The trade performance in neighbouring countries has reflected the exports pressure inflicted onto the region

by SHAHEERA AZNAM SHAH/ pic by TMR FILE

THE drawback of the national economy is expected to persist as a result of global uncertainties which have affected the external trade performance and investment.

Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias (picture) said the country’s latest statistics signal the extension of the challenging business environment.

“In the first half of 2019, Malaysia’s exports fell by 0.2%, down from 6.9% in the corresponding period in 2018. A challenging trade environment will likely to continue judging by the latest trade statistics,” he said in a report entitled Malaysia: Macroeconomic Update.

The trade performance in neighbouring countries has reflected the exports pressure inflicted onto the region.

“The recent performance of neighbouring Singapore also reflects an increasing downward pressure on exports, although its economy is more exposed to global trade vagaries compared to Malaysia.

“Singapore’s exports fell the most in six years in June following a plunge in electronics shipments,” he added.

However, Nor Zahidi said the downward cycle of the exports figures is less severe than the downcycle in 2008 and 2016.

“The export numbers in ringgit terms are showing that the current downcycle is less severe than the ones experienced in 2008 and 2016. From its peak in October 2018, gross exports have fallen by about 13% in the recent month.

“During the prior export down- cycle in 2015, gross exports fell by 21% in the seven months following its peak in September that year,” he said.

Nor Zahidi added that the plunge in global semiconductor trading has impacted Malaysia’s electrical and electronics (E&E) exports.

“Due to the sharp decline in the global semiconductor sales, Malaysia’s E&E exports have recently dropped more than they did compared to the 2015 downturn.

“From its peak in October 2018, it has fallen by 24%,” he said.

While the external risks are strengthening coupled with weak investment growth, Nor Zahidi said Malaysia will likely implement protective measures to maintain the economy.

“The continuing contraction in the global semiconductor sales that weigh on Malaysian headline GDP growth has raised the possibility of more pronounced support from both the monetary and fiscal sides. This is despite the stronger GDP growth of 4.9% recorded in 2Q19 (second quarter of 2019),” he said.

Nor Zahidi said the central bank could adjust the Overnight Policy Rate (OPR) in the first six months of 2020, should the conditions of the macro-economy progressively worsened.

“Although Malaysia’s high household debt of about 83% of GDP calls for measures that prevent households’ balance sheets from deteriorating, we think that another 25-basis point reduction in the OPR, if necessary, will not do much harm to the economy.

“This is because the household debt profile has improved in recent years. The share of borrowings by the so-called vulnerable group with a monthly income level of RM5,000 and below continued to fall to 39.8% in 2018 from 46.4% in 2014,” he explained.

According to him, the possible uptick in the budget deficit ratio would not create much concern among international credit rating agencies as the overall macro backdrop is not expected to deteriorate to the levels during financial crisis.

“On the fiscal side, the recent statement by the government that ‘it is challenging for Malaysia to achieve its budget deficit targets’ in view of uncertainties due to the trade war, suggests that the fiscal policy could be relaxed slightly to avert a faster than expected deceleration of economic growth.

“Budget deficits had already declined by 39% in the first five months of 2019 to RM21.4 billion from RM35 billion in the corresponding period in 2018. This is despite a 13.4% increase in the net development expenditure during the period.

“Going forward, we now expect development expenditure to be increased further and budget deficits for 2020 will remain circa 3.2% of GDP, a shade higher than the original target of 3% of GDP,” he said.