On track to meet target despite slower growth in third quarter
Central bank confident GDP will grow between 4.3% and 4.8%
DESPITE slower growth in the third quarter, Malaysia’s economy remains on track to expand within Bank Negara’s full-year projection of 4.3% to 4.8% in 2019.
Such optimism, the central bank notes, is backed by the resilience of domestic private sector spending.
In a briefing announcing the country’s economic performance, Bank Negara governor Datuk Nor Shamsiah Mohd Yunus points out that Malaysia’s gross domestic product (GDP) had clocked in a growth of 4.6% for the first three quarters of the year.
Notwithstanding the uncertainties in the global economic and financial conditions, she says the country’s GDP growth will likely be sustained for the remainder of 2019 and going into 2020.
“This is underpinned mainly by private sector activity, particularly household spending, which is supported by continued expansion in employment and income growth,” Nor Shamsiah says.“private investment growth is projected to remain modest, supported partly by realisation of approved projects, while public investment will be a smaller drag to growth.”
On the external front, Nor Shamsiah concedes, support from net exports will likely moderate due to weak global trade amid ongoing trade tensions between the United States and China as well as slowing global growth.
“Malaysia is not immune to external volatilities because we are a very open economy. But the diversified nature of our export will be able to provide some cushion to external headwinds,” she explains.
Bank Negara announced a GDP growth projection of 4.3% to 4.8% for 2019 when it released its 2018 annual report in March.
This compared with the 4.7% GDP growth estimated by the Finance Ministry during the tabling of Budget 2020 last month.
Nor Shamsiah says Malaysia needs to achieve a growth of 4.8% in the fourth quarter of this year in order to meet the full-year projection of the MOF.
Nevertheless, when asked what will GDP growth look like for the final three months of the year based on prevailing data, Nor Shamsiah simply says, “fourth-quarter growth will be somewhat sustained overall, it will be within the range of what we projected.”
She notes continued private sector spending, recovery in commodity production and operationalisation of new facilities in the mining sector, and resumption of large transportation projects should support growth.
Even so, she says, the balance of risks to growth remains tilted to the downside, arising from a potential escalation in trade tensions, heightened geopolitical tensions and volatility in commodity prices and production.
In 2018, Malaysia’s economy grew 4.7%. For the third quarter of this year, Malaysia’s GDP growth moderated to its slowest pace in a year at 4.4%, matching the median forecast in a Reuters poll of 14 economists.
According to Bank Negara’s data, the slower GDP growth, compared with 4.9% in the second quarter, was primarily attributable to lower growth in key sectors such as manufacturing and agriculture, and a decline in the mining and construction activities.
During the quarter in review, the mining sector contracted 4.3%, due mainly to maintenance works that affected oil production. This partially offset the ongoing output recovery in natural gas. The construction sector, on the other hand, contracted 1.5% due mainly to the slump in the non-residential sub-sector amid the continued oversupply of commercial properties.
On the demand side, most domestic-demand components and net exports registered slower growth momentum, the central bank says.
It noted domestic demand growth moderated to 3.5% in the third quarter from 4.6% in the preceding quarter, with private sector expenditure remaining the key contributor to growth.
While it has also moderated, private sector expenditure remained firm, Nor Shamsiah says.
“Private consumption grew by 7%, compared with 7.8% in the preceding quarter, as household spending has normalised towards its longterm trend following the strong tax holiday spending last year,” she explains. “Going forward, consumer spending will remained supported by continued income and employment growth, as well as supportive Government measures and modest inflationary pressures.”
Of concern, private investment growth has been trending down, expanding a mere 0.3% in the third quarter, compared with 1.8% in the preceding quarter, weighed down by lower capital spending across major economic sectors.
Bank Negara points out private investment remains affected by heightened external uncertainties and slower global growth as well as persistent weakness in the country’s property sector.
Stressing the importance of boosting private investment to support the country’s economy, Nor Shamsiah says, “efforts need to be put in place to attract private investment into areas where we have comparative advantage.”
Meanwhile, gross exports contracted 1.9% in the third quarter due to a decline in commodities and E&E (electrical & electronics) exports, which more than off set the improvement in non-resource based exports. Gross imports, on the other hand, declined at an even faster of 5.8%. Overall, Malaysia remains in a positive current account position, with a surplus of Rm11.5bil, or 3.1% of gross national income, GNI, in the third quarter.
Nor Shamsiah says the country’s current account is expected to remain in surplus in the quarters ahead, on sustained goods surplus amid continued demand from key trade partners.
Accommodative stance
On Bank Negara’s monetary policy stance, Nor Shamsiah reiterates that the central bank will continue to assess the balance of risks to domestic growth and inflation to ensure that the monetary policy stance remains conducive to sustainable growth amid price stability.
“We will always be data dependent,” she points out.
Bank Negara was the first central bank in South-east Asia to cut interest rate this year when it lowered the overnight policy rate (OPR) by 25 basis points (bps) to 3% on May 7 amid concerns of a potential slowdown in the country’s economic growth.
While central banks around the world have been slashing interest rates in recent months in an effort to boost growth, and to contain the impact of a slowing global economy, Bank Negara stood pat, maintaining the OPR at 3% till the end of the year.
However, last week saw the central bank unexpectedly cut the statutory reserve requirement (SRR) for banks to inject liquidity into the system. That was the first SRR cut in three years.
Malaysia’s headline inflation averaged higher in the third quarter at 1.3%, compared with 0.7% in the preceding quarter, due mainly to the lapse in the impact from the zerorisation of the Goods and Services Tax, or GST, between June and August last year.
Nor Shamsiah says headline inflation in 2020 is expected to average higher than this year but remain modest.
“This reflects the lapse in the impact of consumption tax policy changes, the lifting of the fuel price ceilings amid the relatively subdued outlook on global oil prices and policy measures in place to contain food prices,” she explains.
“Underlying inflation is expected to remain stable, supported by continued expansion in economic activity and in the absence of strong demand pressures,” she adds.
Commenting on Malaysia’s economic outlook, RAM Ratings says the country’s economic resilience will rely heavily on domestic drivers in 2020 amid the continually challenging external demand landscape.
And given its baseline expectation of lingering weakness in external growth and, therefore, more emphasis on domestic demand-driven expansion, the credit rating agency says both monetary and fiscal policies will play an integral role as a buffer against downside risks.
“In light of the mildly growth-supportive
Budget 2020, there is also a possibility of Bank Negara cutting the OPR by another 25 bps to 2.75% next year,” RAM Ratings says in its report. “Our expectation of further easing is premised on the potential risk of external downside risks filtering through to the domestic growth drivers of consumption and investment - the backbone of sustainable growth in 2020,” it explains.
RAM Ratings forecasts Malaysia’s GDP growth to ease slightly to 4.5% in 2020 from the 4.6% it expected for this year.
Meanwhile, OCBC Bank says following the release of Malaysia’s GDP numbers for the third quarter, it expects the country’s economic growth to decelerate further to 4.2% in 2020 from its projected expansion of 4.5% for the whole of 2019.
This contrasts with the Government’s forecast last month of an accelerated growth of 4.8% for 2020. “As much as Malaysia’s own domestic drivers can help buffer the impact, the global situation is still the biggest swing factor, with unavoidable impact on investment and trade even though the central bank appears to subscribe to the view that domestic growth remains largely favourable, it is still very much subjected to the ripple effects from global events,” OCBC Bank says in its report.
Meanwhile, Standard Chartered Bank (Stanchart) appears rather unenthusiastic about Malaysia’s economic prospects.it says while private consumption had remained relatively resilient, investments and exports had been weak.
“Looking to 2020, a potential bottoming out (but no strong recovery) of global growth may improve onshore growth sentiment. We estimate that the Malaysian economy may run close to zero potential growth in 2020. However, downside risks remain and could turn the output gap negative,” Stanchart says in its report.
According to JP Morgan, external demand tailwinds may provide some offset to softer private consumption growth momentum for Malaysia.
“We continue to look for some slowing in private consumption, which has been the dominant driver of growth since 2018, next year in the absence of the one-off tax and income rebates to households that facilitated growth in the first half of 2019,” it says. “However, as Malaysia’s overall activity in part reflects external developments, the stabilisation in global capex indicators in the coming quarters could bring external demand tailwinds for the Malaysian economy.”