economic prospects


Cautious outlook for Malaysian economy despite stronger Q2 growth

KUALA LUMPUR: Malaysia’s gross domestic product (GDP) growth in 2019, which may be lower by 0.1 percentage point (ppt) if there is a further escalation in the US-China trade war, will still be “manageable”, said Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.

He said despite the economy growing 4.7% in the first half of 2019, Bank Negara Malaysia (BNM) still wants to maintain its cautiousness.

“There are still a lot of risks ahead, and this trade war effect could have more impact, also possibly lag effect, going into next year. It’s good to be cautious in the assessment of the economy, at least the government can be well prepared for the risks,” he told SunBiz.

BNM sees lower downside risks for Malaysia this year in its latest assessment of the US-China trade war due mainly to the delay in the implementation of selected tariffs.

“Should the trade dispute escalate further, global growth is expected to be lower by 0.1ppt. Consequently, Malaysia’s GDP growth will be lowered by 0.1ppt in 2019 due to lower trade income and investment activity,” BNM governor Datuk Nor Shamsiah Mohd Yunus said when announcing Malaysia’s second quarter (Q2’19) GDP growth figures last Friday.

Further escalation of trade tensions will weigh on growth outlook, with the central bank also estimating that Malaysia’s exports may be lower by 0.2ppt this year, as global trade is projected to shrink by 0.1ppt.

In its Q318 Quarterly Bulletin, BNM warned that Malaysia’s 2019 GDP could be much lower by 0.9 to 1.1ppt, while exports could be lower by 1.2 to 1.7ppt.

However, BNM is maintaining its projection for the Malaysian economy to grow between 4.3% and 4.8% this year.

“Going into second half 2019, we believe that growth will still be challenging and SERC is keeping our full-year GDP growth estimate of 4.5-4.7%. We’re not expecting a global recession but global growth will still be a key risk for next year,” said Lee.

Malaysia’s economy grew at a stronger pace of 4.9% in Q2’19, from 4.5% in the first quarter, supported, by higher household spending and private investment.

Meanwhile, UOB also remained cautious given escalating external risks. Key risks to its growth outlook include a more pronounced global slowdown, breakdown in US-China trade talks with further tariffs and retaliatory actions, and a no-deal Brexit. It is maintaining its GDP growth forecast of 4.6% for 2019.

“We think BNM is less likely to pursue another rate cut in the upcoming MPC meeting des-pite the recent synchronised rate reductions by four Asia-Pacific central banks last week. BNM has already made one pre-emptive 25bps cut in May and is likely to wait for the outcome of US Fed rate deci-sion, US-China talks, and Malaysia’s Budget announce-ment,” UOB added.

Separately, RAM Ratings maintained its Malaysian GDP growth forecast at 4.6% for 2019 although external headwinds prevail. It said ongoing expectations of weaker economic prospects are envisaged to hamper capacity-building activities. Hence, its expectation for private investment activity this year stands at a moderate 2.2% (2018: 4.8%).

Going forward, it expects the policy stance to stay supportive of growth, with potentially looser monetary policy and fiscal buffers at the ready. Potential moves on the Overnight Policy Rate (OPR) are anticipated to be largely data-dependent, in response to signs of significant downside risks to growth.

“Accordingly, we have maintained our expectation of the OPR ending the year at 3.00%, albeit also of the view that there is scope for further loosening if required. Another factor that may support further easing is benign inflationary pressure that has prevailed.”

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Asian stocks in sea of red as US-China trade dispute escalates

PETALING JAYA: Bursa Malaysia, together with the rest of the Asian markets, sank today as the US-China trade war escalated and the Chinese yuan weakened to a low in more than a decade.

The local bourse opened lower with the FBM KLCI at 1,621.12 points, 5.64 points down from Friday’s close of 1,626.76. The benchmark index closed at an intraday low of 1,610.41 points, shedding 16.35 points.

The Bursa scoreboard showed 827 losers and 163 gainers, with 897 counters unchanged, at the end of trading today.

All sectoral indices were down, with the worst performer being the energy index which fell 2.59% or 28.08 points to close at 1,055.75.

Meanwhile, on the currency market, the ringgit slid to a six-week low as the China’s yuan broke the psychological 7-per-dollar level. Based on Bank Negara Malaysia’s (BNM) middle rate, the ringgit continued to weaken by 0.5% against the US dollar to 4.1775 today from 4.1565 last Friday.

On the regional stock markets, Hong Kong’s Hang Seng Index and South Korea’s Kospi Index slumped more than 2% each.

Last week, US President Donald Trump said he would impose 10% tariffs on US$300 billion (RM1.25 trillion) worth of Chinese imports. The abrupt announcement was made on Twitter last Friday after a trade war truce which lasted about a month, and China has vowed to retaliate.

The additional 10% tariff is on top of the 25% tariffs already imposed on some US$250 billion of goods imported from China.

Hong Leong Investment Bank (HLIB) Research said the negative spillover to Malaysia could be in the form of a reduction in gross domestic product (GDP) growth by up to 1.1 percentage points (ppt).

“As a small open economy, Malaysia will not be insulated by the escalating trade tensions. Based on BNM’s estimation, a 25% tariff on remaining trade with China and blanket auto tariff would lead to reduction of Malaysia’s GDP growth by 0.9 to 1.1 ppt, with the impact of US-China trade accounting for about half of that,” it said in its report today.

As the trade war continues to prolong with the possibility of worsening, the research house expects BNM to reduce the Overnight Policy Rate (OPR) by 25 bps to 2.75%, which is the lowest since March 2011, as early as November 2019.

HLIB Research also revised downwards its 2019 average ringgit assumption to 4.15-4.20 against the US dollar from 4.05-4.15 previously. This implies a depreciation bias for the remainder of the year.

“This comes on the back of heightened risk aversion with US-China trade tensions potentially evolving into a full blown trade war, possibility of yuan depreciating and revision in our OPR expectations from unchanged to 25bps cut,” it added.

Meanwhile, S&P Global Ratings said the latest development is a negative for global business confidence and could compound weakened global investment growth and economic prospects if the additional tariffs go into effect on Sept 1.

“We reiterate our view that the first-order impact on credit is generally low to moderate for issuers in both countries. We hold this view even in the scenario of both countries imposing tariffs of 25% in all goods imported from each other.

“Both countries have diversified export markets. Their own domestic markets are very large and businesses still cater to them, and a large number of rated corporates still have some flexibility in managing their costs, including, in some cases, the option of passing on the additional expense from tariffs to customers,” it said in a statement today.

While the short-term impact of higher tariffs is manageable for both countries, S&P said the longer-term effects on growth prospects could be greater.

“The recent reaction in equity markets reflects this risk. This in turn could dampen the investment appetite and have a flow-on effect to credit markets,” it added.

Foreign bond investors return due to Fed rate cut expectations

PETALING JAYA: Foreign bond investors’ interest in Malaysian bonds returned in June with a net inflow of RM6.6 billion, following two consecutive months of net selling attributed to the dovish stance of central banks in major global economies amid weaker-than-expected economic data.

According to RAM Ratings, domestic bond yields also retreated across the entire maturity spectrum and rating bands in June, which is in line with the downward bias in global interest rates and the subsequent search for yields.

“The stronger demand in the secondary market is mirrored by the primary market, as underlined by the robust bid-to-cover (BTC) ratios at government bond auctions last month,” it said in a statement today.

“Both issues that were up for tendering achieved BTC ratios of above two times. Demand for the longer-tenured 20-year Government Investment Issue (GII) achieved a remarkably strong BTC ratio of 4.28 times while the five-year Malaysian Government Securities (MGS) charted 2.48 times,” it said.

The ratings agency said that yields are expected to continue facing downward pressure in July, after investors received yet another clear sign of a looming rate cut from the US Federal Reserve (the Fed) chairman’s remarks to Congress on July 10, and another speech at a Paris event to commemorate Bretton Woods the following week.

In his speech, chairman Jerome Powell had reaffirmed the Fed’s concerns about economic prospects and was ready to take appropriate measures to maintain the recovery momentum.

RAM said that these successive signals had prompted the market to start pricing in a potential 50 basis points (bps) cut, compared to the 25 bps reduction indicated by the fed funds futures market before Powell’s speech.

“There is a multitude of considerations for portfolio investors at this point – whether to pursue yields or seek safety in more conservative assets. As particular factors may dominate at different times, depending on prevailing market developments, volatile capital flows are envisaged to remain a key trend this year,” said RAM head of research Kristina Fong (pix).

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