Malaysia vulnerable to US trade protectionism, China slowdown: Nomura

The main contributors to the increase in the September exports were electrical and electronics (E&E) products, which contributed 37.2% to total exports.

KUALA LUMPUR: China's move to throw down the gauntlet in the ensuing trade war with the US will leave Malaysia's highly open economy vulnerable as exports account for 71% of the country's gross domestic product (GDP).

While heavy foreign positioning in government bonds shows that the exposure to capital outflows is high, Nomura Global Markets Research  sees US trade protectionism or a China slowdown as bigger risks.

In a research note issued on Friday, Nomura estimated Malaysia's ultimate exposure to the US – including via intermediate goods to China for assembly into final products destined for the US – at 10% of GDP, about half of which is in electronics products. Another 8% is exposed to China’s final demand.

The level of foreign ownership in Malaysia government securities (MGS) remains relatively high, falling only slightly to 45% of outstanding from a high of 47% in 2016. 

“The overall level of external debt stands at 65% of GDP. That said, much of the remaining foreign currency portion is hedged naturally with export earnings or financial instruments, as indicated by Bank Negara Malaysia (BNM) in its 2016 annual report,” it said.

Nomura said any decline in oil prices should be manageable. 

It estimates that every US$10 decline in the price of oil would narrow the trade surplus by 0.4% of GDP, mainly via exports of liquefied natural gas (LNG), which make up 4% of total exports. 

That said, a more broadbased commodity price decline that includes palm oil (8% of total exports) would still pose a significant negative terms-of-trade shock.

“In terms of policy responses, we think market concerns over whether Bank Negara imposes more administrative measures on the currency may persist because of its limited forex reserve buffer; Malaysia’s import cover is among the lowest in Asean at just 6.1 months of imports of goods and services, by our estimates,” according to Nomura. 

The research house believes the authorities are more likely to allow the ringgit to adjust to boost export competitiveness. There is some room for Bank Negara to adjust its monetary policy stance. 

“With still-solid GDP growth of 5.5% likely this year, underpinned by robust domestic demand, we see scope for another 25bp policy rate hike if necessary. 

“Cuts to the statutory reserve requirement ratio (currently at 3.50%) to offset the impact of capital outflows on domestic liquidity are also possible.

“Fiscal policy is more hamstrung, with public debt to GDP at 51% against a self-imposed ceiling of 55%.  We do not expect the government to deviate from its medium-term fiscal consolidation agenda, although it could adjust the pace of consolidation,” said Nomura Research.