Malaysia seen posting slightly slower Q2 growth on softer domestic demand

Moody's Investors Service says that it would take a significant deterioration of Malaysia's (A3 stable) external metrics from current levels for the country's credit profile to weaken.

KUALA LUMPUR: Malaysia’s economy is expected to have grown at a slightly slower pace in the second quarter due to weaker private consumption, even as trade remained robust.

South-East Asia’s third-largest economy likely grew 5.4% in April-May from a year earlier, easing from 5.6% in the first quarter, according to the median of forecasts by 12 economists polled by Reuters.

Growth in the first quarter was the strongest in two years, but the pace has been expected to fade, Vaninder Singh of NatWest Markets said in a note last week.

Cement production had slumped 17.1% over March-May, compared with 9.6% growth in the previous three-month period, he said.

Crude oil prices have also skidded around 10% so far this year, after several failed attempts to rally. Malaysia is a significant oil and gas producer in the region.

“With growth slowing over the rest of the year -?? and maybe even turning sub-potential -?? we expect the BNM to leave rates unchanged this year,” Vaninder said, referring to the central bank.

With inflation remaining moderate, Bank Negara has kept its overnight policy rate steady at 3.00% since last July, when it trimmed it by 25 basis points.

Exports have also shown some signs of fatigue after a strong start to the year. Shipments grew 10% in June, well short of the 15.8% forecast by a Reuters poll and sharply down from May’s 32.5% growth.

But economists at Nomura argue the June weakness may be transitory, pointing to continued robust demand globally.

Private consumption will likely moderate over the second quarter, even as wage and employment numbers remain “encouraging”, HSBC said in a note.

“We expect overall momentum to cool in most parts of the economy,” the bank said.

Also hobbling domestic demand, Malaysian households have high levels of debt, which Capital Economics estimate to be equivalent to around 90% of GDP.

POLL GAMBIT 

Strong economic growth is vital for Prime Minister Datuk Seri Najib Tun Razak, who is considering early polls to offset the effects of rising living costs on his popularity and a growing challenge from his former mentor turned foe, Mahathir Mohamad.

Najib, however, will likely want to roll out special stimulus measures and cash handouts for rural and lower-income voters in the next budget to bolster his chances, Nomura said.

“We expect these to be targeted, which should limit their impact on the fiscal consolidation agenda,” said the research house.

Najib is expected to call an election earlier than the scheduled time of mid-2018, as he may want to take advantage of an economic recovery and a currently fractured opposition. - Reuters