Major inflation likely next year, says MIDF

The targeted fuel subsidy is expected to kick off in January as the price of RON95 will be floated


MALAYSIA’S economic growth is expected to fall to 4.5% in 2020 partly due to an expected surge in inflation to 2.4% in 2020, said MIDF Investment Bank Bhd (MIDF Research).

Higher inflation will cause economic moderation for Malaysia next year as it will affect domestic demand, MIDF Research economist Muhammad Zafri Zulkeffeli said.

The targeted fuel subsidy is expected to kick off in January as the price of RON95 will be floated according to the market.

“Inflationary pressure from transportation and fuel-related items is likely to increase in line with our forecast of Brent crude oil price at US$65 (RM269.10) per barrel in 2020, higher than US$63 per barrel estimated for this year,” Muhammad Zafri said at MIDF Research’s market and economic outlook for 2020 in Kuala Lumpur yesterday.

Malaysia’s GDP growth came in at 4.6% for the first nine months of 2019. The central bank is forecasting GDP expansion to range between 4.3% and 4.8% for the full year, alongside the government estimate of 4.7%.

Overall inflation will also be driven higher by the food component as Malaysia is a net importer of food. Coupled with the weaker ringgit, prices of food items will likely be higher in 2020.

“Nevertheless, the latest Producer Price Index — a three to six months leading indicator of price changes at the consumer level — suggests that Malaysia’s headline inflation will stay low for the fourth quarter of 2019 and early 2020,” Muhammad Zafri said.

Overall inflation rose 1.1% in October, driven largely by food and beverages.

Meanwhile, MIDF Research head of research Mohd Redza Abdul Rahman said the firm is expecting a more challenging global economic environment in 2020, amid slow-growing demand, rising geopolitical risks and loss of growth momentum in major economies, including the US, China and Europe.

“Recent developments on the geopolitical scene point to a challenging outlook for the capital market in the future,” he said.

The ongoing US-China trade war, the European Union’s ambitious push against climate change, interest-rate cuts, oil price fluctuations and the status of domestic mega projects continue to cast further uncertainties.

“These affect investor sentiment and introduce increased volatility, not only for our equity market but also regional peers,” Mohd Redza added.

The research firm expects the FTSE Bursa Malaysia KLCI (FBM KLCI) to end 2020 at 1,680 points. The benchmark FBM KLCI, which closed at 1,576.95 yesterday, is down 6.7% year-to-date and heading for its worst year in at least a decade.

Corporate earnings growth is projected at approximately 5% in 2020, driven by the banking, plantation, oil and gas, and telecommunications sectors.

While concern lingers over external trade, commodity-based sectors should provide a boost, Mohd Redza noted.

“In 2020, global commodity prices are expected to stay at profitable levels and we forecast Brent crude oil prices to average at US$65 per barrel and crude palm oil at RM2,450 per metric tonne,” he said.

MIDF Research expects Bank Negara Malaysia to cut the Overnight Policy Rate by 25 basis points in 1Q20.

The ringgit is likely to depreciate further to RM4.20 against the greenback by end-2020 and average at RM4.18 against the US dollar for the year, it added.