This article first appeared in The Edge Malaysia Weekly on November 19, 2018 - November 25, 2018
MALAYSIA’S economy expanded at a more tepid-than-expected 4.4% in the third quarter. But, having reached a “bottom”, it remains intact to achieve the full-year forecast growth of 4.8% as the foundation has been set for a more robust performance in the final quarter, according to Bank Negara Malaysia.
The third-quarter performance fell short of the street’s consensus forecast of 4.6% and marked the slowest pace of growth in two years. It was also slightly below the 4.5% gross domestic product growth seen in the preceding quarter.
Even so, the central bank is confident that the stage has been set for a more robust performance in the final quarter, which needs to grow at 4.9% to meet the 4.8% target for this year.
At a press conference last week, Bank Negara governor Datuk Nor Shamsiah Mohd Yunus said the foundation had been laid for better results after GDP expanded 4.7% in the first nine months.
As gas pipeline repairs had been completed, the production of gas would be gradually normalised, she said, as would the normalisation of crude palm oil production, which has been impacted by adverse weather and other constraints.
“Plus consumption will remain strong because of the recent budget announcement. This will provide the foundation for strong growth in the fourth quarter. So, we are confident that the projection of 4.8% growth this year will be matched,” she added.
If not for lingering commodity supply shocks, GDP growth could have inched up 0.5% to 0.7%, she said. Moreover, if the agriculture and mining sectors were to be excluded, the remaining 82% of the economy actually grew 6.2% in the first nine months of the year.
In 2Q and 3Q, the mining sector was impacted because of natural gas production issues owing to supply outages and pipeline repairs to facilities in Sabah and Sarawak while the agriculture sector was suffering from a longer-than-expected downturn in crude palm oil production because of adverse weather and production constraints.
Weaker exports were largely to blame for the lacklustre growth in 3Q, contracting 0.8% year on year, compared with a 2% expansion in the preceding quarter. According to Nomura Research, the contraction is the first since late-2016.
It is worth noting that the current account surplus was largely flat at RM3.8 billion for 3Q, compared with RM3.9 billion in the preceding quarter. This was on the back of a higher goods surplus and lower services deficit amid a larger deficit in the primary account.
But growth in the quarter was boosted by domestic demand, led by private consumption on the back of the zerorisation of the Goods and Services Tax in July and August. As households spent more, domestic demand accelerated 9% y-o-y, compared to 8% in 2Q.
Private-sector investment grew 6.9% while public-sector consumption and investment also improved. Public-sector consumption grew 5.2% from 3.1% previously while the contraction in investment narrowed to 5.5% from 9.8% over the same period.
In a report, HSBC Research cautions that it expects public investment to become an “increasingly large drag” on growth in the years ahead because of the significant reduced pipeline of large-scale projects.
Moving into 2019
Bank Negara’s GDP growth forecast for next year matches the 4.9% projection of the Ministry of Finance.
However, inflation is expected to creep up to between 2.5% and 3.5% on account of the Sales and Services Tax implementation. Still, Nor Shamsiah maintained that the effect was expected to be temporary and would lapse towards September next year. Higher projected global oil prices and domestic fuel prices, which are to be floated, are the other contributory factors to higher headline inflation, she added.
Brent crude prices have been on the decline, hovering at US$67.70 per barrel last Friday, compared with above US$80 just a month back.
Nor Shamsiah does not think a continued decline in oil prices would have a material impact on the growth projection for next year. “Mineral exports only account for 8.8% of Malaysia’s exports and investment in [the] mining sector only accounts for 13.8% of total investments. Non-commodity sectors account for more than 80% of the economy while the mining sector, only 8.4%.”
She said oil exports only account for 3% of Malaysia’s total exports while manufactured exports make up 82%.
“So, the impact on growth will be manageable. But lower oil prices will also lend support to higher consumption because it will lead to lower fuel prices and higher disposable incomes. And that will provide positive support for consumption,” she explained.
The central bank believes that the risk to growth next year remains tilted to the downside. This risk stems from the more persistent-than-expected supply disruption in the commodity sector and a potential escalation of trade tensions between the US and China.
While the consensus GDP forecast for 2019 is 4.6%, Nomura Research and HSBC Research are taking a more bearish view.
Nomura’s 4.2% projection reflects its concern over a deepening tech downcycle and falling external demand. “This, in turn, should negatively impact domestic demand, particularly private consumption, as wage growth tends to move in tandem with export growth,” it says.
It is worth noting that the region experienced slower export growth in the third quarter of the year, underscoring softer demand from major economies. Electronic and electrical exports have also moderated.
HSBC’s 4.3% GDP forecast is based on an anticipated decline in overall export volumes next year. But Malaysia’s commodity diversification is expected to offset a broader-based decline in electronic shipments.
“As for headline growth next year, we expect a deceleration from this year’s forecast of 4.7%. The extent of the deceleration will depend on how quickly the LNG (liquefied natural gas) pipelines are repaired and the speed at which the RAPID (Refinery and Petrochemical Integrated Development) facility’s estimated 3.3 million tonnes a year of petrochemical exports come online,” says the research house.
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