Affin Hwang anticipates risks of delay in implementing investments in manufacturing and service sectors

Affin Hwang Capital has forecasted a much lower GDP growth than Bank Negara Malaysia’s forecast range of -2.0 percent to 0.5 percent. The bank’s projection of –3.5 percent for the year is due to the bank’s sharply lower growth projection on domestic demand growth, in which they project it to be at -4.0 percent.

“Our cautious view on the country’s domestic demand is partly due to the enforcement of the movement control order (MCO) from 18 March to 14 April 2020, whereby people’s movements are somewhat restricted, with restrictions of people exiting/leaving homes, closure of most businesses, and restrictions on entry of foreign tourists travelling into Malaysia,” the bank stated in their summary of BNM’s recently released annual report.

The bank believes private consumption growth will not be normalised immediately as households will likely be impacted from possible shocks to their incomes and a slight erosion of purchasing power.  The bank also points out that households are also likely to be cautious on their spending due to the uncertain employment situation as well as affected by the expected slower growth in real disposable income.

Possible shock to household income and employment is expected to weigh on consumer sentiment further, translating into weak consumer spending if the virus outbreak prolongs.

Furthermore, on the supply side, Affin Hwang has projected in a growth projection of -3 percent as they expect service sectors to face significant impact by declining transport, storage, wholesale and retail trade sub-sectors as a result of lower business and economic activity.

The bank is also expecting SMEs to face financial difficulties to manage their cash flow problems due to the Covid-19 impact despite assistance from Putrajaya.

“Private investment is another component of domestic demand which we believe will weigh on the domestic economy in 2020,” the bank stated.

Affin Hwang says private investment is highly correlated with external conditions, and as foreign investors are faced with similar challenges from the outbreak in their home countries, there are bound to be risks of delay or postponement in actual implementation from investment in the manufacturing and services sectors.

The bank has also expressed a similar sentiment towards domestic investors, as foreign investor confidence will not be restored in the short to medium term due to weak global economic prospects.

Gross imports growth are also expected to register its second straight year of contraction of -11.9 percent this year in comparison the 2019’s -2.3 percent, primarily due to weaker external and domestic demand.

“For instance, intermediate imports are projected to contract in tandem with the weakness in manufactured exports,” the bank stated.

In terms of capital imports, it is expected to contract but at a slower pace amid the delivery of PFLNG2 in the first first of this year, which is expected to offset some of the downside from slower domestic investment activity. The bank is also anticipating consumption imports to decline due to slower domestic demand conditions.

“Based on our estimate, we project the goods surplus to narrow slightly to RM97bn in 2020 from RM125.5bn in 2019, where the current account surplus will also narrow but remain substantial at RM27bn in 2020 (1.7% of GDP) from RM49.7bn in 2019 (3.3% of GDP),” the bank reported.

 

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