Global and domestic uncertainties leave Malaysian economy in cautious mode

KUALA LUMPUR (Dec 18): Malaysia went through a cautious economic phase this year due to various factors such as the uncertainties in the global economic environment — including the United States (US)-China trade negotiations and Brexit — as well as the domestic political scene.

The country’s 2019 economic growth was expected to be between 4.3% and 4.8% by Bank Negara Malaysia (BNM), subject to downside risks from lingering uncertainties on the global and domestic front, worsening trade tensions and extending weakness in commodity-related sectors.

Growth is expected to be within projections for the year and the pace sustained going into 2020, mainly underpinned by private sector activities, particularly household spending, supported by continued expansion in employment and income.

The country’s gross domestic product (GDP) grew at a resilient pace of 4.5% in the first quarter of 2019 (1Q19), 4.9% in 2Q and 4.4% in 3Q.

Despite the slower growth in 3Q, the central bank remained optimistic of a rebound in 4Q with a spillover effect into 2020, fuelled by normalised supply conditions and revival of megaprojects.

Governor Datuk Nor Shamsiah Mohd Yunus said the economic situation in 3Q19 was somewhat similar to 2Q18 when Malaysia faced a supply disruption.

“And that supply disruption normalises. The oil plants that were closed (in 3Q19) have started producing again in 4Q19, so that will provide support.

“Some of the work towards restarting mega projects by the government is underway. So that will also provide support,” she told reporters during the announcement of Malaysia’s 3Q19 GDP report recently.

The monetary authority continued to engage with index providers and investors to identify ways to increase market efficiency, following FTSE Russell’s decision to keep Malaysia on the watch list on the World Government Bond Index.

In May, BNM lowered the overnight policy rate (OPR) to 3.0%, and the rate remained unchanged at its Nov 5 meeting — the last Monetary Policy Meeting for 2019.

However, an economist said that there was a likelihood of an additional 25-basis point reduction in the OPR next year amid the low inflation rate and weak consumer sentiment.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said BNM appeared to be taking a neutral stand in the immediate term, noting that the economy would continue to be supported by private sector spending, especially household expenditure.

“In that sense, BNM is of the view that economic growth will continue to be decent. Having said that, the inflation rate is expected to be low and modest this year and in 2020. This means room for OPR reduction is wide open in 2020.

“So, BNM is able to prescribe monetary easing measures but wants to wait for further evidence on whether such policy response is warranted,” he added.

The central bank also announced the reduction of the Statutory Reserve Requirement (SRR) ratio to 3.00% from 3.50% effective Nov 16, 2019 — the first cut since 2016, when the ratio was lowered to 3.50% from 4.00%.

The reduction of the SRR was to ensure sufficient liquidity and facilitate effective liquidity management by the banking institutions.

Under the 2020 Budget, the government has set a fiscal deficit target of 3.2% of the GDP, lower than this year’s 3.4%, citing a heightened risk of a global economic slowdown and unanticipated spending needed to rescue troubled state institutions.

The government also launched the new development blueprint, Shared Prosperity Vision 2030 (SPV 2030) this year, aimed at a fair and equitable distribution of economic development at all levels by 2030.

The blueprint reflects the country’s commitment in implementing the 2030 Agenda for Sustainable Development (SDG 2030).

The principles of SDG 2030 is already implemented under the Eleventh Malaysia Plan (2016-2020) — which depicted Malaysians as the centrepiece of all development efforts and ensure that no section of society is left behind in achieving sustainable development.

Its principles will continue in SPV 2030, which will be operationalised via the 12th Malaysia Plan (2021-2025) and the 13th Malaysia Plan (2026-2030).

On the global front, the prolonged US-China trade war is hurting exporting countries globally.

The latest development of the trade dispute saw the two economic powerhouses announcing a “phase one” deal on Dec 13.

Among other things, the deal scrapped the second tranche of the tariffs imposed by both countries, which was previously scheduled to take effect on Dec 15, while some portion of the first tranche of the tariffs imposed were reduced.

The uncertainties on the global economic front has also affected the country’s trade figures.

Based on the latest statistics from the Malaysia External Trade Development Corporation (MATRADE), Malaysia’s total trade in the first 10 months of 2019 declined by 2.8% to RM1.52 trillion.

Chief executive officer Datuk Wan Latiff Wan Musa said exports during this period decreased by 1.8% to RM819.13 billion.

Despite lower exports recorded with Hong Kong, Australia, Japan, Indonesia and China, higher exports have been registered with Taiwan, the US, India and the Philippines.

“Good news is that the trade surplus remains strong and has expanded by 13.3% to RM118.2 billion — the highest trade surplus for January-October since 2009.

“This marked the 264th consecutive month of trade surplus since November 1997 for Malaysia and the highest monthly surplus ever recorded thus far,” he told Bernama.

Moving into 2020, Mohd Afzanizam said BNM and the government are expected to enact more expansionary economic policies in order to cushion the impact from the slower global growth expected next year.

When asked if a stimulus is needed to support the country’s economic growth, he said he believed the government had mulled the move in 2020 Budget.

“I think we need it but it has been reflected in the 2020 Budget to some degree, as the government is looking at a wider fiscal deficit target of 3.2% next year (compared with an earlier projection of 3.0%) and has allocated RM56 billion for development expenditure, which is higher from the average of RM46 billion between 2010 and 2018,” he added.

On trade, Wan Latiff said MATRADE foresees Malaysia’s trade improving by 1.8% to reach RM1.89 trillion in 2020 as per the Economic Outlook 2020 report, with the key point being to continue finding opportunities with businesses overseas.

Source: TheEdgeMarkets