Malaysia’s second-quarter growth slows to 4%

The country is on track to meet full-year growth target of 4%-4.5% despite the increasingly challenging outlook ahead

IN line with market expectations, Malaysia’s economic growth had slowed to its slowest in seven years at 4% during the April-June quarter of 2016 from 4.2% in the preceding quarter.

This was hardly surprising, given the persistently weak external environment.

According to Bank Negara, Malaysia’s gross domestic product (GDP) growth during the quarter in review was weighed down by the continued decline in net exports and a significant drawdown in stocks. Stronger expansion in domestic consumption growth was the only saving grace for the country’s economy.

“Like many other countries in Asia, our economic expansion was supported by domestic demand,” Bank Negara governor Datuk Muhammad Ibrahim says.

“Both private consumption and private investment reported stronger growth. These two domestic-demand components were the key growth drivers and their performance underscores the health and resilience of our economy,” he says at a briefing in conjunction with the release of the country’s GDP results in Kuala Lumpur yesterday.

It was his second quarterly economic briefing to the media since taking over from Tan Sri Zeti Akhtar Aziz as the central bank governor in May 2016. And he already appeared to be a seasoned chief, handling various questions from the media with tact.

According to Muhammad, although Malaysia is experiencing slower growth and an increasingly challenging economic environment, the country would be able to meet the Government’s full-year growth target of 4% to 4.5% for 2016.

“Our assessment is that the Malaysian economy is expected to remain on the current growth trajectory of at least 4% for 2016 amid the increasingly challenging environment,” Muhammad says.

“Undoubtedly, the Malaysian economy is facing greater uncertainty and challenges. But to date, our growth performance has remained resilient, as reflected by the steady growth of our economy, particularly in the domestic demand segment,” he adds.

On a cumulative basis, Malaysia’s GDP grew 4.1% in the first six months of 2016, compared with 5.3% in the corresponding period last year.

Muhammad explains that while uncertainties in the global environment could weigh on Malaysia’s growth in the second half of 2016, the country’s domestic demand growth would remain supported by several factors, including higher wages for civil servants and the upward revision in minimum wages; continued implementation of infrastructure projects; and improved commodity production in line with the diminishing effect of El Nino.

“The weakness, uncertainties and headwinds faced by the Malaysian economy will likely be from the more challenging global environment.

“Nevertheless we are quite confident that our sound fundamentals, pre-emptive policies and well-diversified economy have placed us in a good position to weather these shocks and challenges,” Muhammad says.

Twin-deficits risk?

Of concern, though, is the country’s narrowing current account surplus because of deteriorating net-export receipts in an environment of subdued global trade flows.

If Malaysia’s current account slips into negative territory, the country, which has already been running on fiscal deficits for the past 18 years, will be in a twin-deficits situation. This will have negative implications on the country’s credit ratings and currency value.

Malaysia’s fiscal deficit is expected to narrow to 3.1% of GDP by the end of this year from 3.2% as at end-2015.

Conceding there are increasing headwinds, Bank Negara says the outlook for the country’s current account in the balance of payments next year remains uncertain as it would hinge on global growth performance.

“The current account will continue to face headwinds given that our trade balance will be affected by subdued global demand and rising imports in the domestic economy.

“For this year, we are confident that the country’s current account will remain in the positive territory even though it will be narrower. But for 2017, the position will depend very much on global growth – how that will impact our exports and the intensity of our imports,” Muhammad says.

“It is too soon for us to say at this point in time but certainly by early next year we will be able to get firm information on where the current account is headed,” he adds.

During the second quarter of 2016, Malaysia’s current account surplus narrowed to RM1.88bil, or 0.6% of gross national income (GNI), from RM5.04bil, or 1.8% of GNI, in the preceding quarter. This was attributable to lower trade surplus on account of higher imports for investment and production and higher net income payments.

“Imports are necessary to further enhance our productive capacity and improve our export competitiveness. With quality investments, Malaysia will be in a better position to tap new opportunities when global conditions improve,” Muhammad says.

Ringgit’s ‘new normal’

Meanwhile, the trend of capital flows in the prevailing uncertain global economic environment will continue to affect the value of the ringgit over the short to medium term.

The spot ringgit was quoted at 4.024 against the US dollar yesterday.

Year-to-date, this represented a gain of 6.7% from 4.2933 to the greenback at the start of 2016, and made the ringgit the best-performing currency so far in Asia excluding Japan. This was a reverse from being the worst performer in 2015.

Over the short term, however, stability would still be far reach for the Malaysian currency.

“Volatility is the new normal for the ringgit,” Muhammad says.

“In the short term, the ringgit as with other regional currencies will be influenced by a lot of noises because of growth, geo-political events and policy changes in major economies ... over the long term, though, the ringgit will reflect our strong economic fundamentals,” he explains.

Muhammad says it is important to view the value of Malaysia’s currency in relation to the those of its neighbouring countries.

“Exchange rate reflects the external prices of our goods and services. So, we have to view it in relation to our neighbouring countries,” he says, noting that the performances of regional currencies have been reflecting the strength of the US dollar, which was driven by uncertainties of pace of US interest rate normalisation.

Muhammad points out that there will be three factors that will continue to drive the exchange rates of the ringgit against the US dollar, as well as the performance of other regional currencies. These are the changing expectations of the US interest rate hike, global crude oil price, and impact of United Kingdom’s referendum to leave the European Union, or Brexit.

“Firstly, despite expectations of a slower pace of interest rate increase by the US Federal Reserve, these expectations can shift swiftly,” Muhammad says.

“Secondly, global crude oil prices are expected to remain volatile due to uncertain supply and demand conditions; and thirdly, there are still a lot of uncertaintes surrounding the impact of Brexit and its aftermath,” he adds.

Since July this year, Malaysia had experienced a surge in net inflow of foreign funds, driven by the resurgence of investor-interest in emerging markets in search of higher yields amid stagnant growth and negative interest rates in Western developed economies.

The equity market, for instance, had attracted net foreign inflows of more than RM1.5bil since July, while foreign ownership of Malaysian government and corporate bonds continued to increase, rising to a 22-month high of RM240.9bil last month from RM235.2bil in June.

In particular, foreign ownership of Malaysian Government Securities (MGS) increased RM5.8bil in July to RM209.7bil. Foreigners now own 51.9% of the total outstanding MGS.

Muhammad notes that foreign holdings of Malaysian government bonds is underpinned by long-term investors such as pension funds, central banks/governments, insurance companies and banks. This, he says, will ensure stabilility of the country’s capital market.

In any case, the country has ample reserves, which stood at US$97.3bil as at end-July, to manage market volatility.

Interest rate outlook

On the country’s interest rates, Muhammad says the central bank will continue to monitor the country’s growth conditions, as well as the inflation rate and the risk of financial imbalances before making any changes.

The central bank in July cut the overnight policy rate by 25 basis points to 3%. The adjustment, aimed at supporting the domestic economy, had already started to impact the market and retail interest rates.

For instance, the three-month Kuala Lumpur Interbank Offered Rates had already declined 25 basis points to 3.4%. And as at end-July, the weighted average base rate of commercial banks had decreased by 21 basis points to 3.62%, while the fixed-deposit rates fell by an average of 18 basis points for tenures of less than one year.

The next Monetary Policy Committee would meet on Sept 7 to decide on the interest rate direction of the country.