Malaysia's economy stays resilient in eye of the storm

KUALA LUMPUR: The Malaysian economy remained resilient in the eye of the storm to maintain at least four per cent growth for the first three quarters of 2016 in spite of a challenging global environment.

There are reasons to cheer as the country had weathered the dark clouds and maintained its economic momentum when other developed nations recorded lower growth rates of below one per cent with the risk of facing recession.

US president-elect, Donald Trump, was said to be impressed with Malaysia's third-quarter 2016's performance of 4.3 per cent, as the economy perked for the first time after six consecutive quarters of slowing growth.

The continued expansion in the private sector spending and support from net exports have bolstered the country's economy in the third quarter.

At the same time, the government efforts to boost consumption spending as well as the joint collaboration of Bank Negara Malaysia (BNM) and the Financial Markets Committee (FMC) in introducing measures to enhance liquidity of the foreign exchange (forex) market, have provided stability and sustained growth momentum.

BNM's move to reduce overnight policy rate by 25 basis points to three per cent in July and cash handouts to the low-income group have been some of the measures taken to boost domestic spending.

The increased downside risks to the economy following the UK's vote to exit the European Union was further precipitated by Trump's victory, sending shock waves which drove the US dollar to its strongest level.

Trump's proposed policies to boost fiscal and infrastructure spending in the US pushed the greenback to its high level in 12 years, battering other major currencies, including the ringgit, to their historic lows.

Recently, the ringgit weakened to its 14-month low against the US dollar, lingering at the 4.47 level on prospects of further US interest rate rise next year.

The US Federal Reserve System had increased interest rate for the second time in a decade, by 0.25 on Dec 14, 2016, on improved jobs market and strengthening US economy.

Elsewhere, China, the world's second largest economy, is shaking off from a slowdown to move towards a more sustainable pace in its economic reform which could augur well for Malaysia as China is its main trading partner.

In Europe, however, the emergence of populism in the political scene could present a risk to investor sentiment and trade policies.

As for the US, with Trump taking office next year, there is a looming fear of the resurgence of trade protectionism as the fate of the high-impact Trans-Pacific Partnership Agreement led by the US could stall.

As Malaysia is an open trading economy, the 'Trump effect' and the expected rise in trade protectionism could have an impact on Malaysia's exports.

ForexTime's Vice-President of Corporate Development and Market Research, Jameel Ahmad, said the Malaysian economy could grow by over four per cent next year as the economy relied a great deal on consumer spending to reduce headwinds from the cut in global trade.

"One bright spot is that the Malaysian economy is still expanding at a far stronger pace than the developed world.

"This is in spite of volatility and weakness in the ringgit due to heavy US dollar buying demand that has impacted all global currencies in recent months,” he told Bernama in an email response on the performance of the Malaysian economy.

Jameel said the rebound in oil price could also spur Malaysia's economic growth and help the ringgit as well as other emerging markets' currencies to regain momentum after a pressured past 18 months.

Oil price rebounded to its highest levels since the middle of last year, with the benchmark Brent crude trading at the US$50 level after the Organisation of Petroleum Exporting Countries agreed at a meeting on Nov 30, 2016 to cut output for the first time since 2008, from 33.8 million barrels per day (bpd) to 32.5 million bpd.

In the Budget 2017 announcement, Prime Minister Datuk Seri Najib Tun Razak has outlined strategic targets and measures to diversify government's sources of revenue, particularly in reducing dependency on oil and gas sectorrelated revenue from 41.3 per cent in 2009 to 14.6 per cent in 2016.

The government is also expected to achieve the fiscal deficit target in 2017 accounting for three per cent of the gross domestic product (GDP) from 3.1 per cent this year.

Najib expressed confidence that the country's economy would achieve growth of between four per cent and 4.5 per cent in 2016 and between four and five per cent in 2017.

Jameel said for the GDP to rebound to levels seen in 2014 and 2015, at five to six per cent, Malaysian consumer spending would have to pick up.

“This is, however, difficult if rising inflation presents challenges to the cost of living and reduced disposable income.

"The problem with a weaker currency is generally more expensive import costs, which lead to increased inflation.

"With so many currencies getting hit by the US dollar, Malaysia will not be alone in facing renewed inflation risks,” he said.

Jameel said the government's spending and fiscal stimulus could help but policymakers were unable to intervene in external environment of prolonged weakness in oil price and bullish run in the US dollar.

"Slowing global growth and reduced trade are also likely to weigh further on wage growth due to likelihood that Malaysia might encounter slower demand for its own exports,” he said.

He said when it came to government's budget and spending to support the economy, oil revenue was still a strong and significant contributor.

Therefore, he said, a significant and maintained rebound in oil price would be beneficial for Malaysia.

“The major issue now is that any rebound in the price of oil can fall down like a house of cards at a moment notice,” he said.

With uncertainty and volatility amid global economic headwinds, Jameel said, stability and an 'air of calm' would go a long way towards supporting the local economy.

“In period of uncertainty, stability can go a long way towards reassuring investors,” he said.

Malaysia, he said, could then look at measures to promote stability and provide a conducive environment that promoted trade and investment in these challenging and difficult times, particularly as volatility in oil prices and few lingering external factors remained unresolved.

If market volatility remained at intense level with the surge of the US dollar and the weakening of the ringgit, BNM has the forex reserves to protect the ringgit.

Jameel said while he agreed that some intervention in the market was fine, pegging was not the approach to take as it showed to investors an expectation that the ringgit would remain depressed for a prolonged period.

BNM, in collaboration with FMC, announced initiatives to develop the onshore financial market and enhance liquidity of the forex market which took effect on Dec 5, 2016.

Measures that included liberalisation and deregulation of the onshore ringgit hedging market, streamlining treatment for investment in forex assets as well as incentives and treatment of export proceeds, have supported the ringgit from a further downturn and improves demand for the local currency. Jameel said Malaysia should also keep its eyes on other opportunities that could further support the economy amid challenging times.

With the outlook of slowing global trade next year, he said, many Asian economies would be turning their attention towards Internet economy and other technology sectors.

“Malaysia can also benefit from stronger ties with the UK as it will be looking for new trading partners once it begins the process of leaving the European Union,” he said. — Bernama