Citi: 2Q GDP to decelerate to 4%, forex reserve dips below US$100 bil

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KUALA LUMPUR (Aug 6): Malaysia’s second quarter (2Q) gross domestic product (GDP) is expected to slow down to 4% year-on-year (y-o-y), amidst weak domestic demand, said Citi Research.

The research unit anticipates the country’s international reserve for July to fall below the US$100 billion mark. “In the unlikely event that FX reserves stay above US$100 billion, this may indicate repatriation of offshore assets held by GLCs to shore up reserves,” it commented.

“From an expenditure perspective, the slowdown in 2Q GDP growth was likely led by domestic demand, especially consumption.

“We remain cautious on 3Q prospects given continued slump in the Composite Leading Indicator, the second half of 2015 growth should be cushioned by base effects, a gradual recovery from the goods and services tax (GST) induced slump, and lift to manufactured exports from a US recovery,” Citi Research commented on a note yesterday.

Citi Research pointed out that services were dragged down by 11.2% y-o-y plunge in motor vehicle sales post GST, while mining slowed to below 8% y-o-y on weaker production volumes in oil and gas.

The growth in manufacturing sector dropped below 5% y-o-y on softer electrical and electronics production in April and May, although it rebounded in June to +7.1% y-o-y.

On the country’s fiscal position, Citi Research opines that fiscal data for first six months of the year is on track to meet the deficit target for 2015, as data for June showed a continued decline in the year to date (YTD) deficit to RM15.6 billion, from RM18.1 billion in April.

Revenues in 1HCY15 are up 4.9% y-o-y, beating Budget assumptions for a 1% y-o-y decline.

“We suspect this may reflect stronger than expected GST revenues, as over 355,000 companies registered for GST, against initial Budget assumptions of 163,000 companies. Also, Brent crude prices averaged at US$61.7 per barrel in 2Q, versus the Budget assumption of US$55 per barrel,” the research report said.

Public expenditures were also up 1.2% y-o-y in the first half of the year, compared to the Budget assumption for a 0.9% decline.

Applying 1HCY15 revenue and expenditure growth for the full year would yield a fiscal deficit close to RM31 billion, compared to the Budget assumption of RM35.7 billion, said the research note.

“Even if Brent stays at US$50 per barrel, full year average oil price at US$54 per barrel will be close to the Budget assumption,” the report said.

While oil and gas exports in 1HCY15 were down 34% y-o-y in US dollar terms, it was only down 26% in ringgit terms as the weak currency offers additional cushion on the back of further sliding down of crude prices.

An upside surprise in GST revenues may provide space to cut the 2016 Petronas dividend, whilst continuing to reduce the fiscal deficit in 2015.

The report noted that GDP growth should fall within the 4.5% to 5% range in 2015, with a rate cut unlikely as the weak ringgit eases monetary conditions.

“With growth slowing, we also doubt that Bank Negara Malaysia (BNM) will hike to defend the ringgit,” it added.

However, the report cautioned about the job market, which appears to have softened slightly.