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This article first appeared in The Edge Malaysia Weekly, on November 16 - November 22, 2015.

 

AT 4.7%, Malaysia’s third quarter gross domestic product (GDP) growth is the lowest since June 2013, but the figure was enough to put the country’s annualised growth at 5.1% — “at the stronger end” of the official 4.5% to 5.5% forecast for 2015, central bank governor Tan Sri Zeti Akhtar Aziz told reporters last Friday.

To stay above 5% for the full year, GDP for the fourth quarter would have to be at least 4.8%. But to reach the minimum 4.5%, only 2.8% growth is needed — a quarterly growth Malaysia last fell short of in March 2002. Simply put, the country is not expected to miss its official growth forecast for this year.

In fact, most economists polled by Bloomberg expect Malaysia’s economic growth in 2016 to come in at the higher end of the 4% to 5% official projection. Median and mean forecast at 4.7% and 4.8% respectively at the time of writing means next year’s economic growth is still poised to match 2013’s 4.7%, though coming below 2014’s 6%.

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That does not necessarily mean the worst is over for the ringgit, though.

For one, global oil prices remain volatile. “We are seen as an oil producing economy and the market has given less recognition that [Malaysia has] diversified our economy, that 80% of our economy comprises the manufacturing and services sector,” Zeti said.

Also, the long-talked about first-in-a-decade US Federal Reserve interest rate hike has yet to happen, prolonging market uncertainties globally. That, in turn, fans jitters over the impact of any further capital outflows of the ringgit and Bank Negara Malaysia’s foreign reserves.

“Risk of large capital outflows remains given high external debt (at about 70% of GDP). Foreign holdings of Malaysian Government Securities are still high, at 45.6% of outstanding in September, despite some modest decline,” Bank of America Merrill Lynch Asean economist Chua Hak Bin tells clients in a Nov 13 note.

“We think downside risk to the ringgit remains significant, particularly when the Fed embarks on its rate-hike cycle and if China allows the renminbi to depreciate more significantly,” Chua adds.

More importantly, Zeti said “there may be some quarters” in 2016 when Malaysia’s current account would be in deficit. Already, the current account surplus narrowed further to RM5.1 billion or 1.7% of GDP in the third quarter from RM7.6 billion in 2Q2015. The country’s current account surplus is forecast to halve from RM23.38 billion in 2015 to RM11.29 billion in 2016, according to the Economic Report 2015/16.

A negative balance in the current account would put Malaysia, which expects to have a fiscal deficit until 2020, in the undesirable “twin deficit” situation that — in simple terms — means a country is buying more than it is selling to other countries while also spending more than it earns.

Here, Zeti stressed that any current account deficit situation is expected to be temporary and would be cancelled out for the whole year. “Fundamentally, as a whole, we expect it to remain in surplus,” she said, adding that Malaysia’s export council is already looking at more ways to boost exports while others are focusing on deferring any projects with high import content to maintain the country’s current account surplus.

The globally respected central banker also said, “Malaysia is not a country that is overly dependent on monetary policy to stimulate growth” but has employed other measures including tax relief, special funds and programmes to support the development of small and medium enterprises.

Barclays Bank Singapore economist Rahul Bajoria expects Bank Negara to maintain a cautious stance but “remain moderately dovish” and keep rates unchanged at 3.25% through 2016 on the back of a weaker currency and slowing growth.

Economists from Citi Research share this stance: “With a weak ringgit already easing monetary conditions, we continue to see no OPR (overnight policy rate) changes in 2016, barring the materialisation of downside risks and downgrade in official growth forecasts,” they say in a Nov 13 note.

Closing at 4.38 to the US dollar last Friday, the ringgit is above the median forecast of 4.33 in 2016 but below forward rates of 4.47, according to Bloomberg data, which showed the most bearish ringgit projection at 4.65.

Already, a weak ringgit and the implementation of a consumption tax have nudged inflation higher to 3% in 3Q2015. Zeti said inflation could rise further to 4% to 5% before moderating to the long-term average of “around 3%” but added that higher prices from a weaker ringgit is an “offsetting factor” alongside lower oil and commodity prices.

Yet at the core of it all, softer consumer spending is the key reason for softer 3Q GDP growth. Private consumption growth slowed to 4.1% in 3Q2015 from 6.4% in 2Q2015, 8.8% in 1Q2015 and 6.8% in 3Q2014. Economists see a softer labour market and slower wage growth among contributing factors.

“We expect GDP growth to continue slowing gradually in the fourth quarter, hurt by weaker consumer spending and some pullback in investment spending. The weak recovery in exports so far may not be sustained if the global growth outlook continues to deteriorate,” says Chua, who expects Malaysia’s GDP growth to come in at 4.8% in 2015 and 4.3% in 2016. 

Barclays’ Bajoria is more optimistic, forecasting 5% GDP growth for 2015 and 4.7% for 2016. Citi’s is similar at 5% for 2015 and 4.6% for 2016.

Still, whether the headline GDP figure is met would make scant difference to the average wage earner if more find themselves left behind. Good policy can make sure this does not happen.

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