PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

7 September 2010

1 Investors Are Still Concerned Over Europe Banks’

Holdings Of Sovereign Debts

2 US Plans Stimulus Spending On Transportation

Infrastructure

3 Indonesia Raised Banks’ Reserve Ratio

Tracking The World Economy...

Today’s Highlight

Investors Are Still Concerned Over Europe Banks’ Holdings Of Sovereign Debts

Only seven out of 91 European Union banks that had subjected to stress tests failed with a combined capital shortfall
of €3.5bn (US$4.5bn) when the tests result was unveiled in late July. Investors greeted the data as a much-needed dose
of clarity since the uncertainty surrounding bank sovereign-debt holdings was fanning fears about the health of Europe’s
banking system.

However, fears have flared up again as economies and financial systems in heavily indebted countries continue to
struggle. Europe’s largest financial companies hold more than €134bn in Greek, Portuguese and Spanish government
bonds, according to Bloomberg’s compilation in May. Even after a €750bn (US$960bn) emergency bailout fund was set
up to help the weaker economies in the Euroland, investors are still skeptic about sovereign debt and especially the banks
that hold the region’s government bonds. This was because not all investors are convinced with the results of the stress
tests, as they argued that it was not stringent enough. Indeed, the stress test understated some lenders’ holdings of
potentially risky government debt, according to an analysis by the Wall Street Journal of banks disclosures.

As a result, investors are still demanding a high premium for buying Greek debt. As it stands, the yield of 10-year Greek
bonds was at 11.28% on 3 September, compared with 2.34% on similar German bonds. At the end of August, the gap
between the two, the yield spread, was the widest it has been since the peak in May, just before European leaders agreed
on the bailout. Similarly, Irish bonds yield spread versus German bonds climbed to the highest in at least 20 years, after
Standard & Poor’s on 24 August cut the country’s credit rating by one notch to AA-, citing concern that the rising cost
of supporting Ireland’s struggling banks will increase its budget deficit.

The hesitancy among investors also shows up in the spreads on bank bonds, with some European institutions paying
higher borrowing costs compared with their US counterparts. As of 2 September, buyers demanded an extra 383 basis
points over the yield on government debt to own 5- to 10-year bonds sold by Paris-based BNP Paribas SA, according
to Bank of America Merrill Lynch index data. The comparative premiums were 275 basis points for US based Citigroup
Inc. bonds and 192 basis points for JPMorgan Chase & Co. bonds.

With yields on European bank debt so high, the market has shrunk and lenders have been slow to raise the capital they
need. As a result, many European institutions continue to rely on central banks for funding. In July, the European Central
Bank (ECB) loaned €132bn for three months to 171 financial institutions. Wary of lending to each other, banks are also
keeping record amounts of their cash with the ECB. On 9 June, lenders in the Euroland deposited a record €369bn
overnight with the ECB, more than in October 2008, during the credit meltdown. Knowing the situation, the ECB on 2
September extended emergency lending measures for banks into 2011. The ECB will keep offering unlimited one-week
and one-month loans until at least 18 January, and will offer additional three-month funds in October, November and
December.
Peck Boon Soon
(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

A comprehensive range of market research reports by award-winning economists and analysts are
Page 1 of 3
exclusively available for download from www.rhbinvest.com
 7 September 2010

The US Economy

US Plans Stimulus Spending On Transportation Infrastructure

◆ The US may announce a six-year plan to rehabilitate the nation’s transportation infrastructure with
an initial allocation of US$50bn to help spur economic activities that are slowing down. The US
President will work with Congress to ensure that the plan is fully funded, and a significant portion of the new
investments would be front-loaded in the first year to help create jobs starting in 2011. Construction jobs in the
US have declined by 940,000 since President Barack Obama took office in January 2009, even after a 19,000 gain
in August. The US government plans to pay for it by eliminating tax deductions for oil and gas companies. Much
of the economic stimulus package of US$787bn approved in early 2009 has already been spent, according to the
Congressional Budget Office. Of the total, US$223bn has gone to tax relief, about US$144bn has gone to states
to help prevent layoffs and provide health care and US$145bn has gone towards contracts, grants and loans. Of
the amount of US$38.6bn allocated for the Transportation Department, only US$18.5bn has been paid out thus far.

Asian Economies

Indonesia Raised Banks’ Reserve Ratio

◆ Bank Indonesia, on 3 September, ordered banks to increase their deposits with the central bank as
primary reserves to 8%, from 5% previously, in a move to absorb 50 trillion rupiah (US$5.6bn) of excess
liquidity from the system. The central bank, however, kept its benchmark interest rate unchanged at 6.5%. Bank
Indonesia indicated earlier that it may raise banks’ reserve requirement to absorb liquidity, while refraining from
raising its key policy rate, in a move to contain inflation. Indeed, the central bank has not changed its key policy
rate after reducing it to 6.5% in May 2009. Meanwhile, the country’s inflation accelerated to a 16-month high of
6.4% yoy in August, higher than the central bank’s target of 4-6% for two consecutive months. The new primary
reserve level will take effect on 1 November, and beginning in March next year, the central bank will introduce an
additional reserve requirement that is linked to how much of its funds a lender gives out in loans. It will impose
a penalty for banks whose loan-to-deposit ratio is below 78% or more than 100%. The additional reserve
requirement for banks whose loan-to-deposit ratio is above 100% will be waived if those banks also have a capital
adequacy ratio of at least 14 percent. Currently, 30 banks have loan ratios below 78 percent and no banks are
above 100%.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB
Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as
may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable
and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as
a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the
securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such
statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have
an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances
and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that
investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The
appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI,
RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of
this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities
as well as providing investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing
activities, any member of the RHB Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or
the accounts of customers, in debt or equity securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the
respective directors, officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will
seek investment banking or other services from the companies in which the securities have been discussed/covered by RHBRI in this report or
in RHBRI’s previous reports.

A comprehensive range of market research reports by award-winning economists and analysts are Page 2 of 3
exclusively available for download from www.rhbinvest.com
 7 September 2010

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may
not reflect information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received
compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm
revenues.

A comprehensive range of market research reports by award-winning economists and analysts are Page 3 of 3
exclusively available for download from www.rhbinvest.com