KUALA LUMPUR (March 16): Affin Hwang Capital Research has revised down Malaysia's 2020 gross domestic product (GDP) target to 3.3% from 4% previously, on slower growth in both domestic and external demand which were hit by the outbreak of novel coronavirus (Covid-19), coupled with the recent sharp weakness in global oil prices, which is expected to weigh on Malaysia’s GDP growth.

In a note today, Affin Hwang said growth in domestic demand is projected to slow to 4.1% year-on-year (y-o-y) in 2020, from 4.3% in 2019, and private consumption will remain supportive of growth despite expanding at a slower projected pace of 5.5% y-o-y in 2020 versus 7.6% growth seen in 2019.

“Going forward, we expect Malaysia’s real GDP growth to slow from 4.0% y-o-y in second half of 2019 (2H19) to 2.8% estimated for first half of 2020 (1H20), before recovering gradually to 3.7% estimated for second half of 2020 (2H20). However, the pickup in economic activity in 2H20 is partly attributed to a low base factor when real GDP slowed by 3.6% in 4Q19.

“Already impacted by slower exports and manufacturing sector output, the recent sharp weakness in global oil prices is expected to weigh on Malaysia’s GDP growth further (especially through the mining and quarrying sector, which is the third largest industry in the supply-side of GDP, accounting for 7.1% of GDP),” according to the research note.

Also, the research house pointed out that the likely prolonged Covid-19 outbreak will weigh on tourism-related sectors into the second quarter of this year.

“Based on our own estimate, using the assumption that the Covid-19 outbreak may lead to a 30% decline in tourist arrivals, this could translate into a loss in tourist receipts of about RM30 billion in 2020; the direct impact from lower tourist receipts is estimated to result in a direct 0.5 percentage point reduction in Malaysia’s GDP growth,” it added.

Meanwhile, Affin Hwang said the country’s budget deficit target will likely increase to -3.8% of GDP for 2020, after taking into some consideration a possible shortfall in the government’s total revenue (especially from direct taxation) from the slowing domestic economy as well as lower crude oil prices.

In view of the sudden decline in crude oil prices, which will take some time to stabilise and recover, Affin Hwang believes the newly formed Economic Action Council (EAC) will likely address this issue by recommending to recalibrate the Budget 2020 proposals, which are based on an oil price projection of US$62 per barrel. It is also likely that the EAC will recommend revising the projection to US$50 per barrel.

According to an estimate by the authority, for every US$1 per barrel drop in the price of crude oil, the Federal Government’s revenue will likely translate into a loss of about RM300 million. Therefore, a revision from US$62 to around US$50 will result in a government revenue loss of slightly above RM3 billion, the research house added.

On the overnight policy rate (OPR), Affin Hwang said Bank Negara Malaysia (BNM) is likely to further cut rates by another 25 basis points to 2.25% to curb the impact of the Covid-19 outbreak and the potential downside of the global oil prices on the domestic economy.

BNM has slashed a combined 50 basis points this year to the current OPR of 2.5%, making it the lowest level in a decade.

On the ringgit, Affin Hwang has maintained the year-end target at RM4.20 against the greenback, supported by economic fundamentals, such as liquidity in the domestic market and sound financial markets, as well as healthy current account surpluses together with steady international reserves.

At 12.15pm, the ringgit traded 0.58% lower at RM4.3025 — the lowest level since May 2017. Brent crude oil slip as much as 6.56% to US$31.63 per barrel this morning, before it rebounded to US$32 per barrel, down 5.47% at 2.43pm.