‘Not all doom and gloom’ for M’sia in 2020

This article first appeared in The Edge Financial Daily, on December 6, 2019.
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KUALA LUMPUR: It is not all doom and gloom on the economic front for Malaysia next year, despite expectations of slower growth, said United Overseas Bank (Malaysia) Bhd (UOB Malaysia).

For there is room for the country’s gross domestic product (GDP) growth to accelerate past UOB Malaysia’s forecast of 4.4% if government spending recovers and investor confidence improves, the bank’s senior economist Julia Goh told a press briefing here yesterday.

And she expects Malaysia to be retained in the FTSE Russel World Government Bond Index — although the country’s weightage in the index could be lowered from 0.4% to 0.3% — which will be one of the factors that will drive new investment flows into Malaysia.

Additionally, there has been positive signals coming from the bottoming out of global indicators as several central banks, including Malaysia’s, took pre-emptive measures to secure growth in the region through this challenging period, she said.

“Global manufacturing purchasing managers’ index numbers have actually bottomed out, signalling that the worst may be behind us, and semiconductor sales, despite a contraction, have also turned a corner.

“Another reason why it is not all doom and gloom next year is that although we are seeing a lot of protectionism happening in the global landscape, countries in this region have growth resilience and are still embarking on economic and financial integration, such as the Regional Comprehensive Economic Partnership and other bilateral or multilateral initiatives, to ensure the region remains open and continues to adopt free trade,” she said.

UOB Malaysia’s 4.4% growth projection for Malaysia next year is lower compared with its 4.6% estimated for 2019, but better relative to other parts of the world, such as advanced economies, non-Asia emerging markets and developing economies.

The country’s growth will largely be supported by its steady private consumption levels and the economy’s underlying strengths, which Goh said include its diversified economic structure, improved fiscal position, resilient institutions and significant natural resources.

Ongoing policy reforms to stimulate growth through higher value-added labour, capital and technology, will also further support the domestic economy in 2020, she explained.

Additionally, the economist highlighted several other growth catalysts that may lead to an upward revision of 20 basis points (bps) to 30 bps to UOB Malaysia’s 4.4% forecast, to between 4.6% and 4.7%, Goh said.

These catalysts include private consumption remaining robust, materialisation of approved manufacturing investments, a continuation of major civil engineering projects such as the Mass Rapid Transit 2, Light Rail Transit Line 3, Pan Borneo Highway, Central Spine Road, East Coast Rail Link, Tun Razak Exchange and Bandar Malaysia.

The continued recovery from supply-side shocks, mainly agriculture and mining, together with the diversification of the country’s economic structure and hosting of international events and the Visit Malaysia 2020 initiative may also lend some support, she added.

“If all these catalysts materialise, there is some room for an upward revision.


But risks tilted towards the downside

“We see both upsides and downsides ... but the risks are tilted towards the downside, hence we are more cautious and still see that the environment will remain quite challenging, at least for the first half of 2020,” Goh said after considering external pressures, and lower foreign and public investments.

She also thinks that despite the International Monetary Fund’s projection of a better global growth next year at 3.4% — up from 3% estimated for this year — the US, eurozone, and China are likely to see slower growth.

Furthermore, although markets are hopeful of a “phase one” deal signed between the US and China by mid-December, tensions between the two largest economies could linger and move towards non-tariffs areas, such as technology and investments. The tariffs could also be broadened to include other countries, she said.

Markets are now closely watching trade developments as Dec 15 nears. That is when the 15% tariff on some US$160 billion (RM667.2 billion) of Chinese products, including mobile phones, laptops, toys and clothing, is said to take effect.

“If the tariffs are extended to other countries, particularly to Asean countries, then the outlook for next year would be more towards the downside.

“This is the hardest part to predict because it can also revolve around political developments within the US that could shape their opinion ... That is why we still need to be quite cautious,” said Goh.


OPR may be lowered to 2.75% as pre-emptive move

Hence, UOB Malaysia has pencilled in the possibility that Bank Negara Malaysia would lower the overnight policy rate by 25 bps to 2.75% in the first quarter of 2020.

“As we are projecting [a] 4.4% growth for next year, we think this is a pre-emptive measure just to ensure that we can manage to secure growth for 2020 at above 4%.

“If the US and China can ink a deal and maintain the tariffs, or in the best case, pull back some of the tariffs, then there wouldn’t be a need for further rate cuts,” she added.