This article first appeared in The Edge Financial Daily on January 24, 2019

KUALA LUMPUR: Malaysia’s economy is expected to go through more pain this year as growth slows significantly due to decelerating exports and ongoing institutional reforms, according to UBS Investment Bank.

Its senior economist Edward Teather said the local economy is expected to endure more “pain” this year before seeing a gain in 2020.

He expects several factors to drag Malaysia’s gross domestic product (GDP) growth down to 4% this year — below consensus estimates — compared with the anticipated growth of 4.7% for 2018.

Teather said export growth is expected to slow to 1% in 2019, mainly because of the decline in oil prices and supply chain disruption due to the US-China trade war.

Specifically, Teather sees the electrical and electronics, and oil and gas (O&G) sectors taking a hit. As UBS expects Brent crude oil to trade at US$65 (RM269) per barrel by the end of this year, he noted that this is likely to “hit the brakes on investment in the O&G sector.”

Institutional reforms are also expected to continue contributing to uncertainty among investors in Malaysia throughout 2019, Teather said.

“In the longer term, however, both the Pakatan Harapan government’s institutional reforms and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) membership will improve (Malaysia’s) prospects in 2020,” he said in a UBS conference call on “Overview of Asean Outlook 2019” yesterday.

However, Teather is of the view that the country’s GDP growth in 2020 may not reach its full potential of an estimated 5% if the government does not ratify the

CPTPP. He estimated that the nation’s growth rate may instead fall nearer the low end of between 4.5% and 4.7% next year.

Private consumption, which has long been the growth engine of Malaysia’s economy, is also something that UBS believes will weaken this year.

Instead of the RM37 billion of tax refunds being a boost to the economy, Teather said it is “common for tax refunds to be saved”.

“The additional boost might not provide terribly significant returns (in terms of growth),” he said, adding that private consumption appears to have been brought forward in 2018 due to the tax holiday period between June and September.

On the bright side, UBS sees Malaysia being among the best positioned countries to gain from any shifts in supply chains due to the US-China trade war.

“Of all countries in Asia, Malaysia does relatively well in terms of stepping up to fill [the gap)] left by China’s exports to the US,” Teather said.

UBS’ survey of Chinese companies also indicated that Malaysia is a relatively large recipient of foreign direct investments for factories moving out of China on a 12-month or longer basis, he noted.

Globally, Teather said the good news is that the trade war situation has improved slightly and the investment bank now expects tariff levels to remain unchanged instead of decreasing.

“The bad news is that global growth is slowing, not purely because of the trade war but because of the weakness in Chinese consumer spending, uncertainty in the eurozone and the decline in oil price,” he said.

UBS also expects an additional hike in US Federal Reserve (Fed) interest rates by 1% in September 2019. Although Teather does not believe this hike has been priced in by the market, he believes that Asean currencies will not be significantly affected by the hike by year-end.

“We expect the ringgit to weaken not just because of the Fed rate hike but because it’s a relatively small and open economy, which usually faces downward pressure when trade data surprises on the downside,” he said.

Meanwhile, the ringgit is expected to trade at 4.4 against the US dollar in 2019, as poor trade data has typically exerted downward pressure on currencies for open economies such as Malaysia, said Teather.