated for the 9MP (see Table Table 5). This suggests that greater emphasis will be focussed on promoting growth in the services sector. sector. As it stands, the Government already liberalised 27 services sub-sectors as part of its efforts to draw in investors into these sectors and we expect the Government to do more as the country moves forward. As a result, the share of the services sector will rise to 61.1% of GDP in 2015, from 58% estimated for 2010. According to the Government, growth in the services sector during the 10MP will be driven by the expansion in intermediate services such as finance & business services and transport, storage & communications sub-sectors. Towards this end, Bank Negara Malaysia has issued few new banking and investment licenses to foreign foreign investors. It remains to be seen seen whether these foreign foreign players could eventually bring in more business from abroad to broaden and deepen the country’s banking industry. These will likely be aided by a pick-up in final services such as wholesale & retail and accommodation & restaurants in line with stronger consumer spending projected during the period.

The services sector will likely be the key driver in the

economy

and

its

growth w ill outpace that that of the real GDP growth

Table 5 GDP By Sector (In Real Terms) , 2006-2015 Gr o w t h

St r u c t u r e

( % p .a )

( % t o GDP )

9M P

10M P

'05

‘10

‘15

3.0

3.3

8.0

7.5

6.6

-0.5

1.1

9.5

7. 5

5.9

Ma nufacturing

1.3

5.7

30.7

26.7

26.3

C on s t r u c t i o n

4.4

3.7

3.3

3.3

2.9

Services

6.8

7.2

51.2

58.0

61.1

-Utilities

3.1

4.1

3. 1

2.9

2.7

- T ra d e & a c com mo d at i on

7.7

8.3

13.7

16.1

17.9

- Tr an sp ort a ti on & c omm

6.2

7.5

7.3

8. 0

8.6

- F in a nc e

8.0

8.3

10.0

17.4

19.4

- G ov e r n m e n t

6.3

3.4

6.8

7. 5

6.6

- Ot her s ervic es

5.0

5.8

10.3

6.1

5.9

GDP

4.2

6.0

A g r i c ul t u r e M ini ng

Source: EPU

Similarly, the manufactur manufacturing ing sector is envisaged to grow at a faster pace of 5.7% per annum under the 10MP, compared with +1.3% a year estimated for the 9MP, in line with a recovery in exports and stronger domestic demand. Stronger growth will be contributed by higher value value add in the E&E sub-sector. sub-sector. The fact that growth in the sector is envisaged to be less robust than that of the services sector suggests that it would remain challenging for Malaysia to attract investment into the sector. Consequently, its share of GDP is projected to drop to 26.3% in 2015, from an estimate of 26.7% in 2010.

The manufacturing sector

In the same vein, the agriculture sector is projected to experience a stronger growth of 3.3% a year in the 10MP, compared with +3.0% a year estimated for the 9MP, implying that the sector would continue to be promoted by the Government as one of the main engines of growth.

Agriculture output will inch

Also, the mining value add is projected to bounce back to expand by 1.1% a year in the 10MP, 10MP, from a contraction of -0.5% a year in the 9MP. 9MP. Growth will likely be driven by a pick-up in demand for LNG, while crude oil production will remain modest, in line with the Government’s conservation policy.

The


7

is projected to grow at a faster pace during the plan

up as well

mining

output

projected to recover

2011-201 5


is

The construction sector, however, is projected to grow at a slower pace of 3.7% a year in the 10MP, compared with +4.4% a year estimated for the 9MP, as activities during the 9MP was boosted by the two economic stimulus packages implemented by the Government Government in late 2008 and early 2009. The slowdown is also in line with with a slower increase in public sector investment, as the Government will maintain its development expenditure unchanged during the plan. Meanwhile Meanwhile,, the Government expects the 3P and the PFI procurement models to help generate construction activities worth RM62.7bn in the 10MP. 10MP. This will help to take up some slack and contribute to growth in the civil engineering segment, as the Government keeps its development expenditure unchanged.

Construction

sector,

however, will slow dow n, in line

with

a

stagnant

government spending

Higher Inflation, Employment To Improve The 10MP is silent on inflation forecast. forecast. Nonetheless, by gradually removing subsidies, particularly fuel and power tariff during the 10MP, and pushing for stronger consumer spending, we expect inflation rate to rise to an average rate of around 3.03.5% a year in the 10MP , from +2.7% estimated for the 9MP. 9MP. The labour supply is anticipated to increase by 2.2% per annum in the 10MP to reach 13.65 million by end-2015, compared with +1.6% in the 9MP. 9MP. Given that the economy is projected to expand by around 6.0% during the plan and the Government expects employment to grow by 2.4% a year, the unemployment rate is projected to ease to 3.1% in 2015 , from 3.6% estimated for 2010.

Inflation rate w ill likely rise but unemployment rate to improve

Smaller Current Account Surplus But Remains Sizeable The current account surplus in the balance of payments is projected to narrow to 10.5% of GNI by the final year of the 10MP in 2015, from a surplus of 14.6% of GNI estimated for 2010 (see Table Table 6). Despite smaller, at more than 10% of GNI, the current account surplus in 2015 remains sizeable and will likely contribute to a build-up in foreign exchange reserves and fuel domestic liquidity. Indeed, a sustained large current account surplus implies that the country’s gross national savings rate will remain high as well. As a result, the savings rate is projected to average around 33.7% of GNI in 2015, albeit smaller compared with 35.6% of GNI estimated for 2010. In absolute terms, the current account surplus, however, however, is projected to widen to RM121.7bn by the final year of the 10MP in 2015, from a surplus of RM109.2bn in 2010. This is due mainly to a larger surplus surplus in the merchandise account, which is projected to increase to RM169.3bn in 2015, from RM145.0bn estimated estimated for 2010. The widening services account account surplus during during the year will also help. These will, however, however, be offset partially by a larger deficit in the income account, as multinational companies send more money back home, and the increase in current transfers due to repatriation of foreign workers’ remittances. The latter indicates that Malaysia will still rely on foreign workers to generate economic output in the near future.

The

current

account

surplus in the balance of payments is projected to narrow to 10.5% of GNI in 2015, from a surplus of 14.6% of GNI estimated for 2010

Table 6 Balance Of Payments, 2006-2015 RM billion

Me r ch a nd i se a c cou nt

‘05

‘10

‘ 15

128.9

145.0

169.3

Se r v ic e s a c c ou n t

-9.6

1.3

6.8

Tr a n s p o rt a t i on

-15. 9

-19.4

-21.0

Travel Othe r service s Go v t . t r a n s a c t i o n s

18.9

31.8

40.0

-12. 1

-11.0

-12.1

-0.3

-0. 1

-0.1

In c om e

-23. 9

-19.9

-33.1

C u rr e n t t ra n s f e r s

-17. 0

-17.1

-21.3

Cu r r e n t a c c o u n t

78.4

109.2

121.7

% t o GN I

15.7

14.6

10.5

Source: EPU THE TENTH MALA MALAYSIA YSIA PLAN

8

2011-201 5


Construction:

Allocation For “Physical Hardware” Reduced, Transport Infrastructure In The Spot Light As far as the construction sector is concerned, we rate the just announced 10MP as mixed. While gross development expenditure comes in at RM230bn that is higher than RM180bn guided earlier and matches the amount under the 9MP, the breakdown between “physical hardware” and “soft infrastructure” has been changed to 60:40 under the 10MP from 78:22 under the 9MP as the new focus is on “moving away from merely building schools, to improving teachers”. As such, the allocation for “physical hardware” (that translates to construction jobs) effectively falls by 23% from RM179.4bn (RM230bn x 78%) under the 9MP to RM138bn under the 10MP (RM230bn x 60%). On a positive note, 52 “high-impact” projects worth RM62.7bn to be implemented via privatisation or the public-private partnership (PPP) model are “under consideration” comprising, among others: ◆

Seven toll highways worth RM19bn including the West Coast Expressway (potential beneficiaries: Kumpulan Europlus and IJM), Guthrie-Damansara Expressway, Sungai Juru Expressway and Paroi-Senawang-KLIA Expressway;

◆

Two coal-fired power plants worth RM7bn (potential beneficiaries: Zelan and Mudajaya);

◆

Development of the Malaysian Rubber Board’s 3,300 acres of land in Sungai Buloh with a GDV of RM10bn (Potential beneficiary: MRCB);

◆

Five Universiti Teknologi MARA (UiTM) branch campuses;

◆

Redevelopment of Angkasapuri into a “Media City”;

◆

Integrated transport terminal in Gombak (Potential beneficiary: WCT); and

◆

Privatisation of Penang port.

Lower

allocation

for

“physical hardware”

RM62.7bn privatisation/ PPP projects, backed by RM20bn “ facilit facilitation ation fund”

Also, a RM20bn “facilitation fund” will be established to “bridge the viability gap for private sector investment in projects with high strategic value to the nation and multiplier effects”. Among the projects currently under consideration are: (1) Senai Hi-Tech Park in Iskandar, Johor; (2) The raw water supply project for industrial complex in Tanjong Langsat, Johor; (3) Land reclamation in Westport, Port Klang; and (4) Malaysia Truly Asia Centre in KL. Realising the importance of investing in transportation infrastructure to stimulate economic activities as well as to ease worsening traffic congestion (that reduces productivity), several major rail projects have been earmarked to be implemented under the 10MP comprising: (1) “The expansion of light rail transit (LRT) coverage in KL” (We take it as referring to the Ampang and Kelana Jaya light rail transit (LRT) line extension as well as the new Cheras – Kota Damansara LRT line); (2) Gemas – Johor Bahru double-tracking; and (3) A new 150-km mass rapid transit (MRT) system covering a 20km radius around KL with 2m passenger-trips per day (see Table 7 for details of the projects).

Rail projects in the spot light

Table 7

Rail Projects Under The 10MP P r o j e ct

V alu e* (RMbn)

Ampang & Kelana Jaya LRT line extension Kota Da Kota Dama mans nsar ara a - Ch Cher eras as ne new w LRT LRT li line ne Gem as- J B doub le tr acking KL M R T

To ta l

7 25 5 30

Status/ Stat us/ Remark

17 and 15 players pre-qualified as main contractors and segmental box girder sub-contractors in Apr 2010 (see Table 8) Preliminary Reported to be led by Chinese contractors This is one of the key initiatives to transform KL into “Greater KL”, leveraging on its “liveability, cosmopolitan population, Asian heritage and world-class infrastructure”.

67 THE TENTH MALA MALAYSIA YSIA PLAN

9

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While Gamuda and MMC Corporation are perceived by the market as the frontrunners for these rail projects given their solid track record in the Ipoh – Padang Besar double-tracking project (and for Gamuda, also the Kaohsiung Metropolitan MRT in Taiwan), we believe those who pre-qualified pre-qualified for the Ampang and Kelana Jaya LRT line will give Gamuda and MMC Corporation a run for their money (see Table 8). Nonetheless, given the size and scale of these rail projects, if they do get off the ground, irrespective of who are in the driver’s seats, the multiplier effect to the construction sector (in terms of sub-contracting jobs), the building material sector as well as the economy as a whole will be tremendous.

Tremendous

multiplier

effect

Table 8

Contractors Pre-qualified For Ampang & Kelana Jaya LRT Line Extension Project M a i n Co n t r a c to r s

S e g m e n t a l B o x G i r d e r Su b -C o n t r a c t o r s

1. Sunway Construction Sdn Bhd 1. Sunway Construction Sdn Bhd 2. Fajarbaru Builder Builder Sdn Bhd Bhd – Signatium Construct Construction ion Sdn Bhd JV 2. Fajarbaru Builder Builder Sdn Bhd Bhd – Signatium Constructi Construction on Sdn Bhd JV 3. WCT – Sinohydro JV 3. WCT – Sinohydro JV 4. IJM Construction Sdn Bhd 4. IJM Construction Sdn Bhd 5. Ra nh il l – C C C C J V 5. R a nh il l – C C CC J V 6. Muhibbah Engineering Sdn Bhd 6. Muhibbah Engineering Sdn Bhd 7. Gamuda Berhad 7. UEM Builders Bhd – Intria Bina Sdn Bhd JV 8. UEM Builders Bhd – Intria Bina Sdn Bhd JV 8. MMC - Ze la n J V 9. M MC - Ze la n J V 9. MRCB Engineering Sdn. Bhd 10. MRCB Engineering Sd n. Bhd 10 . BPH B – Tim Seka t a J V 11. Trans Resources C orp ora tion Sdn Bhd 11 .Zab ima – Leig hton J V 12 . BP HB – Tim Seka t a J V 12 . MT D C – P er s ys J V 1 3 . Z a b i ma – L e i g h t o n J V 13.Ahmad Zaki Sdn Bhd 14. Mudaj aya Corporat ion Berhad 14. Bina Puri – Acre Works – SNC Lava lin JV 15 . MT D C – P er s ys J V 15.U EM C onstruct ion Sd n Bhd – Projek Penyelenggaraan Lebuhraya Berhad 16.Loh & Loh Constructions Sdn Bhd 17.Ahmad Zaki Sdn Bhd Source: Prasarana

Other key projects identified to be implemented under the 10MP include: 1.

Flood Floo d mit mitigat igation ion pro program grammes mes (RM5 (RM5bn); bn);

2.

Expans Exp ansion ion of airp airpor orts ts (RM3 (RM3.3b .3bn); n);

3.

3,580km of paved paved roads, roads, of of which 72% in Sabah Sabah and and Sarawak Sarawak (Potentia (Potentiall beneficiaries: Hock Seng Lee, Loh & Loh and Naim);

4.

Remaining Rema ining work for for the RM3.7 RM3.7bn bn East East Coast Coast Expressw Expressway ay (Phase (Phase 2); 2);

5.

Kuala Kua la Lipis Lipis – Cam Camero eron n Highla Highlands nds road road;;

6.

Jerant Jer antut ut – Sun Sunga gaii Lemb Lembing ing roa road; d;

7.

Sewerage Sewe rage trea treatmen tmentt plant plant in Lemba Lembah h Pantai, Pantai, KL;

8.

Eight hospital hospitals s (including (including speciali specialist st hospitals) hospitals),, 197 clinics clinics and 50 1Malaysia 1Malaysia clinics; clinics;

9.

78,000 unit units s of affo affordab rdable le public public hous housing; ing; and

10. Repair and maintenance maintenance of public/private public/private low-cost housing housing (RM500m) Like all previous Malaysia Plans, the key to the success of the 10MP is not so much a grand plan or a long list of ambitious mega projects, but execution. On the heels of disappointment from a few false starts to the Ampang and Kelana Jaya LRT line extension project, we believe the market will want to see the real action before a re-rating of the construction sector can take place this time around.


10

Execution is key

2011-201 5


On one hand, we foresee improved investors’ risk appetite for construction stocks following: (1) The massive underperformance of the sector vis-à-vis the market in 4Q2009 and 1H2010; and (2) A better sector news flow and new expectations on the heels of the announcement of of the 10MP. On the other hand, hand, certain negative negative elements remain such as: (1) The still slow pace of the roll-out of public projects, shrinking margins and declining dominance of established players in large-scale projects locally; and (2) The not-so-rosy outlook and increased operating risks in key overseas markets (following the Dubai credit crisis, Dong’s devaluation and rising arbitration cases). We maintain N e u t r a l on the construction sector.

We maintain Neutral on the construction sector

Building Materials We believe the higher-than-expected gross development expenditure will lift domestic cement consumption as well as cement producers’ pricing power (on the back of higher demand). However, we believe higher margins arising from increased demand and better selling prices would be partly mitigated by higher energy cost, in particular, thermal coal and electricity. We are keeping our numbers unchanged for now, pending further clarifications from the cement producers.

Cement sub-sector sub-sector – good

While the higher-than-expected gross development expenditure would boost domestic steel consumption, we believe the impact is likely to be muted, as fortunes of the steel players are tied largely to the demand-supply balance in the region. We are keeping to our stance that the near-term earnings prospects of the steel sub-sector are weak on the back of: (1) Increased concerns on overcapacity in China arising from mounting steel output and weak near-term steel consumption, which may prompt steel producers in China to dump steel products in the international market at cheap prices; and (2) Heightened risk on a sharper-than-expected slowdown in global economy, which may affect global steel consumption, hence weighing down on steel prices. Maintain Underweight .

Steel sub-sector – good

for demand and pricing power

for domestic demand, but may not help much in boosting earnings

Infrastructure sector - water Under the 10MP, the Government indicated that it is keeping to the timeline of the water sector restructuring (i.e. all states will migrate to the new licensing regime and become asset light water service providers by 2010 (see Chart 3). However, we are keeping to our stance that water sector restructuring, in particular, the Selangor state, is unlikely to materialise anytime soon (which means the Government’s timeline is unlikely to be achieved), given that: (1) The pricing issue remains unresolved; and (2) All three parties (the Federal Government, state government, and water concessionaires) are involved in the negotiation process, and this may complicate and drag the entire negotiation process. Hence, we remain cautious on Puncak. Our indicative fair value remains unchanged at RM2.55, at 30% to its DCF-derived NPV of RM3.65 (based on WACC of 11.5%).

Timeline on water sector restructuring

remains

unchanged

Chart 3

Water Services Industry Reform Roadmap

8th Plan period 2001-2005 Stabilisation • Privatisation and corporatisation of state water authorities • Planning for restructuring of water services industry

9th Plan period 2006-2010 Consolidation • Operationalisation of National Water Services Commission (SPAN) • Enforcement of Water Services Industry Act (WSIA), 2006 • Pengurusan Aset Air Berhad (PAAB) takes over existing water assets from states at negotiated values and is responsible for implementing water infrastructure development • State water operators are assetlight and focus on service provision

10th Plan period 2011-2015 Moving towards efficiency in operations and management • Tariff-setting mechanism to allow full-cost recovery to be completely phased in by 2013 • Integration of water supply and sewerage services • Initial efforts towards the introduction of integrated water and sewerage tariffs

Source: 10MP THE TENTH MALA MALAYSIA YSIA PLAN

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2011-201 5


Water sector restructuring aside, the Government also allocated RM1.1bn for the non-revenue water (NRW) programme, involving replacement of pipes and old meters to improve the quality of water and reduce losses in water supply. It was also mentioned that RM369m out of the entire RM1.1bn would be allocated in the first two years of the plan. While it is unknown as to the exact amount that will be allocated for pipe replacement activities, we believe this will benefit all pipe makers including YLI and Engtex (ductile iron), Jaks Resources (mild steel), as well as Hiap Teck and Choo Bee (bare steel that is the feedstock for mild steel), given the absence of sizeable pipe replacement activities, resulting in poor demand for pipes over the past few years.


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Pipe makers to benefit from NRW programme

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Economic Highlights - The Tenth Malaysia Plan, 2011-2015, No Easy Task In Shifting To High Income Economy - 10/6/2010

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