Credit crunch may hit Asia, including Malaysia

The median of forecasts from 14 economists is for annual growth of 5.2 percent in April-June. That would be a dip from January-March's 5.4 percent and make the latest quarter - during which Malaysia surprisingly got a new government - the third in a row of slowing growth.

PETALING JAYA: A credit crunch may hit Asia as early as next year, with Malaysia likely to be one of the Asian economies at the centre of the crisis.

Nomura Research, however, said the credit crunch would not be a long-drawn-out affair as the region’s economy would likely recover after July 2019.

In its recent 2019 outlook report, Nomura Research warned that a number of countries in Asia, especially the current account surplus and export-reliant economies, could experience a sudden shortage in the availability of money for lending, leading to a decline in loans available.

Apart from Malaysia, the research house also named South Korea, Greater China, Singapore and Thailand as the potential countries to be most affected by the credit crunch.

Nomura Research described the credit crunch as “the third and final wave of a bear market in Asia”.

The first wave refers to the sharp currency depreciations in India, Indonesia and the Philippines that took place in the third quarter of 2018 (3Q18). Meanwhile, the second wave started in the current fourth quarter, driven by equity market sell-offs in Asia’s current account surplus countries.

“We expect the third wave to be a credit crunch that starts in 1Q19, as an accelerated Asian growth slowdown interacts with property market corrections.

“However, in the second half of 2019 and into 2020, we forecast an economic recovery and, like the phoenix rising from the ashes, we believe it will be Asia’s time to shine.

“Investors will refocus their attention on Asia’s enormous growth potential vis-a-vis the rest of the world, activating a risk-on market rally as early as 2Q19,” stated Nomura Research.

The research house is downbeat on Malaysia’s economic prospects in 2019, and said that it remained concerned on the rising probability of the country’s rating downgrade.

A 25-basis-point cut in the overnight policy rate is expected in 2019, taking the benchmark interest rate down to 3%. This is expected on the back of slowing domestic economic growth, a more benign inflation outlook and the abating risk of financial imbalances.

Nomura Research projects Malaysia’s gross domestic product (GDP) to grow 4% in 2019, compared to the consensus estimate of 4.6%. However, moving into 2020, it foresees the country’s economy improving slightly, with a GDP growth of 4.2%.

“Fiscal slippage in Malaysia raises the risk of a negative rating action, which could, in turn, lead to more disruptive capital outflows, given that foreign holdings in its bond markets remain large, its foreign exchange reserve adequacy is the lowest in the region and monetary policy is hamstrung by growth headwinds,” it said.

Despite its cautious view, Nomura Research believes the balance of risks around Malaysia’s economic outlook may still tilt to the downside.

“A sharp downturn in electronics exports, an escalation in US trade protectionism and an acceleration of capital outflows due to a repricing of Federal Reserve hikes represent significant downside risks. Fiscal concerns could also weigh in, with poor execution of the budget and if long-term fiscal reform measures are delayed.

“A recovery in the prices of crude oil and crude palm oil would be a positive surprise, but conversely, if the declines are sustained and/or lower than official assumptions, then the downside risks could increase.

Finally, political uncertainty could also rise, given Prime Minister Tun Dr Mahathir Mohamad’s promise to hand over power to Datuk Seri Anwar Ibrahim in two years,” it added.