Going gets tough for the economy

Challenging outlook: Although Malaysia exports were up 6.3 in November compared the same month in 2014, the figure was lower than economists’ median expectations of a 12 gain.

World Bank: Weak growth in emerging markets to weigh on global performance

POLICYMAKERS will have a headache trying to navigate the treacherous waters that the Malaysian economy will have to sail through this year. Much has been reported about how challenging the outlook for 2016 is, with no good news to herald the beginning of the year.

The World Bank issued a news release on Thursday noting that weak growth in emerging markets would continue to weigh on the global economy. It expects the Malaysian economy’s as measured by gross domestic product (GDP) to grow by 4.5% this year, down from the estimated 4.7% last year. As a comparison, Bank Negara expects the economy to grow by 4.5% to 5.5% this year from 4% to 5% last year.

The woes

To start with, the latest exports numbers show a decline in exports. Although they were up 6.3% in November compared with the same month in 2014, the figure was lower than economists’ median expectations of a 12% gain. In comparison, October’s exports jumped 16.7%. Imports showed that private consumption is holding up, with consumption goods imports rising by 43.8% on-year but crucially, intermediate and capital goods imports, indicating goods for re-export and private investment respectively, showing only marginal expansion.

The Nikkei Malaysia purchasing managers index (PMI) for December released on Monday showed a slight improvement compared with the previous month, but was still a contraction. The PMI measures new orders, inventory levels and factory employment, among other things, so it is a gauge of how the manufacturing sector will perform in the coming months.

Global PMI has also slowed down, with the JP Morgan global manufacturing index at a three-month low in December largely due to a slowdown in the expansion of production and new orders, reflecting weaker private-sector investment as well as another contraction in intermediate goods (that is, goods made for re-export). The only bright spot being consumer goods, which saw slight growth.

CIMB Investment Bank Bhd chief economist Maslynnawati Ahmad expects modest rebound for exports in 2016 (of between 3% and 3.5%). “Growth in manufactured exports was exceptionally strong in recent months, so we did expect some normalisation,” she tells StarBizWeek.

Maslynnawati sees a normalisation in manufactured goods exports to a more sustainable growth and that the drag from commodities exports should fade away. On that note, she says the current account will continue to have a surplus although there may be some volatility in exports growth but that will smoothen out over the year. The decline in consumption goods imports this year will also relieve pressure on the trade surplus.

For the manufacturing sector, Maslynnawati is taking a wait-and-see stance. “We’ve to wait and see how imports for intermediate goods will fare, which in turn will give us some indication of the direction of exports, although intermediate goods imports can no longer show the exports trend well ahead,” she says.

There is reason for concern as manufacturing-sector exports make up four-fifths of Malaysia’s total exports. The country’s biggest trade partner, China, is another concern. The economy continues to slow down, with the latest data showing that manufacturing activity is still on the decline.

The Caixin PMI, which measures manufacturing activity of Chinese small- and medium-sized firms, contracted for a 10th month and more than expected. China’s official PMI released a week ago also showed a contraction for December, albeit improving from November.

Oil prices are another issue. Malaysia just cannot shake off the view that the Government depends on oil revenue to support spending and pay off debt. Crude oil prices have declined drastically in recent months and that has prompted Prime Minister Datuk Seri Najib Tun Razak to say that the federal budget will be “recalibrated”. Budget 2016 was planned on an assumption of US$48 per barrel oil. Brent, the global benchmark, closed at US$33.75 on Thursday.

Should Budget 2016 be revised, this will be the second year that the Government is taking this measure. Budget 2015 was revised after oil prices fell by half and was based on oil price of US$55 from the initial US$100. If oil prices stay low for longer, proposed projects could even be reconsidered, as Minister in the Prime Minister’s office Datuk Seri Wahid Omar warned last month. Projects come under the development expenditure of the federal budget.

Alliance Research chief economist Manokaran Mottain says the Government should review its operating expenditure like what was done during the global financial crisis of 2008/2009. “Unneccessary spending should be cut, less overseas trips and fewer expensive events,” he says over the phone.

Manokaran says any review of projects will mean that they can be postponed and instead of focusing on large projects, funds could be freed up for a number of smaller ones for a multiplier effect. “Smaller projects can have more impact in such times,” he adds.

Oversea-Chinese Banking Corp Ltd economist Wellian Wiranto says that any revision to the budget can be complicated as the space for fiscal cuts has narrowed. “Hence, there is a risk that – should oil price stay depressed – fiscal expenditure may have to be slashed by more than before in order to keep bond holders and rating agencies at bay,” he says in a report released on Jan 7.

Wiranto says should the oil price remain low for longer, the same game of trying to balance between cutting deficit enough to avoid ratings downgrade and not so much as to endanger economic growth and political support would be playing out for a while more.

The ringgit will continue to come under pressure from the decline in oil prices that not even the waning of political uncertainties stemming from the 1Malaysia Development Bhd issue can overcome. This is because the balancing act between growth and the deficit target, which was revised marginally higher last January, will place the Government under pressure as newsflow in the past year has been of continuous price hikes.

There will be a danger of populist measures being implemented or that the commitment to trimming the Federal Government’s budget deficit falter. In the revision to Budget 2015, the deficit target was revised higher to 3.2% of GDP from 3.1%. Budget 2016 aims for a deficit of 3.1% but this increasingly looks untenable despite the reassurance by Najib that the deficit target will be maintained.

These uncertainties are part of the reasons why there have been capital outflows in the past year and that has been reflected in the ringgit’s performance. Compared with six months ago, the US dollar has strengthened by more than 23% against the ringgit from a year ago. The ringgit closed at 4.392 versus the greenback yesterday.

The China factor continues to loom large in the region, especially for countries tied closely to it via supply-chain trade linkages.

Besides crude oil prices, the ringgit’s performance this year will depend a lot on Chinese monetary policy and it looks like a loose monetary policy, to support the economy and a weaker yuan, to prop exports.

Cut GST rate

On the domestic front, private consumption and investment will continue to be the focus. Private consumption has been the mainstay of the Malaysian economy for the better part of the last 10 years, and in 2014 made up just over half the economy.

But the Malaysian consumer is feeling the burden of the cuts and abolition of subsidies over the past two years. Consumers and businesses continue to grapple with the lingering effects of the goods and services tax (GST) implemented from April last year.

To counter the drop in private consumption, Manokaran suggests the radical step of cutting 1% from the GST rate of 6% to help boost consumption. “The goal is to boost consumption and grow the economy,” he says, admitting that it is a double-edge sword and that the 1% cut will see lost revenue of between RM6bil and RM7bil from the expected RM39bil this year.

“In my opinion, there should be less focus on hitting the deficit target although it is a very delicate time for the country,” Manokaran says. Another step that he says can be taken is to help the low- and middle-income groups via measures such as the direct cash payouts from the Bantuan Rakyat 1Malaysia programme.

As for private investments, Maslynnawati sees capital goods imports picking up pace in the coming months as key construction projects start to roll out. Capital goods imports is an indicator of such investments and given the slight growth in capital goods imports in November on-year, there is worry that private investment may continue to weaken.