Allianz SE chief economist Professor Dr Michael Heise said the trade spat between the world’s two largest economies could emerge as the biggest risk for the local economy.
“The harm that would be done by the two dominant economies of the world is going to have very negative repercussions for all the suppliers indirectly into these two economies,” he told a news conference by Allianz Malaysia Bhd yesterday.
“There may be some benefits because some companies may relocate out of China into Malaysia or other Asian economies to prevent or to avoid tariffs. However, this benefit is going to be outweighed by the contraction in demand from these two huge economies and therefore, this really is the biggest risk,” he said.
Heise opines that the US Federal Reserve (Fed) will not be aggressive in raising interest rates next year.
“The Fed is probably not going to be very hawkish. So, I hope that the outflow or contraction of capital from Malaysia and other emerging markets is reaching an end, or maybe even correcting and changing course in the next few years.
“Interest rate cycles occur every now and then, so [countries] have to be prepared and resilient. They happen but they never have lasting consequences. A trade fight [on the other hand] would have a lasting repercussion for economies like Malaysia as barriers to trade will be there for very long,” he said.
On whether Malaysia, being an oil exporting nation, can seek reprieve in the form of higher oil prices should the trade war escalate, Heise said it is likely, but was quick to add that one of the reasons oil prices have been increasing is due to political factors, which could change.
“That (high oil prices) gives stability, definitely. Presently, the oil markets and the commodity markets are on an upswing. A lot of it are political reasons with the issues in Iran and problems in Nigeria and Venezuela, and now we have the issue with Saudi Arabia.
“So, you should not rely on high prices because if some of these political issues change, then oil prices could change and go in a different direction. It is helpful for the time being, but it is not something to rely on in the long term,” said Heise.
Heise expects Malaysia’s gross domestic product (GDP) growth to slow down from 5.9% in 2017 to 4.7% this year and 4.6% in 2019.
“Economic growth is set to slow in 2018 due to adverse weather conditions and supply disruptions in the second quarter of the year that impacted the agriculture and mining sectors. In 2019, growth is expected to slow further to 4.6% due to slower growth in global demand and continued fiscal consolidation,” he said.
Vulnerability that weighs on the outlook of Malaysia is its elevated private debt, with household debt at 84% of GDP in 2017.
“Malaysia is quite exposed in terms of household debt which stood at 84% of GDP in 2017, which is quite a high number. However, we understand that this figure [has moderated] compared with a year or two ago. This figure is going down slowly, and we view this as a good development,” he said.
Meanwhile, Heise expects one rate hike by 25 basis points in the overnight policy rate (OPR) from Bank Negara Malaysia in 2019. However, he said this would depend on the characteristics of Budget 2019 scheduled for tabling on Nov 2.
“In my view, this depends quite a lot on the national budget. If it is going to be tight and consolidation is projected for next year, maybe then it would not be necessary to hike the [OPR],” he said.
On measures taken by the Pakatan Harapan government such as removing the goods and services tax and reintroducing fuel subsidies, which were part of the coalition’s election manifesto, Heise said making good on election promises is alright as long as the fiscal discipline is kept in check.
“I won’t criticise the election promises carried through as long as it does not stand in the way of a consolidation of the deficit. There is going to be consolidation and the government is trying to reduce the large amount of debt that has been accumulated,” he said.
Heise views the consolidation efforts by the new government as an “adequate plan” to address the high level of accumulated debt.
“Malaysia may have to pay the price of a little less GDP growth, but you gain stability and resilience in the long term,” he said.
Source: The Edge