PETALING JAYA: Amid the downside risk to growth, Malaysia is expected to lower interest rates in the fourth quarter of this year, according to Nomura Research.
According to the research house, Malaysia and India are the only Asian countries that are unlikely to expand fiscal policy to boost domestic demand, but they will likely cut interest rates further to boost growth.
“With the export downturn spilling into weaker domestic demand, we expect further rate cuts in India, Indonesia, the Philippines, Malaysia, South Korea and Thailand, ” Nomura said.
“Fiscal policy will also likely be expanded to boost aggregate demand, except in India and Malaysia, ” it wrote in its report titled “The world economy: Nearing an inflection point”.
Nomura recently tweaked its forecast for India, now expecting a 25 basis points (bp) rate cut in October (versus 15bp earlier). It also expected a risk of Malaysia and the Philippines cutting rates by more than its base case of 25bp.
In Malaysia, Bank Negara cut the overnight policy rate (OPR) to 3% in May from 3.25% previously. It was the first time the central bank had revised its key interest rate in over a year since Jan 25,2018.
There are only two monetary policy committee meetings left before the year ends – that is on Sept 11-12 and Nov 4-5 – for decisions on the OPR.
Nomura said growth slowdown in Asia (excluding Japan) was expected to continue until the fourth quarter of 2019 due to trade tensions, the tech downcycle and a slowing Chinese economy.
“Amid the slowdown, there are signs of growing divergences within the region, with Vietnam, Taiwan and Malaysia benefiting from the diversion of trade away from China, ” Nomura said.
“Further out in 2020, we still expect a gradual growth recovery to set in, as Asia benefits from ongoing policy easing and a potential capex recovery in the tech sector, ” it added.
Nomura noted many Asian economies were currently at a tipping point and multiple factors could trigger a sharper downward spiral.
“As the trade war morphs into a tech and currency war, rising policy uncertainty could delay the tech recovery and act as a drag on investment. Piling inventories will force firms to cut production and cut jobs. There are spill-over risks from a slump in Chinese property sector and significant yuan depreciation, ” it said.
“Asset price correction can tighten financial conditions, resulting in a growth slowdown that is deeper than our base case. Geopolitical flashpoints are also a risk, ” it added.
Under a downside scenario, Asia’s open economies that were more tech-oriented and part of the supply chain would be hurt more than China itself, Nomura said.
“Hong Kong, Singapore and South Korea would enter a recession, with significant slowdowns also likely in Thailand and Malaysia, ” it said.
“Economies with high investment-saving ratios (Indonesia, India, Philippines) will face difficulties in funding the current account deficit due to capital outflows, ” it added.
On the upside, Nomura noted Asia’s exports were currently weak, but they were not collapsing, and they could recover much faster than its base case if trade tensions and geopolitical risks were to deescalate.
“The tech sector has already experienced sharp capex cuts and a V-shaped recovery is possible.
“A large China fiscal stimulus, lower policy uncertainty, rising capital inflows that ease financial conditions and the lagged effects of domestic policy easing can set in motion a swift recovery in exports and investment demand, ” it explained.
“In this scenario, we would expect a faster growth recovery in the open economies (Singapore, Hong Kong, South Korea) and policy rates to be left unchanged due to low inflation, ” it added.
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