(1) Malaysia is the seventh-largest economy amongst Islamic countries according to GDP. Malaysia’s economic system is principally laissez-faire, a free economy with government control for national interests and for realignment of national wealth, focusing on trade, investment, manufacturing, and services
(2) Malaysia ’s economic growth is expected to stabilise in 2019 and over the medium term, with inflation picking up and the current account surplus continuing to narrow, the International Monetary Fund (IMF) said. Further, according to the IMF, this would counter-balance the negative drag from the external environment and fiscal consolidation, leaving growth flat at 4.7% in 2019 and close to potential (about 4.75%) over the medium term. Inflation would rise above 2% in 2019, as the effect of the goods and services tax (GST) removal dissipates and oil subsidies become targeted. Over the medium term, growth is expected to converge to potential and inflation would remain subdued.
(3) Malaysia ’s growth has averaged above 5% over the past five years, leading to a higher per capita income and reducing poverty. The nation’s economy continues to perform well despite external headwinds and is now moderating – estimated at 4.7%. This is underpinned by robust domestic and external demand.
(4) Domestic demand is expected to remain the main driver of growth, with private consumption and investment supported by an improved business environment and investor confidence.
(5) This was also echoed by Finance Minister Lim Guan Eng, who said: “ Malaysia has remained attractive for foreign investors, who were flocking to Malaysia after realising the importance of the Federal Government’s adoption of a policy of accountability and transparency in reforming the country’s institutions, as well as being investor-friendly without forsaking the interests of the people”.
(6) “Not only foreign investors are confident in the strength of the Malaysian economy. Consumer confidence has also risen and this will support the growth of the country’s economy,”
(7) However, the Government must continue implementing credible macroeconomic policies while safeguarding growth and financial stability, and undertaking structural reforms to boost sustainable, inclusive growth.
(8) Malaysia has a low tax revenue ratio, hence revenue mobilisation should be a priority, not only to support medium-term consolidation but also to help finance needed expenditure to achieve government priorities identified under the mid-term review of the Eleventh Malaysia Plan.
(9) In this respect, it is welcomed the governments continued efforts to increase fiscal transparency and supported the broadly neutral monetary policy stance.
(10) Going forward, domestic economic and financial conditions should continue to guide monetary policy decisions, with exchange rate flexibility the first line of defence against shocks.
(11) Risks to the growth outlook stem largely from external factors. It is concerning, that Malaysia ’s highly open economy would be vulnerable to rising protectionism, weaker-than-expected growth in trading partners, or a significant slowdown in China.
(12) There is investors’ nervousness as a consequence of the outright cancellation of government contracts that were already awarded (eg an immigration contract called SKIN); the deferment of mega-projects such as the high-speed rail project between Singapore-Kuala Lumpur and MRT3; the country’s widening fiscal deficit and slipping consumer spending after the removal of GST.
(13) It was a struggle for most to be upbeat on Malaysian equities and even bonds. However, we believe a positive re-rating by the rating agencies is looming.
(14) First, major government contracts are starting to be revived. After multiple false starts, the highly-publicised RM80 billion (S$26.5 billion) East Coast Rail Link is likely to resume, at a more affordable price tag and scale. This project could be a major catalyst for the country’s equity market and economy. A decision is expected as early as April.
(15) The government is making much effort to tighten its finances structurally and provide more transparency. Contracts that were previously directly negotiated will be re-tendered via open tenders. These include the Klang Valley Double-Tracking 2 rail project. The government has also secured cost-savings for its mega-projects. According to the Ministry of Finance, there will be 22 per cent or RM8.8 billion savings for the MRT2 project and 47 per cent or RM15.5 billion savings for LRT3.
(16) Moreover, consumer spending this year will be propped up by a large RM35 billion refund of GST and income tax. Regardless of the exact quantum spent or saved by households, this should be a net positive for consumption spending.
(17) Also, unlike many other emerging markets, Malaysia ‘s external finances remain on a solid footing. Malaysia has been running a current-account surplus for more than 20 years.
(18) Finally, there is room for interest rates to go lower. Malaysia ‘s inflation rate hit a watershed when it turned negative in January. This was its first contraction in almost a decade. Meanwhile, the country’s real 10-year government bond yield is at 4.7 per cent, the highest in a decade. With inflationary pressure subdued and real yields at elevated levels, I believe there is room for the central bank to loosen monetary policy.
(19) Like any investment proposition, there will always be wild cards. Key for Malaysia will be its fiscal deficit. Malaysia expects a fiscal deficit of 3.4 per cent of GDP in FY19. Behind this is its assumption that Brent crude will trade at US$60-70 per barrel. Petroleum accounts for 20-30 per cent of government revenue. With Brent now at US$65, its fiscal deficit should stay on target. However, any persistent drop in oil prices below the US$60 mark could make Malaysia vulnerable to a sovereign downgrade by rating agencies. For now, we see no such risk.
(20)So, what is Malaysia’s economic outlook?
(a) The Malaysian economy accelerated in the final quarter of last year. The national accounts reading came on the back of strong growth in private consumption, which nonetheless moderated slightly from the previous quarter and an improved performance from the external sector. Private consumption benefited from weak inflationary pressures amid strong income growth. On the external front, exports rebounded and, with growth in imports soft, net exports provided a strong and positive impulse to the economy. Looking at the start of the New Year, the manufacturing PMI remained entrenched in contraction territory for the fourth consecutive month in January, although the index did improve somewhat from the prior month.
(b) Firm domestic demand should keep the economy on a robust growth path in 2019, although private consumption is seen moderating after last year’s stellar performance. An economic slowdown in China and a possible flare-up in the U.S.-China trade spat, as well as financial-market volatility, are the main downside risks to the economy. Focus Economics Consensus Forecast panellists expect the economy to grow 4.5% in 2019, which is unchanged from last month’s forecast, and 4.5% again in 2020.s forecast, and 4.5% again in 2020.