Thursday 28 Mar 2024
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KUALA LUMPUR (Dec 21): The Malaysian Rating Corporation Bhd (MARC) remains positive about Malaysia's sovereign rating position despite the latest macro releases pointing to a softer real gross domestic product (GDP) growth in the near term.

In its Economic Outlook 2019 themed "Bracing for Global Speedbumps", MARC chief economist Nor Zahidi Alias said real GDP expansion in the third quarter of 2018 (3Q2018) came in below market consensus and provides evidence of a drag from a weaker external sector.

"Real exports of goods and services contracted in 3Q2018 (on a year-on-year basis) for the first time since 3Q2016 largely due to natural gas supply disruption in East Malaysia as well as the moderation in exports of some electrical and electronics (E&E) sub-sectors," he said.

Nor Zahidi said the unexpected spurt in October's exports was a pleasant surprise, signalling that trade diversions could somewhat help ease the pain of slower exports.

However, he said as it is too early to make a firm assessment with regard to overall trade performance, MARC continues to anticipate a moderation in Malaysia's exports in 2019 on account of weakening global trade, declining commodity prices and moderating China's economy.

Nor Zahidi said foreign net capital flows turned negative in 2018 and weakened the ringgit-US dollar exchange rate by almost 9%, from its peak in April.

He explained that the ringgit also bore the brunt of a stronger US dollar, which appreciated by 7.9% against major global currencies between April and October 2018.

"Going forward, the trend in capital flows and the path of the ringgit will largely hinge on both the prospects of the US dollar and Malaysia's overall macroeconomic performance.

"Notwithstanding this, on a real effective exchange rate (REER) basis, the ringgit remains attractive, trading lower than one standard deviation below its long-term mean," he said.

Meanwhile, he said in the absence of a significant downward pressure on real GDP growth, the monetary policy is expected to remain unchanged.

"However, if real GDP growth slips below 4%, there is a likelihood of a downward adjustment in Bank Negara Malaysia's statutory reserve requirement by 50-100 basis points (bps).

"There is also a possibility of a slight reduction in the overnight policy rate (by 25 bps) should growth deceleration exceed the pace initially expected," he said.

Nor Zahidi added that the exchange rate trend would be closely monitored before such measures are undertaken.

"This is because a more relaxed monetary stance could adversely affect the ringgit performance," he said.

However, Nor Zahidi clarified that notwithstanding these developments, MARC remains positive about Malaysia's sovereign rating position although the rating outlook itself could come under pressure.

"Our view is based on forward-looking and 'through-the-cycle' credit assessments.

"The adjustments in Malaysia's fiscal and debt positions do not imply fiscal profligacy. They were in fact accompanied by spending cuts and capital project cancellations by the new federal government.

"One-off in nature, the adjustments in fiscal and debt positions were the necessary first steps in efforts to repair the government's balance sheet," he said.

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