This article first appeared in The Edge Malaysia Weekly on January 27, 2020 - February 2, 2020
IN a surprise move, Bank Negara Malaysia slashed its key overnight policy rate (OPR) by 25 basis points to 2.75% last Wednesday at its first of six scheduled monetary policy committee (MPC) meetings this year, drawing the spotlight to the country’s official forecast of 4.8% gross domestic product (GDP) growth for the year.
Not only are OPR rates at their lowest since May 2011, the rate cut was the second in nine months.
The move was preceded by a reduction in the statutory reserve requirement (SRR) ratio from 3.5% to 3% last November — estimated to have released RM7.4 billion liquidity into the banking system.
Some economists had already predicted then that an SRR cut would precede a move in the OPR rates. Rather than penning doomsday thoughts though, many repeated the word “pre-emptive” — used when central bankers turn dovish to buy insurance for growth.
Unsurprisingly, the MPC described the OPR cut as a “pre-emptive measure to secure improving growth trajectory amid price stability” in its Jan 22 statement.
To be sure, Malaysia had room for a cut that would favour private consumption — real interest rates have remained positive with benign inflation and the ringgit has been firmer against the greenback the past month. Headline inflation averaged 0.7% in 2019 and is expected to remain modest in 2020, though higher than last year’s.
As many as 15 of the 21 economists polled had expected an OPR cut within the first quarter of the year, according to Bloomberg data, but most had expected it to happen at the MPC’s second meeting of the year on March 3 — after the 4Q2019 GDP release on Feb 12. Only two thought a rate cut would come on Jan 22.
For now, most economists — including MIDF Research, which had expected last Wednesday’s cut — do not expect any more rate cuts for the rest of the year, noting that the MPC “considers the [current OPR level and] stance of monetary policy to be appropriate in sustaining economic growth with price stability”.
“The global economy is projected to grow 3.3% in 2020, higher than the estimate for 2019 at 2.9%. The growth will mainly be contributed by emerging economies. The IMF (International Monetary Fund) forecasts the growth for the US and China to experience further moderation in 2020 at 2.0% and 6.0% respectively. The IMF predicts Malaysia to grow by 4.4% next year. Hence, we expect only one rate cut by Bank Negara this year to stimulate the domestic economy and counteract the external pressure. Heightened global trade tensions, political instability in the European Union and the US presidential election are among the downside risks to global growth in 2020,” MIDF economists say in a note.
UOB Malaysia economist Julia Goh reckons that Bank Negara “will keep the OPR on hold for now to allow the stimulus effect to run through the economy”, noting that the Jan 22 rate cut “helps to extend the stimulus effect from the previous OPR cut in May 2019”.
OCBC Bank economist Wellian Wiranto is among the minority who believes that another 25bps could be trimmed off the OPR down the road this year.
“Even with today’s cut, the official growth assumption may still be hard to reach, especially if global trade flows become curtailed again by a breakdown in the US-China trade truce or if the Wuhan virus scare takes on a life of its own. Hence, this is unlikely to be Bank Negara’s last action of the year. We continue to see the possibility of an aggregate of 50bps of rate cuts this year. That is to say, one more rate cut is to be expected after today’s move,” he tells clients in a Jan 22 note.
Did 4Q2019 GDP disappoint?
When asked if the SRR cut on Nov 8 last year could be read as Bank Negara being a tad more concerned over the country’s growth trajectory and that another OPR cut would be nigh should the central bank not see the improvements it wanted, governor Datuk Nor Shamsiah Mohd Yunus on Nov 15 told reporters: “We are not on any preset course. We will continue to monitor external developments and how they may affect our outlook for growth and inflation.”
That day, she had just announced that 3Q2019 GDP growth slowed to 4.4% from 4.9% in 2Q2019 and 4.5% in 1Q2019 — lowering the average for the first nine months to 4.6% compared with 4.7% in the first half of last year.
That means that 4Q2019 GDP would need to come in at 4.8% for Malaysia to meet its official GDP forecast of 4.7% for the whole of 2019.
Bank Negara’s GDP forecast for 2019 is between 4.3% and 4.9%, a range that will be met — unless 4Q2019 numbers come in below 3.5%.
In its Jan 22 statement, the MPC said 2019 growth “will be within the projected range”.
“For 2020, growth is expected to gradually improve, with continued support from household spending and better export performance. Overall investment activity is expected to record a modest recovery, underpinned by ongoing and new projects, both in the public and private sectors.”
Downside risks mentioned by the MPC were “uncertainty from various trade negotiations, geopolitical risks, weaker-than-expected growth of major trade partners, heightened volatility in financial markets and domestic factors that include weakness in commodity-related sectors and delays in the implementation of projects”.
Will 2020 GDP forecast be revised?
The World Bank expects Malaysia’s GDP to come in at 4.6% in 2019 and 4.5% in 2020 and 2021, with weaker exports partly offset by strong domestic demand, which it expects to be underpinned by favourable financing as well as stable labour conditions.
It remains to be seen if the government would choose to revise its GDP growth forecast of 4.8% for 2020, should full-year growth figures for 2019 come in lower than expected.
Just hours before the OPR rate cut was announced, the Ministry of Finance said “the latest set of economic data suggests the economy will be expanding faster in the coming months” and that Malaysia’s economic outlook “would brighten further with the lessening of trade tensions between China and the US” in welcoming Moody’s affirmation of the country’s sovereign credit rating.
Whatever happens, it seems that the government has room for manoeuvre. Moody’s, for instance, had affirmed the country’s sovereign rating despite expecting its GDP growth to average 4.5% over the next two years because of weaker global growth.
Moody’s expects the country’s GDP to come in at 4.5% in 2019, given generally soft global macroeconomic data. It did note, though, that real GDP growth was “still-solid” at 4.6% in the first nine months of 2019 compared with 4.8% in the previous corresponding period, led by private sector consumption. The latter, it notes, reflects “strong household demand in a tight labour market”.
The credit rating agency also expects the government’s fiscal deficit to average 3.3% of GDP between 2020 and 2021 — a shade above the official estimate of 3.2% of GDP for 2020, which accords the government room to provide additional stimulus, should the situation warrant it.
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