PETALING JAYA: Malaysia’s gross domestic product (GDP) is expected to grow at a slower pace of 4.5 per cent this year, the lowest level since 2009, due to weaker consumer spending and drag from net exports.
In its report, Hong Leong Investment Bank (HLIB) Research said the Malaysian economy is still surrounded by external downside risks including the China slowdown, volatile oil price outlook and the US rate hike cycle, while the prolonged subdued consumer sentiment due to erosion of purchasing power poses the greatest challenge to domestic demand.
“We expect domestic demand growth to remain stable at 5 per cent in 2016, as weaker private consumption growth is cushioned by higher investment spending and mildly expansionary public expenditure. Private consumption growth is likely to ease further to 5.5 per cent in 2016, still below the historical trend at 6.5 per cent, due to further erosion in household disposable income amid subdued sentiment,” it said.
Nevertheless, it noted that household spending will still be underpinned by steady labour market conditions, higher BR1M payouts and RM100-120 hike in minimum wage. Total investment growth is projected to rebound to 4.9 per cent this year while net exports are likely to remain a marginal drag on 2016 GDP growth.
Notwithstanding the low oil price, HLIB Research expects current account (CA) to remain in surplus this year, projecting a RM10 billion surplus which is the smallest surplus since 1998.
It said the main downside risk for CA surplus is a sharper-than-expected downward revision in LNG prices as a result of sustained low global oil prices and lukewarm demand from Japan given potential resumption of more nuclear power plants throughout 2016. “On the fiscal front, we see lesser concern on the impact of low oil prices on government revenue given a stronger than expected GST collection.
Latest guidance from the customs department revealed that GST collection was higher at RM30 billion for the period April-November 2015,” it said. Based on the strong trend, it expects GST revenue to hit RM46 billion in 2016, surpassing the government’s target of RM39 billion.
“The additional RM7 billion GST revenue will come in handy to cushion the lower oil revenue given the latest rout in oil prices. Consequently, we maintain our view that the fiscal deficit-to-GDP ratio of 3.1 per cent in 2016 is attainable without resorting to any cut in spending,” it said, adding that its forecast already takes into account the sharp decline in Petronas’ dividend contribution.
On the overnight policy rate (OPR), HLIB Research expects Bank Negara Malaysia (BNM) to leave the OPR unchanged at 3.25 per cent throughout the year. It expects BNM to tolerate with the negative real interest rate episode in Jan-May 2016 as it is mainly a reflection of both low base effect and administrative price adjustment.
It said negative real interest rate is not an unprecedented scenario in Malaysia while still resilient GDP growth, high household debt level and volatility in the ringgit are factors stopping BNM to consider reducing the OPR.
“The departure of (BNM) governor Zeti (Tan Sri Dr Zeti Akhtar Aziz) whose term ends on April 30, 2016, in our opinion, may introduce some uncertainties in the monetary and financial policy. A loosening of policy (relaxation in lending guidelines and/or OPR cut) may be in place if the successor is appointed externally, especially a more political-centric candidate,” it added. HLIB Research expects the ringgit to stabilise somewhat throughout 2016 although, still at an “undervalued” level. The currency is expected to move sideways in the range of RM44.40/US$ for most of 1H16 before staging an appreciation in 2H16, driven by better clarity on oil market supply-demand dynamics.
The appointment of a new BNM governor and normalisation of GST impact would further aid a recovery in the ringgit. It expects the ringgit to strengthen to RM3.804.00/US$ in 2H16 on improved foreign investor appetite.
FBM KLCI earnings are expected to recover mildly in 2016 and 2017, with earnings per share growth of FBM KLCI to recover to 6.3 per cent in 2016 and 6.5 per cent in 2017 and an end-2016 FBM KLCI target of 1,820 points.
“We advocate a slight defensive stance in larger cap space in most of 1H16, to ride through volatility and to capitalise on deployment of ValueCap funds. Stay invested in export theme, particularly quality export stocks that will deliver growth in the absence of strong US$ catalyst.”
