KUALA LUMPUR (Jan 7): Malaysia's real gross domestic product (GDP) growth will decelerate to 4.3% in 2020, below the government's forecast of 4.8%, due to weaker external trade performance and softer domestic demand growth, according to Malaysian Rating Corp Bhd (MARC).

In a statement today, MARC said although trade diversion arising from trade tensions between the US and China could marginally benefit Malaysia in the short term, the overall weakening of global trade growth will continue to weigh on Malaysia's export sector.

It explained that forward indicators suggest a lacklustre outlook, i.e. a continuing downtrend of the export orders index of US manufacturing Purchasing Managers' Index and a continuing contraction in global semiconductor sales.

MARC said that domestically, Malaysia remains largely dependent on its consumer support, which in the first three quarters of 2019, contributed circa 93% of headline growth.

The rating agency said it does not think this is sustainable and the latest statistics are already showing increasing cautiousness among consumers, judging from recent consumer surveys.

"The plus point, however, is that the labour market remains stable and supportive of consumers' spending behaviour. MARC foresees private consumption growth to soften to 6.5% in 2020," it said.

Meanwhile, MARC expects headline inflation numbers to rise modestly to an average between 1.2% and 1.7%, assuming that the abolishment of fuel price ceilings takes place in 2020.

It said weaker domestic demand, however, will keep inflation below the long-term trend.

MARC said an alternative inflation indicator, the GDP deflator, also shows that a benign inflation environment is likely in 2020.

It said in the first nine months of 2019 (9M19), the deflator fell by an average of 0.2% y-o-y (9M18: 0.8%).

MARC said rapid capital flows led to ringgit gyrations in 2019.

It said going into 2020, ringgit will be affected by risk of a slower GDP growth, expectations of lower overnight policy rate due to the slowing economy, ability to achieve the fiscal targets against the backdrop of slower growth, and decisions by FTSE Russell on the possible exclusion of Malaysian government bonds in its global index.

"The upside risk of ringgit lies in the possibility of softer US dollar due to the widening current account and budget deficits, as well as the weaker US economy," it said.

MARC said on the fiscal front, there are already efforts by the government to become more flexible in its stance, i.e. plan to boost development expenditures to above RM50 billion per annum in 2019 and 2020.

It said notwithstanding this, the balancing act between supporting growth and ensuring a continuing fiscal consolidation effort is becoming more challenging, especially at a time when global growth is weakening.