Spotlight on Bank Negara
Central bank’s guidance will set the tone for expectations of the economy as emerging market currencies slide
PETALING JAYA: Investors will be looking for clues on Malaysia’s future growth from Bank Negara’s announcement on the second quarter economic performance this week.
The announcement comes as emerging markets are going through a turmoil sparked by the steeply weakening Turkish lira last Friday, which fell close to 15% against the US dollar in a single day after President Donald Trump imposed tariffs on aluminium and steel imports from the country.
The Russian ruble also fell to its lowest level against the US dollar since June 2016 after the US said it would impose sanctions on Russia coupled with falling oil prices and a stronger dollar.
Since April this year, the lira has fallen by 62%, the ruble by close to 18% and the yuan by 10% against the US dollar.
Late last Friday, the South African rand and the Mexican peso also fell as investors pulled out money from emerging markets.
So far the currencies in South-East Asia and South Korea have not been greatly affected by the crises in other emerging markets. Since April this year, the ringgit is down by 5.8% against the US dollar while the rupiah is down by 5.3%. The Korean won has weaken by 6.9%.
How far the extent of the contagion will be contained will only be known today when the markets open.
Fund managers generally feel that Malaysia may be strong enough to withstand the pressure on currencies in emerging markets because countries such as Turkey, China and Russia were facing trade wars and tariffs imposed by the US.
Areca Capital chief executive Danny Wong said the tumbling of the lira and ruble has affected some emerging market currencies but Malaysia may be strong enough to withstand the pressure.
“Sentiment is negative on emerging market currencies but the plunge in the lira and ruble was linked to specific political issues with the US. Some Asian countries may still benefit from foreign fund flows as they are in better fiscal and current account positions with banks that are well capitalised,’’ he said.
Notably, this would be Bank Negara’s first statement under governor Datuk Nor Shamsiah Mohd Yunus who replaced Tan Sri Muhammad Ibrahim in June.
Moody’s Analytics reckoned that the tax breaks following the zerorisation of the Goods and Services Tax (GST) would apply “a little” to the upbeat growth engine in the second half to compensate for the slower construction sector following the shelving of some infrasructure projects by the new government.
“Private consumption likely enjoyed a lift from government cash handouts and the zerorisation of the GST in early June, which encouraged higher discretionary spending,” it said in a report on Friday.
The firm targeted Malaysia to post a GDP growth of 5.4% in the second quarter, which is similar with the first quarter growth. Last year, the country’s GDP growth accelerated to 5.9% from 4.2% in 2016.
Alliance Bank Malaysia Bhd chief economist Manokaran Mottain said although the direct impact of the construction sector was only 4%-5% of the overall economy, the indirect impact is far greater.
“A slowdown in construction sector would also impact the manufacturing and services sectors. Nonetheless, the (GST) tax break would help to offset the slowdown,” he told StarBiz.
Manokaran has maintained his 2018 GDP forecast at 5.6% but warned of a possible economic slowdown next year which could result in a recession if the trade war between the US and China goes full-blown.
A country is considered to be in recession if it records two consecutive quarters of negative economic growth.
“The main challenge is from the trade side and external sectors as uncertainties escalated from the trade wars,” Manokaran said.
Meanwhile, MIDF Amanah Investment Bank Bhd chief economist Kamaruddin Mohd Nor said the flattening of yield curve in the recent months was stirring fears of recession
“The gap between long and short-dated yields turning negative has been a reliable predictor of recessions in the past,” he said.
Nonetheless, he said the slowdown in growth was a worldwide phenomenon, and not only unique to Malaysia.
“The trade wars is dampening business confidence and as a result future investments could be affected. This will affect future growth,” Kamaruddin said.
Back at home, interestingly, confidence in the business and consumer sector has been on the rise. In June, the consumer sentiment index has risen to a 21-year high at 132.9 points as oil prices stabilised and GST was zerorised.