Govt can­not af­ford mean­ing­ful fis­cal stim­u­lus

> It will have to make sig­nif­i­cant ex­pen­di­ture cuts in the sec­ond half of 2016 to achieve deficit tar­get

The Sun (Malaysia) - - SUNBIZ -

PE­TAL­ING JAYA: The govern­ment will not be able to af­ford any mean­ing­ful fis­cal stim­u­lus, with rev­enue lag­ging tar­gets and ex­pen­di­ture hav­ing over­shot, HSBC Global Re­search said in its Asian Eco­nomic Quar­terly re­leased yes­ter­day.

It said, this had left deficit at a hefty 5.6% of gross do­mes­tic prod­uct (GDP) for the first half of 2016 and sig­nif­i­cant ex­pen­di­ture cuts will have to be made in the sec­ond half of the year to achieve the govern­ment’s 3.1% deficit goal.

HSBC Re­search opines that it will likely achieve a deficit of 3.2% of GDP for the year. It has a 4% growth in GDP tar­get for 2016.

It also said that the govern­ment is likely to face sim­i­lar fis­cal con­straints in 2017, with the bud­get to be tabled on Oct 21 likely to con­tain more or less the same lim­ited mea­sures for low- and mid­dlein­come earn­ers as the 2016 bud­get.

“The econ­omy’s ex­ter­nal vul­ner­a­bil­i­ties have risen, with the cur­rent ac­count sur­plus much thin­ner than ex­pected, and the bud­get deficit un­der pres­sure. In the event that oil prices fall fur­ther, Malaysia is ex­posed to the risk of run­ning twin deficits – not the best dy­nam­ics in the cur­rent global un­cer­tainty,” it said in its re­port.

In its com­men­tary on the econ­omy, HSBC Re­search said ac­tiv­ity con­tin­ues to weaken, given lim­ited pol­icy op­tions to boost growth.

HSBC Re­search said data re­leased since the GDP re­port does not sug­gest any im­mi­nent turn­around. The Pur­chas­ing Man­ager’s Index showed man­u­fac­tur­ing ac­tiv­ity con­tract­ing in July and Au­gust, and an on­go­ing re­duc­tion in em­ploy­ment in the sec­tor – the largest hirer in the coun­try along­side whole­sale and re­tail trade.

July trade data was also weaker than ex­pected, again un­der­scor­ing soft de­mand ex­ter­nally and do­mes­ti­cally. Trade sur­plus nar­rowed to RM1.9 bil­lion (unad­justed), the small­est sur­plus since Oc­to­ber 2014.

“This was in line with our low-end es­ti­mate, but both ex­ports and im­ports con­tracted more sharply than we ex­pected,” HSBC Re­search said in the re­port.

Ex­ports plunged 10% month-on­month (-5.3% year-on-year), giv­ing back nearly all of the gains made in June, while im­ports fell 9.2% month-on­month (-4.8% year-on-year).

It said amid mod­er­at­ing de­mand-pull pres­sures, in­fla­tion has stayed be­low Bank Ne­gara Malaysia’s (BNM) 2-3% com­fort range, and is likely to con­tinue to do so for most of the re­main­der of 2016.

HSBC Re­search opined how­ever that the most wor­ry­ing in­di­ca­tor of all is bank lend­ing growth, which has de­cel­er­ated sharply in re­cent months. In both mon­thon-month and year-on-year terms, loan growth is now near to or even lower than the rate dur­ing the Global Fi­nan­cial Cri­sis in 2008-09. The largest sources of drag are prop­erty loans (both res­i­den­tial and non­res­i­den­tial) and work­ing cap­i­tal loans, all of which are now at multi-year lows.

HSBC Re­search said with ac­tiv­ity con­tin­u­ing to slow and loan growth at multi-year lows, there is a press­ing need for BNM to de­liver mean­ing­ful pol­icy ac­com­mo­da­tion in this eas­ing cy­cle, and cut the Overnight Pol­icy Rate by an­other 25bp to 2.75% at the Nov 23 meet­ing – its last meet­ing of the year.

“Un­for­tu­nately, there is lim­ited scope for rate cuts be­yond that. Although low in­fla­tion does pro­vide room for eas­ing, overly ag­gres­sive cuts could re­sult in cap­i­tal out­flows, which BNM might find chal­leng­ing to counter with its thin forex re­serves,” HSBC Re­search said.

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