Friday 29 Mar 2024
By
main news image

This article first appeared in Corporate, The Edge Malaysia Weekly, on August 15 - 21, 2016.

MALAYSIA’S economic growth rate slowed, for the fifth consecutive quarter, to 4% in the second quarter of this year after registering expansion of 4.2% in the first quarter.

The 2Q2016 growth was nevertheless within economists’ expectations. Growth was held up by strong domestic demand but weighed down by a continued decline in net exports.

On a quarter-on-quarter seasonally adjusted basis, the economy expanded 0.7%. It was the slowest pace of quarterly expansion since 1Q2013.

Bank Negara Malaysia said it would maintain its growth projection of 4% to 4.5% for the full year. Economists, too, seem to be maintaining their full-year growth forecasts for Malaysia, although most are on the lower end of the central bank’s projected range.

“The second quarter growth is within what we had projected earlier, so there were no big surprises,” Bank Negara governor Datuk Muhammad Ibrahim said at a press conference last Friday.

“To date, our growth performance has remained resilient, as reflected by the steady growth performance of the economy, particularly in domestic demand. Our assessment is that the Malaysian economy is expected to remain on the current growth trajectory of 4% to 4.5% for 2016 amid the increasingly challenging environment.

“In the second half of 2016, growth will be supported by several factors, including higher wages for civil ser­vants and the upward revision to the minimum wage, continued implementation of infrastructure projects, and improved commodities production from the diminishing effect of El Niño,” Muhammad said.

He added that the biggest headwind the economy is facing is the more challenging global environment, which could weigh on Malaysia’s growth in the second half. He warned that global economic activity is expected to remain subdued despite unprecedented easing of monetary conditions in major and regional economies.

“Nevertheless, we are quite confident that our sound fundamentals, pre-emptive policies and well-diversified economy have placed us in a good position to weather these shocks and challenges.”

For the first half of this year, the economy grew a markedly weaker 4.1% compared with 5.3% in the same period a year ago.

“We expect 2H2016 GDP (gross domestic product) growth to also average 4.1%, thereby registering a full-year growth of 4.1%. Our inflation forecast remains at 3% for this year (2015: 2.1%) on cost-push price pressures,” AllianceDBS Research economist Manokaran Mottain says in a report last Friday. Headline inflation declined to 1.9% in the second quarter.

Manokaran notes that while downside risks from weak external macro and commodity prices have yet to recede, efforts to sustain domestic demand growth are already in place.

The Employees Provident Fund’s voluntary rate cut of employees’ contribution, special individual income tax relief announced during the Budget 2016 revision and BR1M transfers cumulatively add up to around RM13 billion household expenditure, which could boost private consumption percentage point contribution to GDP by as much as 1% this year, he says.

Additionally, Bank Negara’s surprise cut to the Overnight Policy Rate by 25 basis points to 3% in July is a pre-emptive measure to support domestic consumption.

On a positive note, domestic demand (excluding stocks) held up better than expected in the second quarter, registering a stronger growth of 6.3% compared with 3.6% in the first quarter and 4.6% in 2Q2015. Domestic demand was led by stronger growth in consumption and investment in the private sector, which recorded 6.3% and 5.6% year-on-year growth respectively during the quarter. It is noteworthy that public investment turned around to register a positive growth of 7.5% y-o-y compared with a negative growth of 4.5% in the first quarter, on account of higher spending on fixed assets by both the government and public corporations.

However, net exports continued to decline, by 7% y-o-y (1Q2016: -12.4%), amid the more challenging external macro conditions.

“Exports and imports grew by a marginal 1% and 2% y-o-y respectively, leading to the lowest net exports in three years by RM19.7 billion. This alone led the GDP growth to be lower by 0.6% y-o-y, confirming our worries that the slow global trade activity will eventually affect our economic growth. There have been signs of a rebound in global trade activity in June. However, the Brexit vote will most likely diminish all hope,” says an economist at MIDF Research.

On the supply side, all of Malaysia’s economic sectors continued to expand in the second quarter, with the exception of the agriculture sector. Agriculture declined 7.9% compared with a decline of 3.8% in the first quarter, due to the lagged impact of El Niño on crude palm oil production.

Meanwhile, the country’s current account surplus narrowed to RM1.9 billion (0.6% of GDP) in the second quarter from RM5 billion in the first quarter — well below a consensus forecast of RM3.4 billion. This was due mainly to the lower trade surplus, higher investment income received by foreign investors in Malaysia and continued outward remittances by foreign workers here.

Bank Negara’s Muhammad said he is confident the current account will remain in positive territory for the full year, albeit narrower. “[But] for 2017, it will very much depend on global growth, whether that will impact our exports and the intensity of our imports.”

Nomura Research says, overall, the 2Q2016 data continues to support its view that the Malaysian economy remains resilient despite domestic and external headwinds.

“In addition to the Brexit vote appearing to have a more limited impact on financial markets and confidence than we expected, today’s GDP print increases the upside risks to our full-year GDP growth forecast of 3.9%. Consequently, while we expect Bank Negara to cut its policy rate again this year by 25 basis points, this faces a risk of some delay,” its economist Euben Paracuelles says in a note last Friday.

Bank Negara said the domestic banking system remains sound and that its exposure to the troubled oil and gas industry is small, at less than 2%. On the banks’ exposure to troubled Singapore firm Swiber Holdings, Muhammad said, “We have looked at their [loan] exposure … it’s quite small and already been fully provided. They have absorbed that provision quite comfortably, and so we do not have any concerns.”

 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share