AmWatch - Economic Update: Inflation elevates to 3.5% YoY in February, 24 Mar 2014

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Economic Update: Inflation elevates to 3.5% YoY in February

Malaysia’s Consumer Price Index (CPI) advanced by 3.5% YoY in February compared to our and consensus expectations of 3.4% (January: +3.4% YoY). Specifically, core inflation grew by 3.3% YoY while the cost component of Food and Non-alcoholic Beverages increased by 3.8% during the month.

Note that the transport index surged by 5.5% YoY while Housing, Water, Electricity, Gas & Other Fuels increased by 3.5% YoY. With that, inflation soared by 3.5% YTD. The increase was driven by the Food & Non-Alcoholic Beverages and Non-Food index, which grew by 4.0% and 3.3% YTD, respectively.

On the back of price increases and subsidy reforms, inflation will stay elevated during the most part of 2014. The government remained committed with its fiscal consolidation efforts in order to meet its full-year fiscal deficit target.

We expect another round of cut in petrol subsidies in mid-2014. Note that the government plans to reduce overall spending on subsidies by 15.6% YoY (or -RM7.3bil) to RM39.4bil in 2014. For the first three quarters of 2013, government spending on subsidies declined by 3.4% YoY (or -RM869.2mil) to RM24.5bil. Meanwhile, the government allocated RM46.7bil for subsidies in 2013.

Assuming a one-time petrol pump price adjustment of 20 sen/ litre in June 2014, the government’s total savings on subsidies will amount to approximately RM5.2bil in 2014. As such, monthly headline inflation is expected to soar in the middle of this year before prices ease towards the later part of 2014.

No change to our CPI growth assumption at this juncture. We are keeping our full-year CPI growth estimate for 2014 at 3.0% (2013: +2.1%). BNM has guided recently that Malaysia’s headline inflation is expected to average between 3% and 4% in 2014. As for its monetary policy stance, BNM will mainly focus on ensuring sustainable growth in a stable price environment while avoiding the build-up of financial imbalances.

Others :

Genting Malaysia : Stronger profit growth in FY15F/FY16F             Hold

Economic Update : Forex reserves fall by another USD1.0bil in 1H of March         

QUICK TAKE

Plantation Sector : Newsflow for week 17-21 March        Overweight

NEWS HIGHLIGHTS

Malaysia Airports Holdings : AirAsia X ‘dying to move into’ klia2 as current terminal is at full capacity

Oil and Gas Sector : Petronas exceeds targets, production grows at 5.8%.

Energy Sector : Tenders being prepared for 2 gas power plants

Property Sector : Illegal property brokers account for RM24bil transactions

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