This article first appeared in The Edge Financial Daily on September 5, 2018

KUALA LUMPUR: Standard Chartered Bank (StanChart) has lowered Malaysia’s 2018 gross domestic product (GDP) growth forecast to 4.8% from its previous estimate of 5.3% on the back of negative trade sentiment and weaker-than-expected growth in the first half of the year.

Growth is expected to improve to 5% in 2019 as the slowdown in 2018 is also affected by the high base of 2017, said StanChart chief economist for Asean and South Asia, Edward Lee.

Lee projected a shift in the local growth driver to consumption from investment, which has been soft for the first half of 2018 and is likely to remain so due to uncertainty and negative sentiment on global trade.

“The impact to China [from lower demand due to its trade dispute with the US] could be 0.6 percentage points of growth — that’s huge. This could [translate into] a 0.3 percentage point impact on Malaysia’s GDP growth,” he said at a media briefing yesterday.

“While consumption will continue to be buoyant, we still need to import. So the net effect will be a decline in the trade surplus,” Lee said.

As it is, China’s economy is slowing faster than expected due to heavy uncertainty from the trade dispute, Lee noted, adding that the government would likely change its stance to be more supportive of growth, particularly in the infrastructure sector.

Meanwhile, StanChart said the ringgit is expected to appreciate to 4.00 against the US dollar by year end from a nine-year low of 4.1392 currently, although the greenback is projected to remain strong against global currencies.

The ringgit is expected to continue to outperform its regional peers as it is still undervalued, according to StanChart’s house view.

“Malaysia’s real yields on its bonds are still quite high,” said Divya Devesh, the bank’s foreign exchange strategist for Asean and South Asia.

Quantitative tightening across global markets is expected to have a limited negative impact on the ringgit as Malaysia is relatively insulated, with most investors already being underweight on the currency, he added.

A stabilisation of oil prices at an expected US$70 (RM289.80) a barrel this year would also support the ringgit, shared Madhur Jha, head of thematic research at StanChart.

“Because this rise in oil price is driven by higher demand, the price is likely to be more stable,” she said.

Jha also noted that Malaysia may benefit from rising commodity prices, which usually track crude oil prices. However, Lee pointed out that prices of crude palm oil and liquified natural gas seem to be lagging behind the former indicator at the moment.

Meanwhile, the government is expected to be able to keep to its 2.8% fiscal deficit target for the year, which may grow to 3% next year, Lee said.

He noted that the absolute value of federal debt is not as much of a concern as how much it will cost to service payments. Although interest payments have risen over the years, Lee opined that the figure was not alarming.

“[Federal] debt levels are on the high side but manageable,” he said.