Affin Hwang: GDP growth forecast revised to 3.3% for 2020

By NUR HAZIQAH A KAMEL / Graphic By ANIS SHAMSUL

RESEARCH firm Affin Hwang Investment Bank Bhd has cut the GDP growth forecast to 3.3% for 2020 which signals continued pessimism on the outlook for the economy dragged by Covid 19, weak exports, slow manufacturing output and collapse in global oil prices.

Analysts at the research house noted that the GDP could slow to 2.8% for the first half of 2020 (1H20) from 4% year-on-year (YoY) before recovering gradually to 3.7% estimated for 2H20.

“The pickup in economic activity in 2H20 is partly attributed to a low base factor when real GDP slowed by 3.6% in the fourth quarter of 2019 (4Q19).

“The recent sharp weakness in global oil prices is expected to weigh on Malaysia’s GDP growth further (especially through the mining and quarrying sector which is the third-largest industry in the supply-side of GDP, accounting for 7.1% of GDP),” the firm noted in a report yesterday.

The economic woes are expected to be further compounded by weak growth in domestic and external demand.

“Growth in domestic demand is projected to slow to 4.1% YoY for 2020, from 4.3% in 2019, where private consumption will remain supportive of growth despite expan-ding at a slower pace of 5.5% YoY projected for 2020 (7.6% in 2019).

“Domestically, there are several reasons for our downgrade in real GDP growth. The likely prolonged Covid-19 outbreak will weigh on tourism-related sectors into 2Q20,” the report noted.

Analysts also noted that the impact of the outbreak on tourism-related sectors has already affected air passenger traffic, which declined 23.4% YoY in February 2020, almost matching the decline seen in 2003 during the SARS epidemic.

“Previously, we lowered our GDP growth forecast based on the immediate impact on the country’s tou-rism-related sectors and the estimated loss in tourist receipts to Malaysia’s GDP growth.

“For 2020, Tourism Malaysia is still targeting tourist arrivals to rise 6.8% YoY to 30 million in 2020 (28.1 million targeted in 2019), while tourist receipts are projected to expand 8.5% YoY to RM100 billion in 2020 (RM92.2 billion in 2019),” it noted.

Affin Hwang said based on its own estimate, the outbreak potentially leads to a 30% decline in tou-rist arrivals that could translate into a loss of tourist receipts of about RM30 billion in 2020, whereby the direct impact from lower tourist receipts is estimated to result in 0.5 percentage point reduction in Malaysia’s GDP growth.

Malaysia also could be at risk of losing up to one-third of its potential oil revenue, including taxes and dividends due to the crash in global oil prices that further drag on the country’s economic growth.

Oil prices have fallen sharply with Brent crude oil trading at US$33 (RM141.19) per barrel as of March 13, 2020, which is a 50% drop since early 2020.

“The sharp drop in oil prices was triggered by Russia’s refusal to participate in the production cuts, which also likely led to OPEC abandoning its cuts altogether, where earlier the OPEC meeting recommended a further adjustment of a production cut of 1.5 million barrels per day (bpd).

“The existing deal limiting production by 1.7 million bpd (2.1 million bpd taking into account Saudi’s voluntary cut) is set to expire at the end of this month,” it noted.

The current account surplus is likely to sustain but narrowing in the year, where there are some renewed concerns by market observers on the lower exports of commodities and falling global commodity prices.

“The same concern was raised before, when the current account surplus in the balance of payments narrowed to only RM2.8 billion or 0.8% of GDP in 2Q18.

“However, the Malaysian eco-nomy had registered 21 consecutive years of current account surplus since 1998,” it noted.

The research house also noted that the country’s current account position will likely be under some pressure in the near term, but unlikely to fall into a deficit in 2020, unless exports fall significantly while imports increase.

“We believe the slowdown in exports of crude petroleum and palm oil-based products were likely to be cushioned by the healthy demand for electrical and electronic products,” the research house noted.

Subsequently, the research house has maintained a ‘Neutral’ call on the nation’s index FTSE Bursa Malaysia KLCI (FBM KLCI) as global equity markets suffered a major rout last week reacting to prospects of a global economic slowdown.

“We cut our FBM KLCI earnings per share growth forecast to lower by 4.7% to reflect our cut in GDP growth to 3.3% from 4%, although the risk remains to the downside should Covid-19 prolong.

“Alongside a higher market risk premium, we lower our FBM KLCI 2020 year-end target to 1,200,” analysts noted.