This article first appeared in The Edge Financial Daily on January 23, 2019

KUALA LUMPUR: Standard Chartered (StanChart) has forecast an above-consensus growth rate of 4.9% for Malaysia this year on the back of the consumption boost from tax refunds and a possible recovery in the mining sector.

“Without these one-off factors, my forecast would actually be between 4.4% and 4.5%,” said StanChart chief economist for Asean and South Asia, Edward Lee.

“In any other economy, the tax refunds would contribute a 2.5% boost to gross domestic product (GDP),” he said, adding that in Malaysia, even after accounting for poor consumer sentiment due to global economic uncertainties, the refunds are still likely to contribute at least 0.1% to headline growth.

Lee said the removal of the goods and services tax in June 2018 and the reintroduction of the sales and services tax in September saw 0.5% to 1% of GDP’s worth of fiscal receipts returning to consumers.

Meanwhile, the mining sector, which dragged GDP growth in the first three months of 2018 due to what Lee believes was pipeline maintenance, is likely to see supply returning and as a result, boost growth.

Lee noted that this year, Malaysia appears to have a “single growth engine” in the form of consumers. This will be supported by a healthy labour market, which had a record high participation rate of 68.5% as at September 2018.

Meanwhile, unemployment remained low at 3.3% in the third quarter of last year while wages grew 5.7% year-on-year.

The increase in minimum wage to RM1,100 nationwide is also expected to support spending, said StanChart.

Otherwise, the bank is bearish on Malaysia’s growth, citing a negative growth in government consumption and a dim investment outlook.

StanChart’s growth forecast is above the average estimate of 4.73% this year, according to Bloomberg data. But it matches the GDP forecast of the finance ministry as stated in Budget 2019.

Meanwhile, StanChart head of Asean and South Asia foreign exchange research, Divya Devesh, said the outlook on the ringgit would remain neutral with a range-bound trading of 4.1-4.3 against the US dollar for the full year.

Devesh expects the ringgit to trade at 4.2 against the dollar by March and 4.25 by end-June, as portfolio inflows remain weak.

A lack of improvement in commodity prices and weak external demand would continue to weigh on the ringgit, despite StanChart viewing the currency as being undervalued.

According to Lee, medium-term trends that have been less supportive of global growth include quantitative tightening although leverage remains high, making funding expensive.

A reversal of globalisation, which he pointed out is clear from the increase in tariffs and decline in global trade to global GDP ratio since the 2009 financial crisis, is another factor that has impinged on global growth.

“We have already seen weakening Producers’ Manufacturing Indexes due to the trade dispute,” said Lee, who noted that although Southeast Asian nations such as Malaysia and Vietnam may benefit from supply chains shifting out of China, markets and businesses are still focusing on the negative impacts of US-China trade tensions.

Lee opined that China is likely to do much more to manage its economic slowdown, including ramping up infrastructure spending funded by local government bonds. StanChart believes the country will also continue cutting taxes and increase its reserve requirement ratio by 200 basis points.

That being said, as a small and open economy, any 1% change in China’s GDP will affect Malaysia’s economic headline figure by 0.4%, said Lee.

Two Fed rate hikes seen, but not priced in yet

Lee does not believe the market has priced in the potential of interest rate increases by the US Federal Reserve (Fed) this year, versus StanChart’s forecast of two rate hikes in the second half of 2019.

However, this is unlikely to affect long-term fund flows, although it may lead to short-term volatility in financial markets, Devesh opined.

“Rate hikes are not as dollar-supportive in the late stage of the hiking cycle,” he said, adding that while StanChart views the US dollar as overvalued by over 10%, there are “not a lot of good currencies to buy against the dollar”.

“Idiosyncratic matters will dominate foreign exchange markets, with investors looking very closely at every bit of economic data released,” Devesh said, referencing the Fed’s recent more data-dependent approach towards policymaking.