MARC is of the view that Malaysia’s real gross domestic product (GDP) growth will decelerate to 4.3% in 2020, below the government forecast of 4.8% due to weaker external trade performance and softer domestic demand growth.
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. Forward indicators suggest a lacklustre outlook, i.e. a continuing downtrend of the export orders index of US manufacturing Purchasing Managers’ Index (PMI) and a continuing contraction in global semiconductor sales.
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 behavior. MARC foresees private consumption growth to soften to 6.5% in 2020.
Meanwhile, MARC expects headline inflation numbers to rise modestly to an average between 1.2%-1.7% assuming that the abolishment of fuel price ceilings takes place in 2020. Weaker domestic demand, however, 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 9 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 (USD) due to the widening current account and budget deficits, as well as the weaker US economy.
Rhetoric from Bank Negara Malaysia (BNM) suggests a cautious monetary policy stance as global central banks acknowledge the limits of monetary tools in supporting growth. Although there are perceptions that the recent moves by regional central banks to reduce their policy rates could exert pressure on BNM to follow suit, MARC respectfully disagrees with such a view. MARC foresees the trend in ringgit to be a crucial factor in determining BNM’s future moves.
On the fiscal front, there are already efforts by the government to become more flexible in its stance, i.e. plan to boost development expenditures to above RM50 billion per annum in 2019 and 2020. Notwithstanding this, the balancing act between supporting growth and ensuring a continuing fiscal consolidation effort is becoming more challenging, especially at a time when global growth is weakening.
Nevertheless, MARC believes the greater transparency about the government’s total liability and efforts to address it, are 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.