Malaysia weathers the storm as economy expands 4.5% in 1Q19

Growth for the January-March period was supported by domestic demand and recovery in agricultural production


THE country’s economy has expanded 4.5% in the first three months of 2019 amid political uncertainty, outflows of foreign capital, muted equity market and heightened tension between the world’s two largest economies.

Growth for the January through March period was supported by domestic demand and recovery in agricultural production, but weakness in overall investment activity weighed on the country.

Bank Negara Malaysia (BNM) said the first quarter of 2019 (1Q19) GDP growth was mainly underpinned by a 4.4% expansion in domestic demand (4Q18: 5.7%) with a private consumption growth of 7.6% (4Q18: 8.4%), as well as better results from commodities.

“The agriculture sector rebounded with a growth of 5.6% in 1Q19 (4Q18: -0.1%) on account of significant improvement in the production of crude palm oil (CPO) and natural rubber.

“CPO rebounded strongly during the quarter due to recovery in oil palm yields, while improvement in rubber prices led to more rubber tapping activities,” central bank governor Datuk Nor Shamsiah Mohd Yunus said when announcing the country’s 1Q economic performance in Kuala Lumpur yesterday.

But sectors like mining continued to decline as oil and natural gas production was impacted by the unexpected production facilities closure. The construction sector also had a muted quarter with just a 0.3% growth compared to 4.9% a year ago.

The January-March 2019 growth also surpassed estimates of 4.3%, but was lower than the 5.4% growth registered in 1Q18 and 4.7% in 4Q18.

Private investment growth plunged to 0.4% in 1Q19 from 5.8% recorded in 4Q18, weighed down by weak machinery and equipment investment amid softening demand and moderating business sentiment.

“Looking ahead, while investment activity is likely to receive support from ongoing multi-year projects, the growth trend could be below the longterm average.

“Such underperformance underscores the urgency to re-look at policies to invigorate private investment, including to review investment incentives,” Nor Shamsiah said.

Lower exports also dragged the economy and demand is expected to moderate due to volatile global economic outlook and trade tensions.

The central bank maintains its full-year 2019 GDP forecast at between 4.3% and 4.8%. The forecast has already taken into account the escalation of US-China trade tariffs in the past week.

“Risks to the outlook remain tilted to the downside, mainly emanating from external factors,” it said.

Economists are largely surprised by the better than expected quarterly performance, demonstrating the resilience of the economy despite the sombre outlook.

A Bloomberg survey of economists had put the consensus at 4.3%.

Institute for Democracy and Economic Affairs CEO Ali Salman said the growth rate is positive news compared to the forecast. However, against the backdrop of the same period last year, the growth rate slowed from 5.3% to 4.5%.

“The economic fundamentals of Malaysia, including its macro-economic indicators, external account and fiscal capacity of the government, remain strong.

“But one can also notice that with the exception of the agriculture sector, all sectors of the economy are showing sluggish growth, when 1Q18 and 1Q19 are compared against (each other).

“The decreasing business confidence and slowing down of economic growth are mutually consistent, but I hope that more clarity from the government in terms of Shared Prosperity 2030 and the positive outcomes of foreign direct investment (FDI) received and approved in 2018 will eventually help the overall economic growth to rebound by the end of 2019,” Ali told The Malaysian Reserve.

IHS Markit Ltd Asia Pacific chief economist Rajiv Biswas views Malaysia’s 1Q19 economic performance as strong, despite it moderating slightly from 4.7% recorded in 4Q18.

The large decline in public sector investment, which fell by 13.2% year-on-year, contributed to the lower quarterly performance, Rajiv said.

He expects Malaysia’s economic outlook for 2019 to remain robust with a growth of around 4.4% for the full year, supported by improved global oil prices, which will boost exports and fiscal revenues.

A downside risk to the near-term outlook is the recent escalation of the US-China trade war, which will likely have negative effects on the local manufacturing supply chain to China’s manufacturing sector.

On the upside, an escalating US-China trade war could reinforce trade diversion effects, as US buyers shift their orders to other manufacturing hubs.

Rajiv said companies in Malaysia’s manufacturing sector could benefit from some diversion of export orders and stronger FDI flows over the medium term as multinationals diversify their global supply chain away from China.

Economic Affairs Minister Datuk Seri Mohamed Azmin Ali said Malaysia has successfully maintained its growth momentum in 1Q19 despite external headwinds from ongoing US-China trade tensions, fiscal uncertainties in developed countries and slow growth across Asian nations.

Azmin said Malaysia will focus on enhancing domestic economic activity by incentivising the private sector to drive up investments. He said the government has also taken steps to accelerate investment activities through the resumption of previously deferred projects, such as Bandar Malaysia and the East Coast Rail Link.

Malaysia’s proactive participation in the Belt and Road Initiative is also expected to have a significant impact on the economy through increased FDI and connectivity with the world economy.

Malaysia has the potential to become a gateway to the Asean market which comprises more than 650 million people whose purchasing power is on the rise.

“To support economic growth, while ensuring the wellbeing of the people, the government has also allocated RM54.7 billion in development expenditure this year and will ensure the implementation of more than 3,700 development projects, including the construction of schools, hospitals and roads, as well as infrastructure facilities,” he said in a statement.

Beside the stronger performance, the ringgit appreciated by 1.4% against the US dollar in 1Q19, driven mainly by non-resident portfolio inflows of RM13.5 billion.

However, since April, the ringgit has depreciated by 2.2% against the US dollar, in line with most regional currencies.

“In light of recent developments, the ringgit has experienced some volatility and depreciation pressure. This is likely to continue in the near term amid the global growth outlook and ongoing uncertainties surrounding geopolitical and trade factors,” Nor Shamsiah said.