Malaysia to weather tough times in 2017
We believe this would be achievable as the uncertain global economic outlook plus bouts of currency and financial market volatility should be mitigated by ongoing implementation of infrastructure projects, possible early elections in 2017, and pre-election spending.
KUCHING: Analysts expect Malaysia to weather through tough times in 2017, underpinned by ongoing implementation of infrastructure projects, possible early elections, and pre-election spending.
RHB Research Sdn Bhd (RHB Research) said despite seeing volatility in Malaysia’s financial markets due unforeseen circumstances which occurred throughout the year, the country is still able to achieve a growth of four per cent in 2017.
“We believe this would be achievable as the uncertain global economic outlook plus bouts of currency and financial market volatility should be mitigated by ongoing implementation of infrastructure projects, possible early elections in 2017, and pre-election spending,” it opined.
Nevertheless, it cautioned that Malaysia faces headwinds from currency volatility.
“Despite gross domestic product (GDP) data that was released on November 11 showing the Malaysian economy picking up for the first time in seven quarters to 4.3 per cent in the third quarter of 2016 (compared with four per cent in 2Q16), financial markets were hit by volatility as the news was overshadowed by concerns over Donald Trump’s reflationary policy that could be inflationary – translating to fears of a faster increase in interest rates and a stronger US dollar.
“This triggered a selldown in developed markets’ debt papers and a surge in bond yields. As higheryielding emerging market bonds become less attractive in addition to a stronger US dollar, investors sold down their holdings in the regional equity and fixed income markets,” it explained.
As it stands, according to RHB Research, the ringgit has suffered badly, having weakened 6.2 per cent since the US election results were announced on November 8, as foreign investors adjusted their investment portfolios following the unexpected outcome.
“This was made worse by high levels of foreign holdings in Malaysian Government Securities (MGS) that reached 51.9 per cent as at end-October,” it added.
Despite that, the research team believed Malaysia’s economic fundamentals remains strong and able to withstand this currency turbulence.
“As fundamentals remain intact and the Malaysian economy is still expected to grow at a steady pace, we expect the ringgit to recover gradually over time after this round of volatility, when markets return to calm with more clarity from the Trump presidency.
“Although investors are adjusting their investment portfolios, it is worth noting that Malaysian bond market yields remain attractive, as the spread of 10-year MGS yield over the 10-year US Treasury yield has widened to 209bps as at November 28, from a low of 160bps on November 9,” it said.
However, it noted that continuing uncertainties in the global economic and policy environment, a series of elections in the eurozone, as well as geopolitical developments could still result in bouts of volatility in the regional financial and foreign exchange markets.
RHB Research
Looking ahead, RHB Research expect domestic demand to sustain its pace at 4.7 per cent in 2017, from an estimate of 4.6 per cent in 2016.
This is expected to be largely driven by a pick-up in private investment on the back of infrastructure spending, a modest rise in public spending but offset by a slight downtick in consumer spending.
It added, ongoing implementation of projects under the various economic programmes, in particular the construction of mega-infrastructure projects such as the Pan-Borneo Highway, MRT Line 2, the Sungai Besi-Ulu Kelang Elevated Expressway and DamansaraShah Alam Elevated Expressway would likely continue to lend support to private investment in 2017.
As for Malaysia’s trade activity, the research team said the global economic outlook is faced with further uncertainty following Donald Trump’s victory in the US elections on November 8.
“Due to his hardline rhetoric on immigration and trade protectionism during his election campaign we believe the election result presents some downside risk to global trade activities,” it opined.
The research team expect Malaysia’s real exports to grow only modestly by one per cent in 2017, from an estimated 0.2 per cent for 2016 and compared to 0.6 per cent in 2015.
It also noted that going forward, the current account surplus is expected to improve to RM20.2 billion or 1.6 per cent of GDP in 2017. It further pointed out that 2017 could see a recovery in commodity trade surplus on stronger oil prices. However, this could be offset by larger services and income deficit.
Aside from that, RHB Research believed that Malaysia’s government’s budget deficit would narrow to three per cent of GDP in 2017 from 3.1 per cent in 2016.
This would be due to an increase in revenue collection, and a slowdown in development expenditure which could be partly offset by stronger operating expenditure.
Overall, it believed that Malaysia would see a manageable inflation next year, with limited room for policy easing.
“Headline inflation rate to remain manageable at 2.5 per cent while the overnight policy rate ( OPR) is expected to be maintained for 2017 due to higher administered prices but mitigated by weak demand and currency weakness limits scope for OPR cuts,” it said.