This article first appeared in The Edge Financial Daily on December 29, 2017
KUALA LUMPUR: 2017, a year that will likely be remembered as the turning point for the global economy as synchronised economic recovery took place amid political uncertainties, rising geopolitical tension coupled with the slow climb seen in most commodity prices.
In terms of gross domestic product (GDP) growth, Malaysia has outshone many in the region, supported by strong exports and steady consumer spending.
Ringgit has regained some strength along with better economic data. The return of foreign interests in Malaysian equities and debt papers has also lent support to the local currency.
Let’s look at some of the economic indicators on how the country has fared in 2017, just as we get ready to usher in the new year. Will the economic growth gain further momentum? Are there reasons for caution ahead? Generally, economists anticipate the high base effect to set in, so it might be wishful thinking to expect equally strong set of economic statistics in 2018.
GDP growth a pleasant surprise
It is probably a pleasant surprise to all Malaysians that the country’s GDP growth accelerated at the fastest pace in three years, despite the prolonged downturn in the oil & gas industry and the soft property market. The growth rate of 6.2% in third quarter of 2017 (3Q17) was the highest since 2Q14. Economists have been revising their forecasts upward throughout the year.
The first three quarters recorded an average GDP growth of 5.9%. Comparatively, 2016 saw an average GDP growth of 4.23%, the lowest rate of GDP growth since 2010.
Exports have been the locomotive for the country’s GDP growth. Besides, domestic demand amid steady employment rate also helped drive the growth.
Higher transportation and food prices fuel inflation
Transportation and food are the two main components that have continued to push up inflation.
Brent crude oil’s steady rise, breaching the US$60 (RM244.20)-level per barrel, has fuelled inflation with the Consumer Price Index staying above 3% throughout the year. Consequently, the grouses of rising cost of living are getting louder.
Meanwhile, food and utility prices have increased steadily throughout the year. Food price inflation has averaged at 4.45%, hitting a high of 4.8% in September this year.
Inflation in the prices of food away from home has seen a sharp rise in 2017, hitting a five-year high of 5.2% in October 2017, according to data compiled by Khazanah Research Institute.
Taming inflation is probably a priority for policymakers in 2018.
External trade remains robust
Robust global demand, which belied a recovery in world economic activity, supported Malaysian exporters in 2017. Coupled with ringgit that remained relatively weak at above 4.00 against the US dollar, exports have grown above 10% year-on-year for every month in 2017 so far.
This was largely led by an increase in exports from the electrical and electronics sector, which have been up every month.
In fact, export growth hit a more than five-year high of 32.5% to RM79.4 billion in May — the first time export growth outpaced import’s since May 2016.
Meanwhile, import growth was equally robust, registering 39.42% in March on the back of higher intermediate, capital and consumption goods purchased. This was the strongest growth in five years.
Interestingly, Malaysia’s industrial production index did not reflect such stellar growth; it was moving in the range of between 3.5% and 6.8% in 2017.
Malaysia’s Nikkei Producers’ Manufacturing Index has also hovered in contractionary territory throughout most of the year, with expansionary activity recorded only in April and November.
US oil price vs ringgit
The ringgit has recovered strongly in 2017 after the sharp depreciation since the collapse of the oil price in 2014. In fact, the ringgit was the second-strongest currency in Asia behind South Korea’s won after it gained 10.3% to RM4.06 as of press time.
The correlation between the ringgit and oil price has re-emerged this year after a disconnect seen at the end of 2016 when the oil price slowly crept up while the ringgit continued to remain under pressure.
In November 2016, the ringgit plunged to its weakest in more than 12 years in offshore market, prompting Bank Negara Malaysia (BNM) to curb non-deliverable forward trading. After the curb, the liquidity in the onshore ringgit market improved and the central bank also introduced several measures to boost onshore ringgit trading, which included a dynamic hedging framework.
The strength in the ringgit is especially prominent during 4Q17 as a reflection of the strengthening crude oil and natural gas prices, which is viewed by analysts as positive for Malaysia being a net exporter of oil and gas.
The Brent crude oil hit its two-year high of US$67.02 per barrel on Boxing Day before sliding lower to US$66.61 as of press time.
The weakening of the US Dollar Index, acceleration of repatriation of export proceeds on expectations of a stronger ringgit and the shift in the central bank’s policy stance towards a hawkish tilt on the back of a stronger-than-expected economic growth have set the stage for the appreciation of the local currency.
The strong inflow by foreign investors into the equity market also helped boost the ringgit. As at last Friday, MIDF Research said that the year to date total inflow into the market was about RM10.16 billion.
The Malaysia’s electrical and electronics (E&E) industry continued to be the key driver for Malaysia’s exports as E&E products recorded a double-digit growth for the 10th consecutive month in October with 16.9%. Analysts have pointed out that export price competitiveness from the soft ringgit does bode well for Malaysia’s external trade in 2017 but higher actual demand for E&E products from advanced economies has been one of the key drivers.
According to the Semiconductor Industry Association, the worldwide semiconductor sales are expected to grow at a stronger rate of 20.6% in 2017, the largest growth since 2010, supported by strong increases from the Americas, Asia-Pacific and Europe markets.
In October this year, the global semiconductor sales reached US$37.1 billion, an increase of 21.9% from US$30.4 billion in October 2016. The stronger demand was led by a synchronised economic recovery seen globally despite some of the uncertainties due to geopolitical tension, as well as some protectionist policies by US President Donald Trump, who has dumped the Trans-Pacific Partnership agreement.
International reserves
It is comforting for Malaysians to see the rise in BNM’s international reserves. It recovered to above the US$100 billion mark in August 2017, after it had dipped below the level for over two years.
The central bank said in a statement dated Dec 22 that its reserves position as at Dec 15 was “sufficient to finance 7.5 months of retained imports and is 1.1 times the short-term external debt”.
The upward trend since January this year was backed by increasing current account surplus, outstanding GDP growth in the first three quarters of 2017, and increasing trade surplus position amid double-digit exports growth for most parts of the year.
Also putting Malaysia in a better position is net foreign inflows of RM10.16 billion in the equity market from Jan 1 to Dec 22, as well as higher foreign holdings of Malaysian Government Securities (MGS).
Nonetheless, rating agent Moody’s Investors Services recently commented that Malaysia’s reserves are not sufficient to meet maturing external long-term debt repayments and short-term debts.
Renewed interest in Malaysian bond market
It is worth noting that foreign holding of MGS bounced back to RM160.3 billion or 44.3% of total as at end-November this year from a low of RM135.9 billion or 38.5% in total as at end-March 2017.
The renewed interest in the domestic bond market is partly due to the ample liquidity in the market and positive economic growth prospects on top of the rising likelihood of the overnight policy rate hike in 2018. The buying interest has also led to a decline in the 10-year MGS yield, which declined from about 4.1% in the middle of November to 3.9% on Dec 27 this year.
Consumer Sentiment Index
Malaysians seem to be counting every ringgit they spend as reflected in the weak Consumer Sentiment Index (CSI), although the domestic economy is on a strong growth path.
Malaysian Institute of Economic Research’s (MIER) CSI survey, which involved 1,023 households in Peninsular Malaysia, saw the index fall slightly in 3Q17 to 77.1 from 80.7 in 2Q17, which was still below the optimism threshold of 100 points.
The survey shows that consumers are concerned with global and domestic uncertainties biting into job security and that the high cost of living is eroding their purchasing power. MIER noted that as the labour market continues to look fatigued, it is unlikely to see a faster income growth any time soon, which could be a bane to consumer spending.
Nonetheless, consumers are likely to stick to their spending plan, for instance purchase of big-ticket items, despite the cautious sentiment. The survey indicates that ambitious spending plans remain intact, especially during festive celebrations.
Tourist arrivals
Despite all the talk of the influx of tourists from China, boost from the Kuala Lumpur Southeast Asian Games (SEA Games) 2017 as well as the weaker ringgit that was expected to draw more tourists to the country this year, tourist arrivals in 2017 fell from January to August.
According to Tourism Malaysia, the overall tourist arrivals slipped lower by 1.5% to 17.3 million visitors as at August this year, compared with 17.6 million tourists in August a year ago. The drop was despite tourist arrivals from China growing by 2.4% to 223,678 visitors this year.
While the Kuala Lumpur SEA Games 2017 were held in August, tourist arrivals in that month alone dropped by 6.7% to 2.1 million visitors from 2.3 million visitors in August last year. Furthermore, August is usually the peak season for summer holidays.
With 17.3 million visitors until August, it only made up 54.4% of the 2017’s target of 31.8 million tourist arrivals.
Budget 2018 has seen allocation of RM2 billion to provide small and medium enterprises a tourism fund with 2% subsidy on interest, RM1 billion for Tourism Infrastructure Development Fund plus RM500 million for tourism promotion & development programmes aiming to boost the industry.
Vehicle sales
Between January and November, the automotive industry sold some 521,939 units, representing 82.85% of the Malaysian Automotive Association’s (MAA) full-year forecast of 630,000 units.
Analyst expectations have lagged behind the association’s — Kenanga Research is expecting total sales of 590,000 in 2017, while TA Research forecasts 2017 total industry volume (TIV) to be at 586,500 units. Note that 2016 TIV was at 580,107 — the first time since 2009 that it dropped below 600,000 units.
December has historically clocked the highest monthly sales in a year, due to aggressive year-end promotional events. December 2016 TIV stood at 64,822 units, against 2016’s monthly average of 48,342 units.
Also, the hyped introduction of the third-generation Myvi model in November is likely to extend the month-on-month recovery in TIV from October to December.
With MIER CSI staying at 77.1 points in 3Q17, it will pose a challenge for December 2017 TIV to be higher than last year’s to support MAA’s projected full-year numbers.
Stock market
The strong-than-expected GDP growth did not manage to make Bursa Malaysia the best-performing market. Indeed, Bursa is lagging its peers in the region as the rally in the first half of 2017 (1H17) faltered in 2H17.
Analysts have opined that the equity market movement, which is currently in divergence against otherwise healthy economic indicators, is due to “pre-election effects”. A correction can be expected after the end of the 14th general election, which is expected to be held in 1H18.
Other factors in play include a series of rising interest rates by US Federal Reserve this year — in line with the proposed reversal of quantitative easing — with a one-time hike in Malaysia’s own overnight policy rate expected next year, keeping some foreign investor interests intact.