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

In an economic update issued yesterday, 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 (2Q15), but it forecast a recovery to 5% in 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 painted a bleak picture for global growth in 2H15 and 2016, with downside risks from possible tightening of United States monetary policy and the 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 with the global economy, the uncertainties and issues prevailing in the external sector will continue to impact on Malaysia’s economic fundamentals,” it said. The ringgit was projected to remain weak against the US dollar at around RM3.68/US dollar until the end of 2015, even as current account surpluses become the feature of Malaysia’s economic fundamentals.

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. 

AffinHwang also retained its inflation forecast at 2.5% for 2015. “If the real GDP growth in 2Q15 were to dip below 4% y-o-y, Bank Negara may cut its overnight policy rate from 3.25% to 3% in 2H15,” it said.

This article first appeared in The Edge Financial Daily, on July 1, 2015.