Analysts point out that the country has seen some form of foreign interest returning to its markets this year
ALTHOUGH Malaysia has had a good year-to-date performance with growth that surpassed expectations, a currency that outperformed its peers when benchmarked against the US dollar, and foreigners that have bought into local stocks, there are divided views on how the second half of the year will pan out.
Yeah Kim Leng, who is an external member of Bank Negara’s Monetary Policy Committee, thinks that after an expectation-beating first quarter growth of 5.6%, the economy may again surprise with an equally strong or better second half, rather than easing off as widely anticipated.
Yeah, who is also a professor of economics at Sunway University’s business school, says a second-half growth of at least 5% (year-on-year) appears achievable given the continuing strength in global output as reflected by the global Purchasing Managers’ Index.
“Other indicators such as improved bank lending, high capacity utilisation rates in many industries, rising investment and hiring activities also point to steady or rising economic activities,” he tells StarBizWeek.
The economy grew by some 5.6% in the first three months of this year, surpassing consensus estimates of 4.6%.
Recent data also show that exports and imports chalked up 21% and 27% increases respectively in the first four months of the year.
Nevertheless, despite the better-than-expected figures, the Government has maintained its full-year GDP growth forecast at a range of 4.2% to 4.8%.
In the currency market, the ringgit which slumped the most against the US dollar for a good part of last year, has given out the best year-to-date returns of some 4.5%, followed by the Thai baht at 3.94%, the Indonesia rupiah at 3.12% and the Singapore dollar at 2.60%. The ringgit last traded at 4.29 against the greenback at press time.
Yeah thinks if growth and other economic fundamentals continue to improve or at least remain stable, “the ringgit is likely to strengthen although other external determinants will have to remain favourable.”
“These include a gradual pace of US interest rate increase, China’s continuing growth of over 6% and firm commodity prices including crude oil prices of at least US$40 per barrel.”
However, not everyone is as optimistic as Yeah, who admits that he is choosing to look at the positive side of the latest numbers.
Not as positive
Weiwen Ng, an economist at Singapore-based Australia & New Zealand Banking Group Ltd. (ANZ) foresees a softer second half for the country.
“While economic growth will remain on a firm footing, we will not see a repeat of the first quarter performance largely because external demand will ease as some global industry up-cycles come full circle,” Ng, who tracks Asean economies including Malaysia’s, tells StarBizWeek.
Ng, whose house is predicting a 4.5% gross domestic product (GDP) growth for Malaysia this year and has yet to make any upward revisions, thinks that the ringgit will not experience the surge it did in late 2016.
ANZ has a year-end prediction of 4.35 against the US dollar.
The upside risk to the ringgit’s appreciation is the US’s Federal Reserve raising its interest rates further, Ng says, which theoretically means a stronger greenback and weaker emerging market currencies.
Financial Markets Association of Malaysia president Datuk Lee Kok Kwan believes that the ringgit will not move on a linear path, going into the second half of the year.
“However, my view is that sometime during the second half of this year, it might break 4.10 as economic outlook is decent with GDP growth stronger than expected in the first quarter, and exports sustaining its momentum into April,” he says.
This will also be supported by surpluses in the current and trade accounts as well as recent central bank measures including the conversion of 75% of export proceeds into ringgit, which resulted in more than US$1bil of net remittances in May, he says.
The main risk to this upside of the ringgit is energy prices coming off “by a lot”, which will also adversely impact other commodity prices like palm oil, as well as external geopolitical risks, Lee adds.
Foreign interest returns, still below record levels
Whatever the views, Malaysia has seen some form of foreign interest returning to its markets this year.
Year-to-date cumulative net inflow to the equities market has exceeded RM10bil vis-à-vis negative net outflow three years earlier.
Notably, total outflow between 2014 and 2016 amounted close to RM20bil.
“So yes, foreign investors have indeed made a comeback in 2017,” says Thomas Yong, chief executive officer and fund manager at Fortress Capital Group .
Having said that, Yong who manages RM1bil in clients’ money, points out that foreign shareholding interest in Malaysia’s equities is at a seven-year average of 23%, which is below its peak of 25.8% in 2013.
“This suggests that there is still room for foreign funds to continue to plough money into the local market, going forward.”
Foreign interest has also returned to the bonds market with RM6.8bil and RM10.1bil of inflows to domestic debt markets in April and May respectively after a negative first quarter. This, analysts say, is premised largely on a stronger ringgit which can be attributed mostly to Bank Negara’s foreign exchange hedging measures introduced in April.
In terms of corporate earnings, which is a good indicator of the state of the economy, this year has been relatively good compared with the past three years of subdued earnings although improvements were more apparent in some sectors.
The banking industry, a barometer of an economy’s condition, has performed quite well with earnings of most local banks exceeding or at least meeting estimates. This has largely been the result of earlier kitchen-sinking exercises to control costs and clean up balance sheets.
In a report to clients, AmInvestment Bank analyst Kelvin Ong says the house has an “overweight” stance on the banking sector, helped by a positive momentum for loan growth, stable asset quality trend for domestic loans, signs of a better outlook for capital market activities, stable return on equity ratios and gradual improvement in terms of provisions and earnings of banks moving forward.
In the second half of this year, Ong says, there are expectations of continual mild pressure on banks’ net interest margins (NIM), “as banks are still offering higher rates for longer-term deposits in preparation for the implementation of the net stable funding ratio requirement in 2018.”
Nevertheless, he is projecting a lower NIM contraction of three basis points this year, compared with four basis points last year.