KUALA LUMPUR: UOB Global Economics and Markets Research is cautiously optimistic about the outlook for Malaysia as some early signs of a turnaround have emerged despite concerns of waning growth momentum and persistent downside risks.
In its research outlook for the Malaysian economy, UOB Malaysia Research said there were 10 signs of a turnaround in the economy as it maintained its GDP forecast of 4.4% for 2020 versus estimated 4.6% in 2019.
Among the factors for its cautious optimism were the improvement in manufacturing activity index, business sentiment, gross exports, industrial production and headline inflation.
“Given a projected GDP growth that is below Malaysia’s potential output of around 4.8% to 5.0% and moderate inflation pressures, we think there is room to lower policy rates.
“This will help safeguard this year’s growth and bolster confidence. As such, we have penciled in a 25bps cut in the Overnight Policy Rate (OPR) to 2.75% in 1Q 2020, ” it said.
UOB Malaysia Research said the rate cut was more likely to happen in the early part of this year to extend the stimulus effect from last year’s rate cut.
Recall that Bank Negara Malaysia cut the OPR by 25bps to 3% in May 2019. This was followed by a reduction in the Statutory Reserve Requirement (SRR) ratio by 50bps to 3% effective Nov 16,2019. This was the first SRR reduction since February 2016.
First, it said the manufacturing activity index or PMI indices improved in Nov-Dec 2019 following the announcement of US-China Phase One deal that lowers tariff rates for US$110bil Chinese goods to the US and prevented an escalation of tariffs. The headline PMI rose to a 15-month high of 50.0 in December amid further gains in output and new orders.
Second, business surveys signal a turnaround in sentiment with the IHS Markit manufacturing survey showing stronger output expectations for the next 12 months.
RAM’s Business Confidence Index also suggests a possible bottoming out of negative sentiment among Malaysian businesses, with the corporate sector showing higher optimism following a sustained downtrend since end-2018 and the SME sentiment improving for the second straight quarter. This suggests slightly better business prospects heading into 2020.
Third, the leading index rose by 0.3% y/y and 1.5% y/y in September and October on account of expanding money supply, imports of semiconductors and other metals, approved housing permits, and expected manufacturing sales.
Fourth, gross exports fell by 5.5% y/y in November (-6.7% in Oct) bringing year-to-date exports to contract 2.1% y/y. However, it thinks a recovery in global growth and trade will assist a turnaround for Malaysia’s exports. Though exports to few key markets fell in November, Malaysia’s exports to China rose 4.1% y/y (Oct: -11% y/y) and to the US increased 6.5% y/y (Oct: 2.7% y/y).
Fifth, imports of intermediate and capital goods recorded softer declines that suggest receding pessimism for future exports and investments. Gross imports recorded a narrower decline of 3.6% y/y in November (vs. -8.7% y/y in Oct) owing to softer contractions of intermediate imports (-1.8% y/y in Nov vs. -5.1% y/y in Oct) and capital imports (-4.3% y/y in Nov vs. -11.5% y/y in Oct).
Sixth, industrial production index rose 2.0% y/y in November (vs. 0.3% y/y in Oct) helped by improvements across the mining, manufacturing and electricity indices.
Production of LNG appears to have turned around to expand 3.7% y/y in November (-6.3% y/y in Oct) and crude oil production recorded a narrower decline of 3.3% y/y in November (- 5.1% y/y in Oct).
The manufacturing sector expanded by 2.5% y/y in November (2.2% y/y in Oct) and electricity output rose 1.6% y/y (0.5% y/y in Oct). Manufacturing production has been lifted by domestic-oriented sectors amid the muted export performance.
Seventh, for construction, new permits and renewal of licenses saw double-digit growth of 50.6% y/y and 18.4% y/y at the start of 3Q 2019. Housing approvals spiked 127.5% y/y to 15,554 in October. Production of concrete, cement and plaster strengthened by 17% y/y in October (14.4% y/y in Sep). Outstanding loans to the construction sector rose 7.1% y/y in October (8.7% y/y in Sep).
Eight, the distributive trade index recorded an uptick of 5.5% y/y in November (vs. 5.3% in Oct) amid higher wholesale and retail trade activity by 4.8% y/y and 6.9% y/y respectively in November (4.4% and 6.7% in Oct). This could be attributed to year-end seasonal spend amid broader expansions of sales of household goods, food and beverage, fuel, information and communication.
Retail trade not in stores, stalls or markets (including online sales) expanded 8.2% y/y in November. Motor vehicle sales stabilised at 8.9% y/y in November following few months of steep declines owing to the high base effect. This was supported by stable labor market conditions as the unemployment rate eased to a four-year low of 3.2% in Oct-Nov and labor force participation rates rising to 68.8%.
Meanwhile higher crude palm oil prices that spiked over 50% y/y to MYR3,000 per tonne supports agriculture incomes and spending.
The ninth factor is that headline inflation hit a six-month low of 0.9% y/y in November (vs. 1.1% y/y in Oct) bringing year-to-date average inflation to 0.7% in Jan-Nov 2019.
A recent announcement that the implementation of targeted fuel subsidies would be delayed keeps petrol prices (RON95) at the pump unchanged for now. This keeps inflation pressures at bay and poses downside risks to our inflation projection of 2.5% for this year.
Tenth, monetary indicators moderated for most of 2019 but the slowdown appears to be stabilising in November amid upticks in loan indicators including loan applications and approvals while loans disbursed recorded a narrower decline. Overall loans growth levelled at 3.7% y/y in Oct-Nov.
There has been an uptick in loans to the construction and property, manufacturing, transport storage and communication, education, health and household sectors. The delinquency rate or gross non-performing loans (NPLs) ratio hovers at 1.6% since July (vs. 1.5% as at end-2018) despite the slowdown in loans outstanding.
Overall deposit growth was lower at 2.7% y/y in November (vs. 3.4% in Oct) albeit savings deposits growth remains healthy at 7.1% y/y while demand deposits rose 4.7% and fixed deposits increased 4.0%. The robust deposit growth suggests higher precautionary savings that can be spent or invested under the right market conditions or as sentiment improves.
“These signals are encouraging though we are still cautious amid the fragile growth environment and lingering domestic political and policy uncertainties, ” UOB Malaysia Research said.
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