malaysia economic outlook 2q15 economics kenanga ......apr 07, 2015 · malaysia economic outlook...

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Economic Viewpoint

7 April 2015

Summary

• Moderating growth – The pace of economic expansion will slow in the first half of 2015 before

rebounding in the second half of the year. The worst-performing quarter is likely to be 2Q15, dragged

down by GST implementation on April 1. Full-year growth is projected at 5.1%, lower than last year’s

6.0% on weaker export revenue and a slowdown in consumer spending.

• Two opposing forces – Inflation has been pushed down by low crude oil prices and is expected to

register an annual increase of just 0.7% for 1Q15. For the next three quarters, however, inflation will

be significantly higher and close to the long-run average of about 3.0% as GST implementation will

cause a one-off increase in consumer prices, putting upwards pressure on headline inflation.

• Fiscal consolidation – The halving of crude oil prices and a subsequent fall in government revenue

from oil & gas sources expected this year has lead the government to revise higher its end-2015 fiscal

deficit target from 3.0% to 3.2% of GDP. The new target is still ambitious given the challenges of

cutting RM5.5b from operating expenditure that the new target would entail.

• Accommodative monetary policy – At this stage, Bank Negara Malaysia is unlikely to follow other

central banks in the region in easing monetary policy despite real interest rates rising to the highest in

five years. The Overnight Policy Rate will stay unchanged at 3.25% this year. Nothing is set in stone,

however, and the Monetary Policy Committee, now leaning ever so slightly to a rate cut, might take

action if growth were to fall short of projections.

• Ringgit decline to level out – US dollar appreciation has slowed after the US Federal Reserve

guided for a more gradual pace of rate hikes. While USD/MYR could continue to test levels above

3.70, with only the slightest chance of temporarily slipping past the 3.80 mark, the ringgit is not far off

from finding some strength to eventually appreciate to 3.45 by year-end. In the meantime, the

undervalued ringgit is a boon for export-oriented industries.

• Credit rating at risk – Fitch Ratings has indicated a more than 50% chance of a credit rating

downgrade to BBB+ by late May earliest as the agency believes Malaysia sits more naturally in the

BBB range given a narrowing current account balance, depleting fiscal revenue, high public debt and

weak governance. The money market has mostly priced-in the downgrade but expect to see a

kneejerk reaction in financial markets on the decision announcement. On Moody’s and Standard &

Poor’s rating scale, Malaysia remains at A3 positive and A- stable respectively.

Malaysia Economic Outlook 2Q15 Seeking calm and clarity amidst volatility

Economics Kenanga Investment Bank Berhad [email protected] [email protected] T: 603-2079 1379

07 April 2015 Economic Viewpoint

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Global outlook

Advanced economies looking up . The trajectory of growth in advanced economies is diverging from that

of emerging markets. Latest data indicates an improving trend for the United States economy despite

doubts over the quality of the over 200,000 jobs being created every month. The Eurozone and Japan are

starting out on shaky ground but will soon see an improvement from the current situation as aggressive

stimulus measures take hold. Emerging market economies, meanwhile, have had to revise lower growth

expectations for this year. While they remain the world’s fastest growing and most vibrant economies, a

slowdown is inevitable. China is aiming for just around 7.0% growth, the lowest in a quarter century as it

undergoes a challenging phase of unwinding from over-investment. Economies in the region have been

affected by a slowdown in Chinese demand, which has created a massive trade surplus for the world’s

second biggest economy at the expense of exports from East and Southeast Asian countries. This is the

year the US will come to the fore as the engine of growth, with other major economies not too far along.

Waiting on the Fed . Financial markets the world over are in turmoil as the US Federal Reserve prepares to

normalise interest rates with the first hike in the federal funds rate since 2006. The benchmark rate has

been held near zero since December 2008 alongside a massive quantitative easing programme that

increased the Fed’s balance sheet by about US$3 trillion over several years. Indications are the Fed will

make the first rate hike at the June meeting, or if that opportunity is missed then July or September. In the

meantime, capital flows will continue to exit emerging markets for what some consider to be better

prospects in the US. Expectations of further divergence in monetary policy between the US and the rest of

the world will further encourage the flow of capital into the world’s largest economy. But some of the loftier

expectations have been cut down to size after the Fed chair Janet Yellen guided for a more gradual pace of

interest rate normalisation and said rate hike decisions will be highly dependent on economic data. The

Federal Open Market Committee is predicting a 0.625% median funds rate for end-2015, making for a more

gradual stepping up of rates than the earlier December estimate of 1.125%.

Kenanga Research Malaysia Macroeconomic Forecast Su mmary

2013 2014 2015F Remarks

GDP (%YoY) 4.7 6.0 5.1

Consumption spike in the 1Q15 but moderate growth for following two to three quarters due to acclimatizing period of the GST. 2Q15 likely to be the worst-performing quarter

CPI (Average %YoY)

2.1 3.2 2.7 Inflation a balance of two opposing forces; cost-push from GST introduction and the weaker ringgit, both partly mitigated by lower oil prices.

OPR (%) End-period 3.00 3.25 3.25

BNM to keep rates steady in 2015 despite growing monetary policy divergence and a regional easing pattern. Possibility of a cut should the economy require a shot of growth.

USD/MYR End-period 3.174 3.497 3.452

Eager anticipation of a US rate hike and depressed crude oil prices means another year of volatile trading. Appreciation of the dollar has slowed and could reverse.

Sources: Kenanga Research, F=forecast


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Cheap oil is here to stay . The oversupply situation in global markets looks certain to persist well into 2016

or for as long as the main OPEC producers keep up current production levels in their bid to cling on to

market share that in the past few years have been slowly chipped away by US shale producers. In the

absence of a swing producer, most oil companies are choosing to maintain production (and cash flow)

instead of voluntarily making cuts. With most of the adverse effects of the initial shock to producer nations

from the free-fall in crude oil prices now behind us and oil prices expected to stay low at under US$70 a

barrel for a considerable period of time, we should see the global economy begin to reap the full benefits of

cheaper energy costs. Based on the new dynamics of global crude demand and supply, a US$57 a barrel

average price is expected for 2015.

Return to pole position . The United States economy will well and truly reassume the title of the engine of

the world economy in 2Q15. Growth is picking up pace with the economy expanding by 2.4% in 2014.

Unemployment continues to fall at a stunning rate and was as low as 5.5% in February. Over 200,000 jobs

are being created every month, although labour

participation remains at a more than 30-year low and

real wages have barely risen from 2009 levels. For

most of 2014, the US economy showed improvement

in economic indicators from manufacturing to home

sales to consumer spending, but going into 2015 this

momentum appears to be tapering off. Conditions in

1Q15 point to a weaker quarter on harsh winter

weather, strong dollar a slowdown at West Coast

ports on labour disputes. However, less than

impressive 1Q15 numbers should not distract from

reasonably healthy growth in 2015 as a whole for the

US economy.

Graph 2: IMF Emerging Asia GDP Forecast

0

2

4

6

8

10

12

14

16

2006 2008 2010 2012 2014 2016F

Emerging Asia

China

India

Asean-5

%

Source: IMF, Kenanga Research

Graph 1: IMF Advanced Economies GDP Forecast

-6

-4

-2

0

2

4

6

2006 2008 2010 2012 2014 2016F

Advanced economies

U.S.

Eurozone

Japan

%


Graph 3: U.S. Unemployment and Participation Rate

59

60

61

62

63

64

65

66

67

68

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

Feb-75 Feb-85 Feb-95 Feb-05 Feb-15

Unemployment rate

Labor Participation Rate (RHS)% %



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China’s gains are someone else’s losses. China’s waning appetite has created its largest trade surplus

yet. In turn, East and Southeast Asia economies are seeing exports to China fall and their own trade

surpluses narrow, concern enough for central banks in Thailand and South Korea to cite a decline in

exports to China as reasons for easing monetary policy. Is this the new normal China’s neighbours simply

have to get used to? Unlike in previous slowdowns, China’s leaders are this time reluctant to take the pump-

priming route, choosing instead to allow the economy to grow at a more natural pace. That is not to say its

leaders are stifling growth; some restrictions on foreign investment have been lifted and the minimum

downpayment for second home purchases reduced in an effort to introduce policy reforms targeted to

lagging sectors of the economy to boost domestic demand. The lending rate has been cut twice, but not

excessively and the People’s Bank of China continues to prop up the yuan against the dollar even as other

Asian currencies have fallen. Judging by its recent policy initiatives, the People’s Bank of China will take

further steps toward internationalisation of the yuan and seek to deepen trade relationships to extend soft

power.

ECB late to the QE game. The European Central Bank has begun a €60b a month quantitative easing

(QE) programme similar to the one ended by the US Fed last year. The bond purchases are intended to

continue until at least September 2016 to boost lagging Eurozone growth. Although unemployment is still a

chronic problem in Europe, leading indicators of the economy point to a recovery this year. Purchasing

Managers’ Index (PMI) readings for the Eurozone as a whole have recovered from a slowdown last year

and for March reached a 10-month high of 52.2, suggesting an uptick in manufacturing activity. New export

orders are on the increase on the weak euro. Counted separately, Central and Eastern Europe economies

are growing their manufacturing base even faster, with PMI readings in the Czech Republic, Hungary and

Poland registering between 54.1 and 56.1. This pattern of faster growth in the periphery is typified by

Ireland, which claims the title of the fastest growing EU economy in 2014 with GDP growth of 4.8%, more

than impressive when compared to growth rates of

less than 1.0% in most of Europe. Also a periphery

country, but of an entirely different kind than the

likes of Ireland and Poland, Greece is in a debt

crisis and close to a default as a newly-elected anti-

austerity government negotiates the terms of a debt

restructuring. The exit of Greece from the Eurozone

is being debated but even such an eventuality will

not have a widespread effect and will not break the

resolve of other member countries and the troika to

continue to put the common market on the path to

full recovery.

Graph 4: Eurozone Benchmark Bond Yields

0

5

10

15

20

25

30

35

40

Apr-09 Apr-11 Apr-13 Apr-15

Germany

Greece

Portugal

Italy

%

Source: Bloomberg, Kenanga Research


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Land of the falling yen . Japan's economy has very

much been a mixed bag lately. On the one hand, the

Japanese Yen continues to weaken as growth and

deflation concerns continue to weigh in on Japan's

economy. On the other, the Nikkei 225 continues to

reach all time highs, trading at 1,9746.20 points at

the time of this write up.

Competitive advantage . Meanwhile, the weak yen

puts Japan in a good place to increase exports. As

an export-oriented economy, Japan benefits when

its currency weakens relative to that of its global

trading partners. Therefore, as the national currency

drops, the Nikkei 225 continues to surge in spite of

economic growth concerns. In this context, while it may be counterintuitive, weak economic growth may in

fact be of benefit to Japan as far as global market perception is concerned. A weak economy leads to a

weak currency, which in turn provides a boon to exports allowing the Nikkei 225 to continue climbing.

Malaysia Growth Prospects

1Q15 Overview

Private consumption the growth driver . Growth

in the final quarter of 2014 came in ahead of

expectations, with GDP expanding 5.8% YoY to tip

full-year growth to a solid 6.0%. Domestic demand

was the key growth driver, with healthy gains in

private investment and consumption in the lead-up

to GST implementation. We expect to see a similar

pattern of private-led growth in 1Q15 when GDP

numbers come out in May after observing

businesses make pre-emptive purchases and

spend on GST-related professional services and

software. Closer to the April 1 implementation

date, consumers thronged retail establishments to

stock up on non-perishables thought to increase in

Graph 5: Japan Key Economic Indicators

-100

-80

-60

-40

-20

0

20

-15

-10

-5

0

5

10

15

2005 2007 2009 2011 2013 2015

GDP Household Expenditure

Inflation Tankan Survey (RHS)%

Source: BoJ, Bloomberg, Kenanga Research

Graph 6: GDP Demand-Side Growth Trend

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015

GDP

Aggregatedemand

Investment

Privateconsumption

%YoY

forecast

Source: Department of Statistics, Kenanga Research


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price with GST. Despite the pick up in consumer spending from purchases brought forward we estimate

1Q15 GDP growth to decelerate to 5.0% on erosion in exports, fall in investment in the oil & gas sector and

difficulty in matching up to an exceptionally strong 1Q14 (high base effect).

Manufacturing holds up . Factory output is expected to hold up (just barely) in 1Q15 at last year’s growth

levels, but may see a seasonal decline during the Lunar New Year month. Production at export-oriented

industries is likely to outpace that of other industries on the weak ringgit, which naturally favours exporters

over importers. However, manufacturing input costs have thus far been little affected by the depreciation in

the ringgit as there has been no increase in the import price index, which was down 0.4% YoY in February.

The Import Price Index managed to stay flat as global food and commodity prices fell more or less in step

with the depreciating ringgit in the past year. The Producer Price index was down 5.4% YoY in February on

far cheaper local production prices. Manufacturing activity is expected to contribute 1.3 percentage points

(ppts) to GDP growth in 1Q15, matching that in the preceding two quarters but far lower than the 1.7 ppts in

the same quarter a year ago.

Oil still flowing and still building . Construction, a small but important sector, will continue to grow at

relatively strong rates just under the 2014 average on the project annoucements in Budget 2015. Our

estimate for 1Q15 is a respectable 9.5% YoY growth rate for the sector. Despite the halving of crude oil

prices caused by oversupply issues expected to stretch well into 2016, the mining sector turned out to be an

outperformer on the demand side with much of the gains in industrial activity in recent months due to mining

activity. New production of up to 135,000 barrels a day of crude oil from the Gumusut-Kakap offshore field

in Sabah waters beginning last year has

sustained mining activity in the face of the

commodities rout and a huge cut in export unit

prices.

Decelerating quarter . On balance, 1Q15 will be

a quarter of decelerating growth with GDP

expanding by 5.0% YoY according to our

estimates compared to 5.8% in the preceding

quarter. With luck, the slight downward trajectory

of GDP growth will shift in 2Q15, which we

expect to be the worst-performing quarter in

2015 but also a turning point that might mark a

change from moderating growth to a new

positive growth trajectory.

Graph 7: GDP Supply-Side Growth Trend

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015

GDP

Aggregatedemand

Investment

Privateconsumption

%YoY

forecast



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Outlook 2015 – Uncertainties Abound

It might get worse before getting better . The domestic economy will register a spike in consumption in

1Q15, coinciding with the lead-up period to the April implementation of the GST, as businesses spend on

GST-related professional services and software, and consumers bring forward some purchases to avoid

having to pay higher prices once GST comes into effect. As what follows a spike is often a fall, 2Q15 will

fare worse as consumer spending takes a hit. The ill effects of GST implementation on the economy are

thankfully not expected to last for more than two quarters, setting up the economy for a healthy rebound in

4Q15, uplifted by an improving global economy and domestic demand.

The impact of adjustment . The following quarters, 2Q15 and probably extended to the 3Q15, however will

see limited spending as the economy acclimatizes itself to the new tax system. Lower crude oil prices

however, should help mitigate things, adding some extra spending money for consumers while cushioning

the impact of the GST. By the end of the year, we should begin to see a rebound in aggregate demand as

prices normalize while exports are also expected to perform better as the global economy rebounds. For the

whole of 2015, Malaysia’s GDP is projected to grow at a slower pace of 5.1% compared to 6.0% in 2014.

Growth nadir in 2Q15 . Although the lower fuel prices would have a positive net effect on consumer

spending it would only partially mitigate the adverse impact of GST. Based on experience of other countries,

the GST would impact the hardest on consumer spending as well as businesses within the first three to six

months. This would be largely reflected in the growth of private consumption which we expect would slow to

3.7% in the 2Q15, its slowest since the global financial crisis in 2009. In terms of contribution to GDP growth

it would be reduced to nearly half or 1.9 ppts compared to last year’s average of 3.7 ppts. Combined with a

moderate investment growth (4.7%), the aggregate demand growth is projected to slow to 3.9% in 2Q15 its

lowest since 4Q09. Along with a slower export growth (2.9% vs. 3.5% in 1Q15), we project overall GDP

growth in 2Q15 to settle at 4.0%, the lowest in five years.

Temporary impact. The adverse impact of GST on household spending is expected to be temporary as it

would be partially offset by the Government measures to assist targeted groups (BR1M), additional

disposable income via savings from lower fuel prices as well as the reduction of individual income tax by

one to three percentage points and favourable labour market conditions. On that basis, private consumption

is projected to expand to 7.3% in 2H15 from 4.9% in 1H15. For the whole of 2015, in spite of the negative

impact of GST on household spending, we project private consumption to remain decent at 6.2%, albeit

slower than 7.1% in 2014.

Improving investment trend. Meanwhile gross capital formation is expected to pickup as private

investments along with the government’s stimulus would mitigate the impact of GST in the 1H15 and

continue to support growth in the 2H15. We project investments to accelerate to 6.5% in 2H15 from 5.3% in

1H15 to bring about an average growth of 5.9% for 2015 better than 4.7% posted in 2014. Still our

projection is rather conservative than BNM’s projection of 7.6%


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Exports to slow in spite of weaker ringgit . Weak global demand trend and seasonality is expected to

weigh on exports in the 1H15. The global semiconductor sales growth may have peaked and is beginning to

taper. Though the weaker ringgit should be advantageous to export-oriented industries, weak global

demand could drag down production capacity. The competitive devaluation of regional currencies indirectly

via monetary easing makes it hard for Malaysia to take advantage of its weakening currency. Trade with

China, though expected to somewhat recover, won’t be as robust as they continue to undergo policy and

economic restructuring. Judging by the uneven US economic growth trend, we do not reckon the USA alone

would be able to pull exports forward. Along with a higher base effect, value-added exports growth is

projected to moderate to 3.2% in 1H15 compared to 8.3% in the same period last year. On the assumption

of better global outlook in the 2H15 and a lower base effect, we expect value-added exports to expand by

5.8% in 2H15. For the whole of 2015, exports are projected to slow to 4.5% from 5.1% in 2014.

Manufacturing mixed outlook . The manufacturing sector usually mirrors exports’ performance. We

anticipate the depreciation of the ringgit will continue to give export-oriented industries only a slight edge

over domestic-oriented industries. Output of the domestic-oriented industries would continue to languish for

at least two to three quarters following the implementation of the GST. Furthermore, expected weak

demand from major trading partners namely China, Asean and the Eurozone this year would put the lid on

any upside to export of manufactures going forward. Hence, the growth of value-added manufacturing

sector, which account for about 25.0% of GDP, is projected to moderate to 5.0% from 6.2% in 2014.

Better growth prospects in 2H15 . Assuming the harshest impact of GST would last for three months

followed by another three months to heal from the painful impact of adjustment, we might see improvement

Table 1: GDP Growth Trend and Forecast – (% YoY)

Kenanga Forecast

2013 2014 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 1H15 2H15 2015

By Sector

Agriculture 2.1 2.6 0.2 2.3 7.1 4.0 -2.8 0.5 0.9 0.7 2.9 1.9

Mining 0.7 3.1 -1.2 -0.8 2.1 1.4 0.5 2.0 2.0 2.0 2.6 2.3

Manufacturing 3.5 6.2 5.2 6.8 7.3 5.3 5.2 5.4 4.1 4.7 5.2 5.0

Construction 10.9 11.6 9.8 18.9 9.9 9.7 8.7 9.5 8.8 9.2 10.3 9.7

Services 5.9 6.3 6.4 6.6 6.2 6.7 6.4 5.3 4.4 4.9 6.1 5.5

Real GDP 4.7 6.0 5.1 6.2 6.5 5.6 5.8 5.0 4.0 4.5 5.6 5.1

By Aggregate Demand

Consumption 7.0 6.5 6.8 8.0 5.2 6.4 6.5 5.2 3.5 4.3 6.7 5.6

Public 6.3 4.4 5.2 12.3 -0.5 5.2 2.7 1.0 2.5 1.8 4.5 2.1

Private 7.2 7.1 7.4 7.1 6.5 6.7 7.8 6.1 3.7 4.9 7.3 6.1

Investment 8.5 4.7 6.5 6.3 7.2 1.1 4.3 6.0 4.7 5.3 6.5 5.9

Aggregate Demand 7.4 6.0 6.7 7.5 5.8 4.8 5.9 5.4 3.9 4.6 6.7 5.7

Exports 0.6 5.1 5.7 7.9 8.8 2.8 1.5 3.5 2.9 3.2 5.8 4.5

Imports 2.0 3.9 7.1 7.1 3.9 2.2 2.6 4.9 4.6 4.8 7.3 5.3

Real GDP 4.7 6.0 5.1 6.2 6.5 5.6 5.8 5.0 4.0 4.5 5.6 5.1

Source: Dept. of Statistics, Kenanga Research


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in the overall economic growth no later than 4Q15. But that may come sooner as global economy is

expected to improve in the later part of the year. Sustainable expansion in gross capital formation,

improving external demand and a gradual pick up in private consumption growth would primarily add to a

stronger 2H15. Hence, we forecast GDP growth to expand by 5.6% in the 2H15 from 4.5% in the 1H15,

bringing about an average growth of 5.1% for the whole of 2015.

Fiscal Policy

Subsidies gone . The removal of petrol subsidies in

December 2014 is positive with full impact on the

fiscal balance in 2015. The timing of the removal

was ideal as consumers now enjoy savings from

lower crude oil prices in the form of reduced fuel

costs, even below that of the government subsidised

price about a year ago.

Shrinking O&G revenue. Since 2004, the average

O&G sector revenue accounted for about a 32.0%

share of total government revenue. However, this is

expected to fall to around 22.0% of revenue in 2015

on a decline in petroleum taxes, duties and

royalties. The hefty annual dividend Petronas pays to the government is expected to remain intact, which is

expected to average around RM25.0b. The shortfall in revenue from O&G sources will likely be spread out

over 2015 and possibly stretch to 2017 because of oversupply as well as the slowing global demand. While

we expect crude oil prices to end the year above US$60 a barrel, it will remain relatively inexpensive in the

foreseeable future.

Alternative sources of income. Through incentive programmes such as the Economic Transformation

Programme (ETP), there are now wider sources of income that the Government can extract from in the

event of a shortfall from O&G. Furthermore, revenue made from the implementation of the GST should help

to partly mitigate revenue loss from the O&G sector. The government estimates that gross revenue from

GST to be about RM23.2b. After netting estimated revenue forgone from Sales and Services Tax of

RM13.8b and from exempted goods of RM3.8b, the Government is expected to receive RM5.6b. As

promised, the Government would channelled back RM4.9b to the public via social welfare programmes

such as BR1M, leaving a net balance of slightly less than RM1.0b.

No escape . While we believe that the net gain from GST is rather conservative more importantly it is an

effective programme to cast a wider net on tax evaders. The number of businesses registered with the

Royal Malaysian Customs Department under the GST programme by end of 2014 has more than doubled

to 272,847 from an initial target of 123,000. By end of March this year the number reached 362,748. It is

Graph 8: Fiscal Deficit vs. Public Debt Trend (% of GDP)

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

91 92 93 94 95 96 97 98 99 `00 `01`02 `03`04 `05`06 `07`08 `09 `10`11 `12`13 `140.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0Public Debt to GDP (Right)

Budget Deficit (Left)

% GDP% GDP

55% Cap on Public Debt



PP7004/02/2013(031762) of 12

learnt that almost 10% have not had a tax file. Under the GST, more companies would have little choice but

to end up paying tax because the system forces companies to be compliant and businesses to have in

place a system that is “self-disciplined”. According to data from the Companies Commission of Malaysia of

the 1.02 million companies registered with them as at end 2012, only 15.6% or 159,000 companies paid tax.

This means about 30,000 or more of these companies that have a turnover of more than RM500,000 have

not been paying taxes all these years.

A conservative estimate . Judging by higher-than-expected registrants for the GST programme we expect

the net GST revenue would be much higher than the official estimate by a big margin. That is why we are

revising our fiscal deficit projection from 3.5% of GDP to 3.2% for 2015, matching the Government’s latest

target. The original official target was 3.0% of GDP following 3.5% achieved in 2014. However, we believe

achieving the new target of 3.2% of GDP could still prove challenging due to the substantial reduction of

revenue from O&G and the challenges of cutting RM5.5b from the operating expenditure amid the

environment of weak ringgit and slowing economy.

Monetary Policy

Monetary policy divergence . While the Fed is looking to normalise interest rates this year with a much-

awaited rate hike, no less than seven central banks in the region have shifted to monetary policy easing to

stoke economic growth. They include the heavyweight economies of China, India and Indonesia as well as

Australia, South Korea, Singapore and Thailand. At the last Bank Negara Malaysia’s Monetary Policy

Committee meeting on Mar 5, the OPR rate was maintained at the current level of 3.25%, which is

accommodative of economic growth. We expect the OPR to stay unchanged this year and only a major

external shock such as a recessionary threat or uncontrollable inflation will be able to influence the central

bank to alter its policy mode.

Lower inflation lessens the sting of GST. Our

inflation forecasts for 2015 have been revised down

to between 2.5% and 3.0% after accounting for the

deflationary impact of lower fuel prices, which has

shown to be significant during February when the

reported YoY inflation rate reached 0.1%. This is

lower than the 4.0% - 5.0% expected earlier. Inflation

has been pushed down by low crude oil prices and is

expected to register an annual increase of just 0.7%

for 1Q15. For the next three quarters, however,

inflation will be pushed back up and return to the

long-run average of about 3.0% as the Goods and

Services Tax (GST) comes into effect, causing a one-off increase in consumer prices.

Graph 9: Real interest rates sharply positive

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15

Real Interest rateCPIOPR

YoY%

Source: Bank Negara Malaysia, Dept of Statistics, Kenanga Research


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OPR to likely stay pat. A hike in the Overnight Policy Rate (OPR) towards the end of the 2H15 is no longer

seen as possible because of monetary policy divergence between the US and much of the rest of the world.

If anything, Bank Negara is likely to be leaning ever so slightly to a rate cut and will take action if economic

growth weakens below projections. Regional economies have fallen into a pattern of monetary policy easing

to stoke economic growth, complicating monetary policy for BNM. Taken as a whole, lower policy rates and

cheaper currencies are a boon to the region’s investment and export-driven economies.

Ringgit outlook

Not the biggest loser . The fall in the ringgit over the past 8

months, by about 13.4% relative to the USD, has more to do

with the appreciation in the dollar and the reversal of capital

flows and less to do with any fundamental weakness in the

local currency. Comparing world currencies, the euro,

Australian dollar and the Japanese yen are weaker

compared to the ringgit while the Indonesian rupiah,

Singapore dollar and Chinese yuan are relatively stronger,

but still down against the USD. Part of the weakness in the

ringgit can be explained by investors discounting Malaysia

as an investment destination on account of its dependence

on O&G export revenue as well as issues with regards to governance and government debt obligations. Our

forecasts anticipate the USDMYR to trade at an average of 3.57 in 2015.

The end for the strong dollar? The historic advance in the dollar index over the past 8 months could be

setting up of the currency for a Black Swan event. Appreciation in the dollar has slowed following the Fed’s

guidance for a more gradual pace of rate hikes than previously guided. Expectations of better returns in

dollar denominated assets were diminished following the announcement. This is further supported by

weaker-than-expected March payroll data. The Federal Open Market Committee is predicting a 0.625%

median funds rate for end-2015, making for a more gradual stepping up of rates than the earlier December

estimate of 1.125%. The ringgit should eventually pare back some losses against the US dollar before the

end of the year after the Fed commits to a date for the first rate hike, which will return some clarity and

sense into forex markets.

Risks to growth

Same risks but more clarity . We reiterate that the risk on the overall economic growth and the financial

market in the short to immediate term has not changed that much since middle of last year but they appear

to yield more clarity now. The issue of Government’s contingent liabilities, the sovereign downgrade threat,

the adverse impact of GST on consumption spending, the resumption of Eurozone’s debt debacle, the risk

of deflation, monetary policy divergence, the impact of China’s structural reforms, competitive currency

Graph 11: Change relative to USD (1 Jul 2014 – 1 Ap r 2015)

Source: Bloomberg, Kenanga Research


PP7004/02/2013(031762) of 12

devaluation and O&G price volatility are among the major risk issues that would become the mainstay for at

least the rest of the year.

Ths document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Chan Ken Yew Telephone: (603) 2166 6822 Facsimile: (603) 2166 6823 Website: http://www.kenanga.com.my Head of Research

Kenanga Research Macroeconomic Forecast and Assumpt ions 2013 - 2014

2008 2009 2010 2011 2012 2013 2014 2015F

Real GDP (%YoY) 4.8 -1.5 7.2 5.1 5.6 4.7 6.0 5.1

Consumer Price Index (avg.) 5.4 0.6 1.7 3.2 1.7 2.1 3.2 2.7

Current Account Balance (% of GNI) 17.6 15.8 11.3 11.9 6.0 4.2 4.8 2.7

Fiscal Balance (% of GDP) -4.8 -7.0 -5.6 -5.4 -4.7 -4.0 -3.5 -3.2

Unemployment rate (% of working population) 3.3 3.7 3.3 3.1 3.0 3.1 2.9 3.1

Manufacturing output (%YoY) 0.6 -9.9 11.1 5.7 5.2 4.2 6.1 4.3

Exports of goods (%YoY) 9.6 -16.5 15.5 9.2 0.7 2.4 6.4 3.2

Overnight Policy Rate (end period) 3.25 2.00 2.75 3.00 3.00 3.00 3.25 3.25

Exchange rate: Ringgit/US$ (avg.) 3.3325 3.5189 3.2182 3.0595 3.0898 3.1678 3.2729 3.5713

Exchange rate: Ringgit/US$ (end period) 3.4640 3.4245 3.0835 3.1770 3.0583 3.1743 3.4973 3.4524

Crude Oil (Brent) - US$/barrel (avg.) 98.52 62.67 80.34 110.91 111.68 108.71 99.45 57.00

Crude Oil (Brent) - US$/barrel (end period) 45.59 77.93 94.75 107.38 111.11 110.80 57.33 68.00

Source: BNM, Ministry of Finance, Dept of Statistics, Bloomberg, CEIC, Kenanga Research

malaysia economic outlook 2q15 economics kenanga ......apr 07, 2015 · malaysia economic outlook...

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