PETALING JAYA: A weaker external trade performance and softer domestic demand growth will be among the main drags on the economy this year as Malaysian Rating Corp (MARC) sees gross domestic product (GDP) growing at 4.3%.
The rating agency said in a report yesterday its expected GDP growth was slower than the government forecast of 4.8% due to these two factors.
“Although trade diversion arising from trade tensions between the US and China could marginally benefit Malaysia in the short term, the overall weakening of global trade growth will continue to weigh on Malaysia’s export sector, ” it said.
Forward indicators suggested a lacklustre outlook, that is a continuing downtrend of the export orders index of US manufacturing Purchasing Managers’ Index (PMI) and a continuing contraction in global semiconductor sales, MARC added.
Domestically, Malaysia remains largely dependent on its consumer support which in the first three quarters of 2019, contributed circa 93% of headline growth.
“MARC does not think that this is sustainable and the latest statistics are already showing increasing cautiousness among consumers, judging from recent consumer surveys.
“The plus point, however, is that the labour market remains stable and supportive of consumers’ spending behaviour. MARC foresees private consumption growth to soften to 6.5% in 2020, ” it said.
As for headline inflation, MARC expects it to average between 1.2%-1.7% assuming that the abolition of fuel price ceilings takes place in 2020. Weaker domestic demand, hwever, will keep inflation below the long-term trend.
An alternative inflation indicator, the GDP deflator, also shows that a benign inflation environment is likely in 2020.
In the first nine months of 2019, the deflator fell by an average of 0.2% y-o-y (9M2018: 0.8%).
“Rapid capital flows led to ringgit gyrations in 2019.
“Going into 2020, ringgit will be affected by (a) risk of a slower GDP growth; (b) expectations of lower overnight policy rate (OPR) due to the slowing economy; (c) ability to achieve the fiscal targets against the backdrop of slower growth; (d) decisions by FTSE Russell on the possible exclusion of Malaysian government bonds in its global index.
“The upside risk of ringgit lies in the possibility of softer US dollar due to the widening current account and budget deficits, as well as the weaker US economy, ” it said.
MARC said rhetoric from Bank Negara suggests a cautious monetary policy stance as global central banks acknowledge the limits of monetary tools in supporting growth.
However, it pointed out that although there are perceptions that the recent moves by regional central banks to reduce their policy rates could exert pressure on Bank Negara to follow suit, MARC respectfully disagrees with such a view.
“MARC foresees the trend in ringgit to be a crucial factor in determining Bank Negara’s future moves, ” it said.
On the fiscal front, it noted the government was becoming more flexible in its stance, that is a plan to boost development expenditures to above RM50bil per annum in 2019 and 2020.
However, the balancing act between supporting growth and ensuring a continuing fiscal consolidation effort was becoming more challenging amid weakening global growth.
Nevertheless, MARC believed the greater transparency about the government’s total liability and efforts to address it, were a positive factor for Malaysia’s overall sovereign rating assessment.
“The government has taken respectable efforts to ensure Malaysia’s A-/A3 rating is not threatened by some of the current macro challenges.
“Going forward, MARC believes the rating would be maintained at the current level, ” it said.
Did you find this article insightful?