Saturday, May 09, 2015

Malaysia Economic Outlook 2015 : Executive Briefing Scotia Bank.

March 2015
Executive Briefing
is available on and Bloomberg at SCOT
Global Economics
Tuuli McCully
Executive Briefing
is available on and Bloomberg at SCOT
     Capital Market Dynamics
     Foreign Exchange
The Malaysian ringgit (MYR) is facing a period of weakness as investors readjust their portfolios' emerging market portfolios’ emerging market exposure and lower international oil prices lead to a narrowing of
Malaysia’s currentaccount surplus. While the country’s authorities maintain a managed float policy for the MYR against a trade-weighted currency basket, the MYR has lost 13.8% vis-à-vis the US dollar (USD) over the past six months. We expect the currency to close 2015 at 3.76 per USD,implying a 7% depreciation since the end of 2014. 
      Sovereign Debt & Credit Ratings
The Malaysian sovereign credit rating outlook is mixed: Fitch Ratings assigns a “negative” outlook to 
Malaysia’s long-term foreign currency rating of “A-”, while Moody’s holds a “positive” outlook on its corresponding “A3” assessment. Meanwhile, Standard & Poor’s rates Malaysia in thesame rating category, with a “stable” outlook, judging that the country’s net external asset position, monetary Malaysiaflexibility, and diversified economy counterbalance its fiscal weakness. Malaysia’s gross public debt will likely hover around 55% of GDP through 2016, somewhat higher than the average of its regional peers. Credit default swaps indicate a deterioration in investors’ perceptionof Malaysia’s creditworthiness: they hover close to 140basis points (bps), significantly abovethe six-month average level of 97 bps.
      Economic Outlook
The Malaysian economy continues to record strong perfromance. Real GDP growth reached 5.8% y/y
in the fourth quarter of 2014 following a 5.6% advance in the July-September period, taking the gain to 6% in 2014 as a whole. Activity remains broadly-based with domestic demand being the key driving force. Private consumption continues to be underpinned by rising incomes,supportive labour market conditions, and lower fuel prices, whereas investment activity is bolstered by both public and private sector outlays. This should counterbalance the expected investment downturn in the oil and gas sector. We anticipate a modest real GDP growth deceleration to take place in the coming quarters,reflecting slower gains in the export sector due to lower international commodity prices. Output expansion will likely average 5% annually in 2015-16.
       Inflation & Monetary Context
The collapse in international energy prices is reflected in inflation; consumer prices increased by 1.0% y/y in January, dropping substantially from the 3.1% average advance recorded in 2014. The implementation of a goods and services tax in April 2015 will lead to a temporary pick-up in price gains, with inflation likely hovering around 3% y/y at the end of the year before easing to 2½% by the end of 2016. We expect the central bank to maintain monetary conditions unchanged in the coming months as the inflationary impact
stemming from robust domestic demand is partially offset by lower energy prices. Policymakers increased the benchmark interest rate by 25 bps to 3.25% last July after the rate had been kept unchanged for over three years. 
    Fiscal & Current Account Balance
Public finances are Malaysia’s weakest link. The government’s oil and gas revenues (which account for 30% of total revenue) will be suppressed by lower oil prices, prompting authorities to revise the 2015 budget deficit projection upwards to 3.2% of GDP. Nevertheless, the price drop allowed Prime Minister Najib Razak to announce a fuel subsidy reform in November 2014, which will offer counterbalancing
support to public finances and sovereign creditworthiness. The fuel subsidy bill (2.5% of GDP in 2013) has been one of the highest in the region alongside Indonesia. Furthermore, the implementation of the goods and services tax in April will alleviate pressure on public finances. As Malaysia is a net oil exporter,
lower global oil prices have caused a deterioration in the country’s terms of trade with its current account surplus likely shrinking to an average of 3½% of GDP in 2015-16 from 4.6% in 2014.

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