UBS cuts our GDP growth forecast to 4.5%

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KUALA LUMPUR: Swiss bank UBS AG has cut its gross domestic product (GDP) growth forecast for Malaysia next year to 4.5% from 5%, less than World Bank’s revision from 4.9% to 4.7% last Wednesday, on what it expects to be a “sharper slowdown” in the Malaysian economy.

“Things are not looking great for Malaysia... There was firm consumption previously but now the price of oil has fallen, causing a negative income shock,” said UBS senior economist for Asean and India, Edward Teather, during a conference call with the media last Friday.

The Malaysian economy is already suffering from a slowdown and low oil prices are “adding fuel to the fire”, he said.

“In 2015, we see a sharper slowdown to 4.5% from 5%. In 2016, [we] expect [it] to average [to] 4.7% real GDP growth.”

He projects average oil price next year to be US$70 (RM244.30) per barrel. While this means it will be “more challenging” for the government to meet its 3% fiscal deficit target next year, he believes that it will still meet it.

“[But] if oil prices average around US$60, savings from oil subsidies will not be able to offset lower oil revenues. [Then] we can justifiably say they will miss the deficit target,” he said.

Brent crude oil price has plunged almost half from US$115 per barrel in June. Last week, it hit below US$59 before rallying up to US$60 last Friday.

Teather expects Bank Negara Malaysia to cut its overnight policy rate by 25 basis points to 3% next year, as the fall in oil prices is likely to cushion the pressure on inflation, which should rise to 3.9% due to the incoming goods and services tax (GST).

“The GST will push prices up and there will be a more subdued economy, with some firms choosing to absorb additional costs from the GST.

“Malaysia is facing a period of low investment and low exports. It cannot expect consumption to continue to outperform,” said Teather, adding that with the coming GST, the incentive is for consumers and households to withhold spending.

Comparatively, the World Bank is more confident of Malaysia’s ability to meet its budgetary targets.

“I believe Malaysia will be able to meet its targets for this year and the next,” World Bank country director for Southeast Asia Ulrich Zachau told The Edge Financial Daily in an interview.

“Even if oil prices remain low, that’s going to be compensated by other measures that the government is taking [to meet the fiscal deficit target],” he said.

“It’s possible that external developments will remain weak throughout 2015, which poses a downside risk to Malaysia. However, I don’t see a systemic risk in the sense that Malaysia will need to take exceptional measures and worry about it,” he added.

However, he cautioned Malaysia to be prepared to revise “certain policies”, on both the fiscal and external side, according to different oil price levels.

“We’re projecting a decline in the current account surplus as a result of the decline in oil prices. But we’re not projecting a current account deficit by any means, so Malaysia still has a significant cushion,” he said.

He also disagrees that Malaysia will face the lowest growth among Asean nations next year, low oil prices notwithstanding, due to the country’s strong domestic consumption.

“The largest share of Malaysia’s growth is not determined by oil. It’s important, but domestic consumption is by far the most important factor and that has a lot to do with consumer confidence,” he said.

“It’s a strength that is hard-earned by policies that promote stability, macroeconomic stability, and good monetary and fiscal policy. Malaysia is on track to meeting its fiscal targets. Many countries in the world are not, Malaysia is,” said Zachau.


This article first appeared in The Edge Financial Daily, on December 22, 2014.