Malaysia’s economy has held up well amid the global slowdown. Private consumption remains a strong source of growth support, underpinned by a still healthy labour market. However, we expect consumer spending to moderate in H2 due to unfavourable base effects from tax changes.
Malaysia’s manufacturing sector has also fared better than regional peers, due to both resilient domestic demand and the country’s more diversified export structure. Manufacturing grew 4 percent in 7M-2019; the resumption of natural gas production also supported industrial production growth. Services remained resilient, with strength seen across the retail trade, food and beverage, and business services sectors. While construction activity is still slow, the resumption of mega-infrastructure projects after a hiatus due to contract re-negotiations should boost activity in the sector.
The economy is not fully insulated against weak global sentiment, however. Credit growth has slowed – growth in total financing (loans and bonds, excluding household loans) eased to 5.7 percent y/y in July 2019 from a monthly average of 8.6 percent in 2018. Private investment grew just 1.8 percent y/y in H1-2019, slowing by more than half from 3.7 percent in H1-2018. In addition, initial signs of labour-market softness are emerging.
We estimate that nominal wage growth eased to 1.9 percent y/y in Q2, while the ratio of job vacancies to active registrants looking for jobs fell below 1.0. That said, the job market remains healthy, with the unemployment rate steady at 3.3 percent.
Bank Negara Malaysia (BNM) has room to calibrate its policy response given resilient domestic growth. The central bank already delivered a pre-emptive 25bps cut in May, and maintained a neutral tone in its September monetary policy statement. It made a slightly more negative assessment of global growth conditions, noting increasing spillover from poor external conditions to domestic activity.
However, BNM also highlighted the resilience of Malaysia’s economy, noting that private consumption has held up and that the country’s diversified export structure is moderating the impact of softer global demand. BNM maintained its 2019 growth forecast at 4.3-4.8 percent. The 2020 budget, to be announced on 11 October, will provide a first glimpse of the government’s growth expectations for next year.
With inflation benign, we expect BNM to focus on two broad factors going forward:
- the resilience of the local consumer and
- the US-China trade war.
BNM will be alert to any weakness in private consumption given its importance to growth; an unfavourable base effect in H2 (due to tax changes that boosted spending from June 2018) could weigh on consumption growth. Given Malaysia’s open economy, a further deterioration in US-China trade relations could increase the negative spillover from the external sector to the domestic economy.
The fiscal consolidation trajectory may moderate due to the soft economic outlook. This should not come as a surprise, as the government has previously hinted at a more gradual fiscal consolidation path. The 2019 budget targeted narrowing the fiscal deficit to 3.0 percent of GDP in 2020 from 3.4 percent in 2019. We now project the 2020 deficit at 3.2 percent (versus 3.0 percent previously). However, we do not expect this to raise rating concerns given the challenging economic outlook, as long as the medium-term fiscal consolidation target is adhered to.
The government has said that there will be no new revenue-generating measures in 2020. Measures introduced in 2019 – including a sugar tax, a departure levy, a broader Sales and Service Tax, and a 6 percent digital service tax – will support recurrent revenue. But given the loss of GST, we expect the government to continue to focus on rationalising expenditures such as tax incentives, and on tightening the administration of revenue collection. Total revenue to GDP (ex-oil revenue) has softened in recent years, to an estimated c.12 percent in 2019.
We maintain our Neutral short- and medium-term weighting on the Malaysian ringgit (MYR). We recently raised our USD-MYR forecast for end-2019 to 4.25 from 4.15 given our expectations of a weaker Chinese yuan (CNY). We continue to expect USD-MYR to range trade. Malaysia’s economic resilience and favourable current account surplus (c.4.2 percent of GDP in H1) should help to counter-balance USD strength.
We stay Neutral on Malaysia Government Securities (MGS). Onshore liquidity remains ample, supporting MYR debt. While valuations now look expensive after a strong rally (the 10Y MGS yield is c.70bps lower YTD), demand for duration remains constructive. Onshore investors are buying LCY government debt on expectations of another potential rate cut this year, a lack of government-guaranteed corporate bond issuance, and healthy cash levels amid subdued credit growth. Foreign investors have turned less cautious on the potential exclusion of MGS from the WGBI index. Continued dialogue between BNM and the index provider suggests that both parties aim to prevent market disruption. As a result, we see the risk of MGS withdrawal from the WGBI index as manageable.
Source: Standard Chartered Global Research 2019