News

• Uncertainties about Greece default and exit from the euro bloc (Grexit) subsided after the Greek government submitted a reform proposal on 22 June that was broadly accepted by the creditors as a basis for further discussion. Greece is facing an urgency of securing funding to repay its €1. 6bn to the IMF by end-June and €3.5bn to the ECB by 20 July.
• Greek new reform plan includes: (i) increase in corporate tax rate to 29% from 26%; (ii) tax surcharge of 12% on corporations with net i ncome over €500,000/year; and (iii) phasing out of early retirement options from 2016 to 2025 (refer to Appendix I). Preliminary, the Greek government has agreed to creditors’ request to meet a primary budget surplus of 1.0% of GDP this year, 2.0% next year and 3.0% in 2017.
• The European Union Summit will be held on 25-26 June, with focus on the negotiation of Greek reform plan for continuation of financial to aid loan repayment.

Comments

• From economic perspective, Greece (1.9% of the euro zone GDP) is too small to drag down the whole currency union. However, in the event of default and Grexit, contagion risk could still emerge from linkages to Greek financial system. Statistics revealed that members that most exposure to Greece’s loans, claims and bonds are Germany (28%), France (21%) and Italy (19%).
• In the worst case scenario of Grexit, we opine that kneejerk selldown will still occur, predominantly on countries with high linkages to Greek assets. However, we expect contagion risk to be limited this time around as (i) availability of ECB QE to inject liquidity and stabilize bond yields; (ii ) peripheral economies (i.e. Portugal & Spain) are now fundamentally stronger; and (iii) The IMF and ECB are the most exposed to Greek debt pile (~56% of total debt).
• Closer to home, downside risks to the Malaysian economy and financial markets are rather limited besides transmission via increased uncertainty and financial volatility. Malaysia’s trade with Greece is very tiny with exports to Greece making up just 0.2% of total exports in 1Q15. FDIs from Greece were not in Mal aysia’s top list. European bank loans to Malaysian corporates total less than 5% of GDP.
• With the diminishing Grexit risk, investors should focus on the soft patch of the Chinese economy. Given China is our largest export destination (12% of total exports), it is crucial for China to maintain its economic momentum and resume its import demand. With the proactive monetary and fiscal stimulus imposed since late 2014, we expect China’s growth to stabilize in 2H, ending the year with about 7.0% growth.
• For Malaysia, we maintain our GDP growth at 5.0% for this year and reiterate our end-2015 OPR target at 3.25%.
• Despite the relief of Greece episode, we expect MYR to remain under pressure, mainly attributed to the strength of US$ and unresolved domestic issues. We expect MYR to fluctuate in the range of RM3.55-4.00/US$ ahead with full - year mid-point forecast averaging at RM3.70/US$.

Source: Hong Leong Investment Bank Research - 24 Jun 2015