The country’s economy grew 4.9% in 2Q19 on higher household spending and a turnaround of key sectors

By MARK RAO / Graphic By TMR

THE ringgit spiked almost 0.4% against the US dollar last Friday after the central bank announced that the country’s economy rose higher than its expectations, beating analysts’ estimates and lifting the prospects of the local unit.

Malaysia’s economy, as measured by the GDP, grew 4.9% in the second quarter of 2019 (2Q19) on higher household spending and a turnaround of key sectors like commodity, construction and mining.

The country’s central bank also announced further liberalisation of its foreign-exchange administration (FEA) policy for greater flexibility and efficiency for businesses looking to manage their foreign-exchange (forex) risk.

The positive news helped to push the ringgit higher to RM4.178 last Friday from last Thursday’s close of RM4.194.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said Malaysia’s 2Q19 GDP came in higher than expected and, to some degree, alleviated concerns of a slowing economy, while providing a catalyst for the equity market.

“Nonetheless, the GDP breakdown showed that business investment is very tepid, while the government is very cautious in its spending,” he told The Malaysian Reserve (TMR).

“The net exports growth was higher, but this was on account of lower imports, so the external sector was not really forthcoming.” As such, the case for a second rate cut by Bank Negara Malaysia (BNM) remains valid, he said.

Mohd Afzanizam also expects equities will continue to remain volatile on the ongoing US-China trade war, while funds could move to fixed-income for better protection. The ringgit, by extension, will remain volatile, he said.

The central bank lowered the Overnight Policy Rate (OPR) to 3% in May, but is widely expected to lower the benchmark lending rate again this year. This could bring the rate to 2.75% — the lowest since March 2011.

The impact of a second OPR cut on Malaysia’s capital markets depends on whether the US Federal Reserve (Fed) and other major central banks continue to deploy monetary easing to manage trade and global growth risks.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said Malaysia’s 2Q19 GDP was an “upside surprise” and caught the market — which was expecting a China-affected lower print — off-guard.

“We will need to see if the ringgit maintains its gains once the initial knee-jerk reaction and positioning corrections have run their course,” he told TMR. “In the short term, the ringgit has the potential to continue its rally (against the greenback), but its longer-term performance will hinge on the US-China trade developments and global growth.”

He said BNM’s OPR cut is likely, if the global economy worsens. “Given (Malaysia’s) export-dependent economy, BNM will not likely want to see the ringgit appreciating strongly against its regional compatriots.”

VM Markets Pte Ltd managing partner Stephen Innes said Malaysia’s central bank policy will likely hinge on how dovish the Fed shifts.

“So, if the Fed turns very dovish regardless of the counter regional GDP upswing, it will offer BNM more policy wiggle room,” he said.

“There is nothing more effective than a pro-cycle rate cut for the economy, and BNM could seize the moment if Fed policy cooperates.”

Meanwhile, as part of the liberalisation of the FEA policy, non-resident treasury centres operating outside Malaysia can now hedge on behalf of their related entities in Malaysia and abroad via a licensed onshore bank or the Appointed Overseas Office (AOO).

This is upon a one-time registration with BNM. Non-residents can also hedge on an anticipatory basis via an AOO for settlement of trade in goods and services.

“BNM has moved to liberalise its forex policy again, which is always currency favourable despite the fact it falls well short of what the bond market needs — a proper non-deliverable forward (NDF) market,” Innes said.

Malaysia banned offshore ringgit trading on the NDF market in response to the 1997-1999 Asian financial crisis.

This was in view of containing speculation and capital outflows in its domestic financial markets.