External challenges to weigh on Malaysia's economic outlook

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KUALA LUMPUR (June 30): A slowdown in exports due to challenging external conditions and a loss of momentum in domestic demand, are some of the challenges facing Malaysia’s economy in the second half of 2015 (2H15).

In an economic update issued today, AffinHwang Capital Research said real gross domestic product (GDP) growth may have slowed to around 4.5% year-on-year (y-o-y) in the second quarter of the year (2Q15), but forecasted a recovery to 5% in the second half of 2015 (2H15).

“Malaysia’s exports are likely to be dampened in the months ahead, by the drop in crude oil and gas prices, which have led to declines in monthly nominal exports,” it said.

The research house painted a bleak picture for global growth in 2H15 and 2016, with downside risks from possible tightening of US monetary policy and the economic slowdown in China.

Global economic sustainability may also be threatened by the divergences in the direction of monetary policies among advanced economies.

“Given Malaysia is well integrated in the global economy, the uncertainties and issues prevailing in the external sector will continue to impact on Malaysia’s economic fundamental,” the report said.

The ringgit was projected to remain weak against the US$ at around RM3.68/US$ until the end of 2015, even as current account surpluses become the feature of Malaysia’s economic fundamental.

AffinHwang expects the government to propose measures to support domestic demand in the 2016 Budget, adding that an increase in development expenditure could act as a possible buffer for an unfavourable external environment.

However, this may not be in line with a projected reduction in the government’s budget deficit, from -3.5% of GDP in 2014 to -3.2% of GDP in 2015.

The research house retained its inflation forecast at 2.5% for 2015, as the upward effects of the goods and services tax (GST) turned out to be lower than expected.

“If the real GDP growth in 2Q15 was to dip below 4% y-o-y, there is a possibility that Bank Negara may cut its overnight policy rate (OPR) from 3.25% to 3% in 2H15,” it said.