Govt cannot afford meaningful fiscal stimulus
> It will have to make significant expenditure cuts in the second half of 2016 to achieve deficit target
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.