Recent QET

Recent QET

2019Q2: Can Malaysia weather the storm ahead?

24 June 2019

Executive Summary


World Economic Situation and Prospects for 2019

  • Escalating trade war raises the spectre of global recession. Global growth defies pessimism to expand further in the first quarter of 2019, with most advanced and regional economies have recorded either a sustained or slower pace of economic expansion. High frequency indicators such as manufacturing and trade started the second quarter on somewhat weak note. Global financial market volatility continues as investors’ anxiety remains over escalating trade tensions between the US and China as well as the potential spreading of the trade spat risk involving more countries. A prolonged and full-blown trade war would further dent business and financial market sentiments, slowing investment and trade. This may tip the scale towards a sharper economic slowdown in the US and China, pushing the slowing global economy into recession.
  • Mixed performances in advanced economies. While the US economy roared back strongly by an annualised 3.1% qoq in 1Q19 (2.2% in 4Q18), the heightened uncertainty on the trade war escalation would weigh on business sentiment in the quarters ahead. Moreover, private consumption and investment have already weakened in 1Q19. In euro area, high frequency data and survey information still pointing to soft economic and industrial activities and it remains to be seen if the momentum will continue to keep pace in 2Q-3Q. Japanese economy’s unexpected growth spurt (0.9% yoy in 1Q19 vs. 0.3% in 4Q18) comes with caution about the strength of domestic demand. There have been growing calls to delay the planned consumption tax hike to 10% from 8% in October in the face of worsening domestic and external conditions. Although China expanded robustly by 6.4% in 1Q19, a slew of weak data and the intensifying trade tensions with the US in recent weeks likely to further dent confidence, prompting the roll out of more fiscal measures to cushion overall activity from decelerating.
  • Dovish monetary stance remains. Global central banks have tilted towards the path of monetary easing amid heightened concerns about global economic weakness. The recent escalation in trade wars open the prospect of rate cut if the economic outlook deteriorates further. The Fed funds futures indicate that the most likely outcome is that the Fed will cut once or twice in 2H 2019, with the first move potentially coming in July or September. Looking ahead, the European Central Bank (ECB) is expected to its dovish tone for a while longer. It has reiterated that interest rates are expected to remain at their present levels at least through the first half-year of 2020 and it would continue to fully reinvest the principal payments from maturing securities “for an extended period of time”. Bank of Japan (BOJ) has decided to provide forward guidance on monetary policy for the first time ever and stated that it will keep the short- and long-term interest rates at the current low levels till at least spring 2020.
  • Risks to global growth. There are many downside risks to global growth as follows: (a) If the trade tensions continue unabated and get worse; (b) Even if a trade agreement is reached, tensions in trade policy could flare up again and cause disruptions to global supply chains; (c) Growth in the US (fading stimulus and rich equity market valuations), euro area (sovereign debt) and China (financial and debt risks) may surprise on the downside. The risks surrounding Brexit remain heightened; and (d) A deterioration in market sentiment could tighten financing conditions in an environment of large private and public sector debt in many countries, including sovereign-bank doom loop risks. As at end-Dec 2018, global debt amounted to US$180.3 trillion or 233.7% of GDP, of which non-financial corporations made up 39.2% of total (91.6% of GDP); followed by general government 35.3% of total (82.5% of GDP) and households and non-profit institutions serving households (NPISHs) (25.5% of total or 59.7% of GDP).


Malaysia’s Economic and Financial Conditions

  • The Malaysian economy slowed in 1Q19; downside risk remains. Malaysia’s economic growth grew at a slower pace of 4.5% yoy in 1Q19 (4.7% in 4Q18) due to slowing domestic demand and exports. Looking ahead, real GDP growth is expected to grow by between 4.5% and 4.7% in the remaining quarters as external environment still impaired by the escalation of trade war. On the domestic front, cautious business and consumer sentiments would continue to weigh on private spending. SERC maintained this year’s real GDP growth estimates of 4.5%-4.7% (4.7% in 2018).
  • Still moderate economic indicators. Weak data for April suggests that economic growth would continue to grow moderately estimated between 4.5-4.6% in 2Q. Retail sales, industrial production, exports and banking system loans all continued to grow, albeit moderately for some.
  • Consumer spending continues; private investment indicators seen mixed. Sales of consumer durables such as car sales grew by 8.0% in April (8.3% in 1Q19); consumption credit eased slightly while imports of consumption goods grew robustly by 18.9% in April (1.1% in 1Q19). Private investment indicators were mixed: Sales of commercial vehicles contracted by 9.3% in April though narrowed from -14.9% in 1Q19. Imports of investment goods turned around to grow by 5.7% in April from a sharp decline of 9.8% in 1Q.
  • Exports turned positive in April. Following two straight months of declines, exports grew by 1.1% in April (-0.7% in 1Q), reflecting some improvement in demand of electrical and electronic products, crude petroleum, chemical and chemical products while agriculture exports declined, mainly due to a much lower exports of palm oil.
  • We continue to stay cautious about the outlook of Malaysia’s exports, particularly in the second half-year, with a lot hinging on the US-China trade deal that is proving elusive so far. With trade tensions escalating to the next level of more and higher tariffs, it could further dent business and financial market sentiment, slowing investment and trade.
  • Headline inflation remains subdued. Malaysia has crawled out from the trap of technical deflation as the distortionary effect from the transport prices normalizes. Headline inflation reading, as measured by the Consumer Price Index (CPI) has remained in positive trajectory for two months in a row (0.2% each in April and March respectively). YTD (Jan-Apr), inflation declined by 0.2% while core inflation up 0.4%, indicating continued domestic demand. SERC expects headline inflation to average 1.0%-1.5% in 2019 (1.0% in 2018) due to some cost pass-through from domestic cost factors. These include the lapse in consumption tax policy; increase in prices of soft drinks due to soda tax; increase in minimum wage; higher electricity surcharges for businesses; and potential higher increase in food prices.
  • BNM to keep rates steady at 3.00%. Bank Negara Malaysia (BNM) cut the overnight policy rate (OPR) by 25 basis points (bps) to 3.00% on 7 May in a bid to mitigate the economy against the risk of sharper economic slowdown. Looking ahead, the central bank will remain focus to ensure financial stability and the provision of credit facilities at reasonable rate to support business and consumer spending. SERC expects BNM to keep monetary arsenal for now while continue to assess the impact of interest rate cut on domestic demand amid keeping close monitoring the on-going trade war’s spillover effects on investment and trade. We maintain our OPR estimates at 3.00% by end-2019 (3.25% at end-2018).
  • Headwinds seen continuing weighing on the ringgit. The ringgit has succumbed to downward pressure against the US dollar in late May and early June due to a confluence of negative sentiments: Concerns over heightened uncertainty of the US-China trade tensions and the potential widespread to involve more countries; investors’ uneasiness about FTSE Russell putting Malaysia on a watch list of fixed income markets for a review of potential downgrade to “1” from “2” currently, which would render Malaysia ineligible for inclusion in FTSE World Government Bond Index (WGBI) on 1 September; and the US Treasury places Malaysia in the US Treasury’s Monitoring List.
  • While the Ringgit will continue to be subjected to external pressures in times of increasing uncertainty, we believe that Malaysia’s economic and financial fundamentals should remain supportive of the ringgit over the medium-term. The fundamental factors like the projected continued economic growth, current account surplus and still ample foreign reserves would continue to support the ringgit. The ringgit is estimated at RM4.00-RM4.15 per US dollar by end-Dec 2019 (End-Dec 2018: RM4.1385/US$).


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