Dissecting Malaysia’s 3Q19 GDP — the good and bad

Despite rising to a 4.9% jump in the previous quarter, economic expansion stuttered in 3Q19 due to slower domestic demand and lower exports

by NG MIN SHEN & ASILA JALIL/ pic by BLOOMBERG

MALAYSIA’S GDP for the third quarter of 2019 (3Q19) rose 4.4% year-on-year, the slowest since 3Q18 as exports weakened and mining and construction sectors delivered a timid quarter.

The July through September economic activities came within analysts’ estimates of between 4.1% and 4.4%, but fell short of the corresponding quarter result a year ago.

Despite rising to a 4.9% jump in the previous quarter, economic expansion stuttered in 3Q19 due to slower domestic demand and lower exports.

Bank Negara Malaysia (BNM), however, remains optimistic of a rebound in the 4Q and the spill- over effect into 2020, fuelled by normalised supply conditions and revival of mega projects.

“The 3Q19 is somewhat similar to the 3Q18 when we had a supply disruption. And that supply disruption normalises. The oil plants that were closed (in 3Q19) have started reproducing again in 4Q19, so that itself will provide support.

“Some of the work towards restarting mega projects by the government is underway. So, that will also provide support,” BNM governor Datuk Nor Shamsiah Mohd Yunus said last Friday.

On a quarter-on-quarter seasonally adjusted basis, the economy grew by 0.9%.

“The contribution of real exports of goods and services was -0.9% to growth in 3Q19, so yes, to some extent, the weak export growth contributed to slightly weaker growth in 3Q19,” BNM assistant governor Marzunisham Omar said.

The US-China prolonged trade war is hurting exporting countries globally. Singapore posted a 0.6% economic growth after contracting -2.7% in 2Q, while Thailand’s GDP expanded 0.6% in the April-June quarter. Indonesia, South-East Asia’s largest economy, reported a 5.02% rise, lower than the quarter before of 5.05%.

Malaysia’s nine-month growth came in at 4.6%. BNM retains its forecast of 4.3% to 4.8% GDP growth this year. The government’s estimate is 4.7%.

“Malaysia’s growth will remain positive in 4Q19, and the pace will be sustained into the next year,” Nor Shamsiah said, adding that the private sector especially household spending would drive the economy.

“We are not on any preset course,” she said on the recent statutory reserve rate cut and whether the central bank would push for more cuts of the Overnight Policy Rate (OPR).

The central bank lowered the OPR to 3% in May this year, but kept rates unchanged at its Nov 5 meeting.

The monetary authority will continue to engage with index providers and investors to identify ways to increase market efficiency, following FTSE Russell’s decision to keep Malaysia on the watch list on the World Government Bond Index.

How did the various sectors perform during the June-September 2019 period?

Exports

Exports fell larger during the quarter at -1.9% from -0.4% in 2Q19, while import slumped -5.8% during the period compared to -1.4% in the previous quarter.

Commodities exports turned negative at -10% (2Q19: 0.2%) primarily on a -43.9% plunge in crude petroleum exports (2Q19: -10.4%).

“This was attributable to the temporary closure for maintenance works at selected oil fields and lower global oil prices,” BNM said.

Manufactured exports fell -0.6% (2Q19: 0.2%), while electrical and electronics (E&E) exports declined -4.9% (2Q19: -0.6%) amid lower demand from China and regional economies due to slower semiconductor sales and the ongoing China-US trade barbs.

“We are not immune to developments that are happening globally because we’re such an open economy, but the diversified nature of our economy has provided some sort of cushion against these external headwinds,” Nor Shamsiah said.

Sectoral Growth and Contribution

The services sector grew 5.9% in 3Q19 (2Q19: 6.1%), with stronger expansion in the wholesale sector despite the lower growth in retail and motor vehicle segments.

Manufacturing growth moderated to 3.6% (2Q19: 4.3%) due to slower growth in the E&E and consumer-related industries. Crude and refined palm oil production also slumped.

Agriculture sector dropped to 3.7% from 4.2% in 2Q19 as the pace of recovery in palm oil output slowed, while forestry and logging activities contracted further.

Mining fell -4.3% (2Q19: 2.9%), mainly on maintenance works that affected oil production.

The construction sector turned negative during 3Q19, contracting 1.5% compared to 0.5% growth during the April-June period due to the slowdown in the non-residential subsector as commercial properties oversupply began to drag economic activities.

Mining and quarrying also dragged the overall real GDP growth with a -0.3% contraction in 3Q19, while construction contracted by -0.1%.

Expenditure and Consumption

Private sector expenditure remained the key contributor to growth, backed by continued household spending and private investment growth.

Private consumption fell to 7% in 3Q19 (2Q19: 7.8%), seen as a normalisation towards the long-term household spending trend following strong tax holiday spending last year, Nor Shamsiah said.

Private investment slowed to 0.3% in 3Q19 (2Q19: 1.8%) amid subdued business sentiment.

Headline inflation as measured by the Consumer Price Index (CPI) increased to 1.3% in the 3Q (2Q19: 0.7%). Core inflation, excluding the impact of consumption tax policy changes, was steady at 1.5% (2Q19: 0.1%).

Financial Markets

The ringgit depreciated by 1.1% against the US dollar in 3Q19, following continued heightened risk aversion in global financial markets due to worsening trade tensions and global growth concerns.

For the year up to Nov 14, the ringgit depreciated by 0.5% against the greenback.

The FTSE Bursa Malaysia KLCI declined 5.3% to close at 1,584 points as at end-September (end-June: 1,672 points), while the three-year, five-year and 10-year Malaysian Government Securities yields fell by 19.3, 19.7 and 29.5 basis points respectively.

However, domestic bond yields trended downwards on non-resident inflows into the domestic bond market as heightened global risk aversion pushed preferences towards safer financial assets.

Current Accounts, FDI, Debt

The current account surplus narrowed to RM11.5 billion or 3.1% of gross national income (GNI) in 3Q19, compared to RM14.3 billion or 3.9% of GNI in 2Q19.

As the decline in imports outpaced exports, the goods surplus widened to RM30.8 billion (2Q19: RM28.1 billion).

Direct investments abroad by Malaysian companies registered a net outflow of RM3.7 billion in 3Q19 (2Q19: -RM12.6 billion).

Foreign direct investments (FDIs) inflow was smaller at RM2.9 billion during the quarter (2Q19: RM4.4 billion), as higher equity capital injections were offset by larger dividend payments and a net repayment of intercompany loans.

Residents’ portfolio investments abroad jumped to RM18.9 billion (2Q19: -RM5 billion) as institutional investors purchased equity and debt securities abroad.

Malaysia’s external debt as a percentage of GDP narrowed to 60.4% or RM916.4 billion as at end-September 2019 (end-June 2019: 61.4% or RM931.1 billion).

32.9% of external debt was denominated in ringgit as at end-September 2019 (end-June 2019: 31.7%), mainly in non-resident holdings of domestic debt securities and ringgit deposits.