Press Release 2013

UOB: Stronger fundamentals and rising Asian intra-regional trade to cushion impact from QE pullback

Malaysia's GDP continues to be driven by domestic demand and national development programmes

Kuala Lumpur, 20 August 2013 - United Overseas Bank Group (UOB) today said that stronger economic fundamentals, healthier balance sheets and rising intra-regional trade will help to counter the potential of US$1.4 trillion in capital outflows from the pending reduction in the US Federal Reserve's quantitative easing (QE) programme.

UOB's Head of Research & Investor Relations, Mr Jimmy Koh said, "We believe that though QE tapering will be a short-term destabilising factor in Asia, the economic fundamentals of the region have strengthened due to the prudent economic policies implemented since the 1997 Asian Financial Crisis.

"Asia's foreign reserves and current account levels are strong and will help mitigate the impact of any liquidity outflows. Similarly, Asian companies and financial institutions have built stronger balance sheets and healthier gearing levels, which will make them more resilient against market volatility. Asian policy makers are also more proactive and pre-emptive in managing asset price inflation and consumer credit. We are confident that Asian economies today are equipped to ride out the current economic and interest rate cycles.

"Additionally, Asian economies have benefitted from rising intra-regional trade, investments and consumer affluence trends that will continue to drive the region's economic growth and cushion it from possible global capital outflows."

Though the announcement of the QE pullback has put pressure on Asian currencies, which have been weakening since May 2013, Mr Koh said that the depreciation in Asian currencies is not a reflection of economic weaknesses in the region but a result of improving growth prospects in the US. In this respect, the Ringgit will remain choppy against the US Dollar. Expectations of QE tapering in the US could keep USD/MYR above the Bank's year-end target of 3.29-3.30 in the short-term.

According to Mr Koh, the US Federal Reserve will only raise short-term interest rates in 2015 in view of the modest pace of the US economic recovery. This will give time for Asian central banks to adjust their monetary policies and for investors and businesses to manage potentially higher borrowing costs.

"We maintain our forecast that Bank Negara Malaysia will keep its benchmark overnight policy rate steady for the rest of the year, but we do see greater prospects of tightening in the later part of 2014 as domestic demand retains its strength," Mr Koh said.

Growth outlook for second half of 2013

Domestic demand is expected to be the key driver of growth in Malaysia in the coming quarters against the lacklustre recovery in global markets. While Malaysia's Gross Domestic Product (GDP) growth eased to 4.1 per cent year-on-year in the first quarter of 2013 from a revised 6.5 per cent in the last quarter of 2012, private consumption has held up, rebounding from 6.2 per cent in the last quarter of 2012 to 7.5 per cent year-on-year in the first quarter of 2013. This was helped partly by budget hand-outs and the implementation of minimum wage for the private sector in early 2013.

UOB expects GDP growth to strengthen in the second half to bring the full-year rate to 4.7 per cent, with the recovery in external demand providing upside potential to its forecast.

Supporting development

With the conclusion of the General Elections, the continued roll out of the Economic Transformation Programme, which includes developments in the Iskandar region and Greater Kuala Lumpur/Klang Valley, will help to boost foreign direct investment and sustain GDP growth.

As part of this, UOB Malaysia has provided financing for infrastructure projects in Greater Kuala Lumpur, such as the integrated urban mass rapid transit system and the extension lines for the light rapid transit system, as well as Government-related Private Finance Initiatives that focus on the education and healthcare sectors. In addition, UOB Malaysia has also facilitated the financing needs for foreign companies setting up business in the Iskandar region, including those from the manufacturing, property, food and beverage, logistics and retail sectors.