Friday 29 Mar 2024
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AMID the challenging outlook for the Malaysian economy in 2015, the Royal Bank of Scotland (RBS) does not see exports getting the necessary push they need from the depreciating ringgit.

The weakening ringgit will not help boost exports much as it is not a matter of competitiveness when it comes to Malaysian goods, according to RBS managing director and head of economic research Sanjay Mathur.

Traditionally, exports become more attractive when the currency they are priced in weakens, as price points become relatively more competitive.

The ringgit has been on the decline against the US dollar, depreciating 11% since the 3.1463 peak on Aug 27 to close at a 52-week low of 3.4970 on Dec 15. Last Tuesday, it moved up slightly to 3.496.

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“For 2015, I don’t think we will see a major appreciation in the ringgit,” Sanjay tells The Edge. “It will be kept low by weak commodity prices and slow demand for manufactured goods.

“Exports in general are going to be weak in 2015. We have forecast 4% to 5% export growth for Malaysia.”

In view of that, RBS forecasts Malaysia’s gross domestic product (GDP) to grow 4.9% next year.

Exports have been slowing down since August, and this, Sanjay says, indicates that global trade is not recovering quickly enough. Another factor is the slowdown in wage growth, which has already peaked last year, he adds.

Malaysia’s trade data from the Department of Statistics indicates that export growth had begun to slow in mid-2014. In June, exports showed 8.1% year-on-year growth, but in July, they grew only 0.8% y-o-y to RM61.12 billion.

Export growth came in at 1.7% and 2% for August and September respectively, while the latest trade figures showed a 3.1% y-o-y deceleration to RM65.09 million in October.

Without much growth expected from exports next year, Sanjay expects GDP growth to be more domestically driven, especially in the first half of the year, in line with global recovery.

“The government is on the right track and it should continue to spend on infrastructure. The problem is when it becomes the main driver of growth. What we need is organic growth because at some point, infrastructure spending has to stop,” he says. But it will be a number of years before Malaysia can start relying on organic growth, he adds.

In comparison with countries like Singapore and China, Sanjay believes that Malaysia needs to increase its level of productivity.

“It is time to look at ways to improve human capital, and that calls for a lot more investments. This is the most important thing to do now, and a lot of it has to do with education,” he says.

But on the flip side of public spending is the government’s target to reduce its fiscal deficit to 3.5% of GDP in 2014 and 3% in 2015, from 3.9% last year.

The market has been spooked by fears of Malaysia missing its fiscal deficit target as the government’s main source of revenue — the oil and gas sector — will be impacted by the fall in oil prices from US$115 per barrel on June 19 to below US$60 on Dec 18. Brent crude closed at US$61.69 per barrel last Tuesday.

Last year, oil contributed 31% to the government’s revenue of RM220.4 billion. While the nation’s coffers will surely be affected due to the fact that budgeted revenue is based on oil prices of US$100 to US$110 per barrel, Sanjay believes that Malaysia is still on the right track with the removal of the fuel subsidy.

“I think the government has done a very wise thing to knock off subsidies when oil prices are falling. Even if there is a shortfall in revenue this year, it is a significant step forward for the nation,” he says.

“It is challenging for the government to meet the 3% deficit target. However, one should not be too negative about this. The intent and approach to reducing the deficit is very welcome — the introduction of the Goods and Services Tax, reduction in subsidies and wage restraint for civil servants are major steps in the right direction.”

Nevertheless, he notes that the likelihood of reduced capital expenditure (capex) in the country will impact smaller oil and gas players.

Already, Petroliam Nasional Bhd has said that it will cut capex by 15% to 20% next year. The national oil company had originally planned to spend RM300 billion between 2011 and 2015, but this was based on oil prices of US$80 per barrel.

Regional outlook

The outlook is not good for the region either, and Sanjay says he is not expecting any acceleration in growth.

“Tepid and halting recovery in global trade and diminished policy levers, either in capacity or effectiveness, do not augur well for growth. Our 2015 growth forecast for non-Japan Asia is 6.1%, unchanged from our estimate for this year.

“India is one country where we do see significant acceleration. The new government has introduced a variety of growth and productivity-enhancing reforms,” he says, adding that as a domestic-driven economy, India is more resilient to changes on the global front.

For China, RBS forecasts its GDP to come in at 7% in 2015, which is impressive considering the global growth forecast, Sanjay says. For the third quarter of this year, the world’s second largest economy grew only 7.3%, the slowest since 2009.

In fact, the People’s Bank of China has already cut its GDP forecast for 2015 to 7.1%, compared with 7.4% this year.

“The problem is the composition of growth. Two areas of growth that are import-intensive are corporate investment and real estate — both are slowing, and this will hurt Asian exports,” Sanjay says.

While China’s economy moderates, it remains to be seen how big its impact will be on exports and economic growth across the region.


This article first appeared in The Edge Malaysia Weekly, on December 29, 2014 - January 4, 2015.

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