Lukewarm outlook for Malaysia in 2019

Private consumption and private investment to remain key drivers of the country’s expansion

By NG MIN SHEN / Pic By MUHD AMIN NAHARUL

Malaysia’s economy is expected to see lukewarm albeit stable growth in 2019 as dampened external demand, slowing global growth and domestic political uncertainties continue to weigh on the country, said analysts.

JF Apex Securities Bhd expects GDP growth to slow to 4.7% for 2018 and 4.8% for 2019, with private consumption and private investment remaining the key drivers of expansion.

“However, public consumption and investment could soften in view of austerity measures introduced by the new ruling government in order to curtail elevated national debt,” the research house said in a note yesterday.

Under the new government’s definition, public debt — which now includes overall liabilities — stands at RM1.07 trillion as at June 2018, versus RM686.8 billion under the previous administration, while the debt-to-GDP ratio is now at 74.6% versus 50.6% previously.

The slowdown from 2017’s GDP growth of 5.9% is mainly due to the slowing Chinese economy and global growth, prevailing trade protectionism advocated by the Trump administration, and tumbling crude oil and commodity prices.

Maybank Investment Bank Bhd (Maybank IB) in a recent report also advised caution going forward on external uncertainties and the slowdown in growth worldwide.

It does not discount the possibility of the central bank reducing the Overnight Policy Rate (OPR) in 2019 to stimulate GDP growth. The next meeting of Bank Negara Malaysia’s (BNM) Monetary Policy Committee is scheduled on Jan 23-24.

However, most analysts are expecting domestic interest rates to remain unchanged in the near term as inflation is projected to rise to between 2.5% and 3.5% this year, from between an expected 1.5% and 2.5% in 2018, while the US Federal Reserve has indicated a slower pace of rate hikes that would ease foreign-exchange selling pressure in the region.

Foreign net selling continued on the local bourse last month, with foreign investors having sold RM1 billion net worth of equities, making it nine months of foreign net sell in 2018.

“December 2018’s net sell lifted 2018 foreign net sell to RM11.9 billion, which more than reversed all of the RM10.6 billion of foreign net buy in 2017. Maintain our defensive core equity strategy,” Maybank IB said.

Meanwhile, Kenanga Investment Bank Bhd (Kenanga IB) in a report yesterday said external demand is anticipated to weaken in the coming months with lower new export orders across the region, which would weigh on Malaysia’s export-reliant economy.

Notably, Malaysian manufacturing conditions deteriorated sharply in December, with the headline Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) hitting a 6½-year low of 46.8 on challenging operating conditions, lower demand and stagnant employment rates.

Kenanga IB added that the Baltic Dry Index continues to edge lower, reflecting softer demand for raw materials, while trade jitters continue to weigh on global trade.

Despite the ongoing trade truce between the US and China, coupled with intense talks to lessen the impact of the trade war, the research firm remains sceptical of any major breakthrough.

Thus, it is keeping its projection for GDP growth to moderate to 4.7% in the second half of 2018 (2H18), from 4.9% in 1H18, bringing full-year growth to 4.8% from 5.9% in 2017.

“With global demand and commodity prices waning, a slower growth trajectory would be more realistic for 2019, which we have projected to settle at 4.7%,” Kenanga IB said.

Markets are projected to see volatility in 1H19, with JF Apex predicting correction mode for most of the time as the majority of external risks are concentrated in the first six months.

“Higher premium weighs on global equity markets as investors turn cautious on risky assets, especially in emerging markets (EMs), with rising risk-off appetite,” the firm said.

It added that foreign investors would continue to trade cautiously on the local bourse, at least for 1H19.

“We do not foresee any immediate return of foreign funds in a massive way in the near term, in view of recent flip-flop policies and inconsistent measures being announced by the new government. Investors would rather adopt a wait-and-see attitude towards the implementation of economic reforms as execution has long been viewed as the nation’s weakness,” it said.

Corporate earnings would remain uninspiring and lagging behind valuations, while the volatility in crude oil prices would weigh on the local bourse, which is positively correlated with crude oil price movements.

However, 2H19 could see a market recovery as uncertainties and risks begin to dissipate, while sentiment could further improve with the possibility of loosening monetary policy and fiscal stimuli introduced by the US and China to prevent any global economic downturn or recession.

Foreign funds are expected to return to EMs in 2H19, while China could implement fiscal stimulus and loosen monetary policies to sustain its economic growth.

Amid the cautiously optimistic market outlook for 2019, JF Apex said it is mindful of the “10-year down-cycle” (Black Monday in the US in 1987, the 1997/1998 Asian financial crisis, the 2008/2009 global financial crisis) that could haunt the market.

“The market usually exhibits a strong rally ahead of any perceived market crash that could happen. Hence, we might see a tumultuous year leading to a widely anticipated economic recession to happen in 2020,” JF Apex stated.