Malaysian economic engine loses steam

BNM relaxes currency conversion rules for exporters

M alaysia

cut its full-year growth forecast and reported much slower second-quarter expansion yesterday, as the country reviews mega projects and tackles a massive debt left by the previous government.

Weaker growth figures are expected, analysts say, due to global uncertainties and questions raised by Mahathir Mohamad’s stunning election win in May that ended six-decade-long single party rule in Southeast Asia’s third-largest economy.

Slower growth also signals the economic risks f acing the 93-year-old Mahathir, who was premier from 1981 to 2003 and now has been back in the job for 100 days.

Annual expansion in the second quarter fell to 4.5%. The rate was well below January-March’s 5.4% and 5.2% median forecast in a Reuters poll of 14 economists and the slowest growth since the fourth quarter of 2016.

Bank Negara Malaysia (BNM), the central bank, blamed the fall partly on commodity production “shocks”.

Mining contracted “due mainly to unplanned supply outages, while the agriculture sector was affected by production constraints and adverse weather conditions,” BNM said.

The bank lowered its 2018 growth projection to 5.0% from 5.5-6.0%.

“Given the first half’s results, it’s hard to keep to the previous (growth forecast) numbers,” said Brian Tan, an analyst at Nomura.

The GDP announcement was governor Nor Shamsiah Mohd Yunus’ first since taking over in late June as part of a highlevel management shake-up by Mahathir.

“The second quarter of 2018 was an eventful quarter,” she told reporters.

“For some, it will be remembered for the 14th general election, the beginning of a one-off tax holiday and significant improvement in consumer and business sentiments,” Nor Shamsiah said.

The ringgit has been depreciating since April, but is still emerging Asia’s strongestperforming currency this year, shedding about 1.4% against the dollar.

Also yesterday, BNM relaxed currency conversion rules, saying it would no longer force exporters to convert proceeds into ringgit, relaxing a rule introduced in 2016 to boost onshore trading of the currency.

BNM also said it would allow companies more flexibility for hedging of foreign currency obligations and allow non-resident corporations to trade in ringgitdenominated interest rate derivatives.

Nor Shamsiah said the measures were an effort to give “greater flexibility” amid volatile markets.

Prakash Sakpal, Asia economist at ING in Singapore, said the desired effect of the steps “is to weaken the ringgit and protect against fallout from the trade war between the United States and China, which is Malaysia’s biggest trading partner.’’

“They are relaxing the export controls, so that should cushion some of the impact from the trade war,” he said.

Nor Shamsiah said the trade war has had a minimal effect so far but the global economy will be affected if it escalates.

Since taking over, Mahathir has pushed to review major infrastructure projects launched by the past administration and cracked down on corruption. He also repealed an unpopular goods and services tax.

But his government has warned that much effort is needed to pay off debts of over $1 trillion accumulated by the previous government led by Najib Razak, who is being investigated in connection with a scandal at state fund 1Malaysia Development Berhad (1MDB).

“I think the worst is over for Malaysia — the Q2 figure can even be taken as a sign of strength as the government is trying to take difficult steps,” said Trinh Nguyen, Hong Kong-based senior economist at Natixis Asia.

“The message coming out of Malaysia is that the focus is on fiscal consolidation,” she said.

“The monetary policy will remain accommodative and the economy is on a steady growth path this year and in 2019,’’ Nor Shamsiah said.