KUALA LUMPUR (Jan 9): The Malaysian economy is expected to be adversely affected in 2015, given the rapid decline in global oil prices, according to Malaysian Rating Corporation Bhd’s (MARC) chief economist Nor Zahidi Alias.
"If oil prices remain low for a prolonged period, real gross domestic product (GDP) growth is expected to decelerate to 4.7% in 2015 after a robust performance in 2014," he wrote in a report titled "2015 Bond Market Outlook: Dealing With Policy Divergence And Rising Leverage" released today.
Nor Zahidi believes that domestic investment activities, which moderated in 3Q2014, will continue to decelerate, hence exerting pressure on the headline GDP growth.
In the household segment, the high household debt-to-GDP remains a primary concern as weaknesses in the economy could affect borrowers’ ability to service their debt, he explained.
Against the backdrop of decelerating nominal GDP growth, Nor Zahidi also expects the budget deficit target of 3% of GDP for 2015 “to be revised slightly by the government”.
“Although this may have some implications on the country’s credit risk, the recent abolishment of fuel subsidies provides credit rating agencies with a reason not to be excessively negative on the economy,” he said.
Nor Zahidi has also projected inflation rate to accelerate to between 4% and 4.5% in 2015, driven by the upcoming implementation of the Goods and Services Tax (GST) in April this year, as well as a possible further rationalisation of non-fuel subsidies.
According to him, the higher inflation rate, although likely to be a one-off event, will put upward pressure on yields, especially those at the longer end of the curve.
Another potential risk for government bond investors is the deterioration of some economic parameters due to the weakening global economy as well as domestic imbalances.
“In 2015, we expect the MGS yield curve to steepen bearishly due to a possible deterioration in the government’s fiscal position as well as growing inflation expectations,” said Nor Zahidi.
According to him, while Malaysia’s external debt remains manageable, the pace of increase is worth monitoring, especially when the ringgit has weakened significantly.
In this period of cyclical weakness, the rise in short-term external debt will likely cause some adverse ramifications for certain corporations, he added, "although we think the risk of broad-based credit deterioration is unlikely".
MARC estimated that foreigners had trimmed about 20% of their total holdings in local debt securities to RM200 billion in December 2014 from RM251.1 billion in October 2014.
While outflows are anticipated to be dominated by shorter-term Bank Negara Bills / Bank Negara Monetary Notes which are more sensitive to ringgit movement, the rating agency felt that considerable foreign outflows of Malaysian Government Securities (MGS) have taken place between October and December 2014, judging from a sharp increase in the benchmark 10-year MGS yields.
Nor Zahidi said the presence of large domestic institutional investors which served as a strong buffer against external shocks remains an important mitigating factor against the risk of a significant reversal of foreign flows.
“Going forward, we believe strong [local] institutional investors will continue to provide support to the domestic capital market, moderating the volatility in foreign portfolio flow,” he added.