KUALA LUMPUR, Sept 27 — Malaysia is likely to turn more inward to hold up economic growth, says RHB Research.
In a note today, it said the government may look to shore up spending for the fiscal Budget 2020.
“The government has indicated that it is unlikely to introduce new tax measures for Budget 2020 and we think the budget would likely be more expansionary to counter the effects of the trade war and the fiscal deficit may come in at -3.20 per cent of gross domestic product (GDP) versus the medium-term target of 3.00 per cent,” the research house said in a note today.
It expects the country’s economic growth to hold up, albeit moderating to 4.3 per cent for 2020 compared to an estimated of 4.5 per cent this year as weak global demand amid the protracted US-China trade tension will likely weigh on the country’s exports.
“But Malaysia may benefit from a trade diversion arising from the trade tension. Stronger growth in domestic demand, however, will likely provide some mitigation.
"This is on account of more expansionary fiscal spending and an improvement in private investment, while private consumption is expected to be resilient during the year,” it added.
RHB Research said signs of trade diversion were seen for Malaysia as exports to the US surged to 9.2 per cent year-on-year during Apr-July 2019, compared to a -1.0 per cent in the first quarter 2019 (Q12019), while exports to China, more recently in July, rebounded to 3.8 per cent year-on-year after falling 6.3 per cent in the prior three months.
Bank Negara Malaysia (BNM) in a recent analysis showed that Malaysia has gained greater share of US and China’s imports for various items such as photosensitive semiconductor device and diode-transistor imports and petrochemical products.
Malaysia has also benefited from investment diversion with the approved foreign investment in the first half 2019 (1H2019) jumping 97.2 per cent to RM49.5 billion from RM25.1 billion a year ago led by the US with RM11.7 billion and China at RM4.4 billion.
“We expect Malaysia’s real exports to grow modestly at 0.1 per cent for 2020, marginally slower than a revised +0.2 per cent estimate for 2019, while real imports are expected to recover to a 0.3 per cent pace next year, after falling an estimated 1.0 per cent in 2019,” said RHB Research.
It also believed that another overnight policy rate cut by Bank Negara Malaysia is likely to support growth.
"We believe another overnight policy rate cut by BNM is likely to support growth, given the cautious tone and downside risks emanating from worsening US-China trade tensions. This may happen in late 4Q2019 or 1Q2020," RHB Research explained.
In addition, inflationary pressure is expected to rise ahead but is manageable, as fuel price cap may be removed but the impact from consumption tax is expected to fade.
“We expect the headline inflation to pick up to 2.00 per cent for 2020, from an estimated 0.9 per cent in 2019,” it said.
The ringgit meanwhile is expected to recover to MYR4.00 versus the US dollar towards end-2020 given surplus in the current account, and bond yield differentials remain in favour of Malaysia as well as inflow of foreign direct investment. — Bernama
