The economy slowed down to 4.4% y/y in 3Q2018 with the continued drag from commodity shocks i.e. both mining and agriculture while services and manufacturing continued to support growth. Besides, private expenditure i.e. consumption and investment remained as key growth catalysts.

Given the slower GDP print in the third quarter, we feel 2018 growth could fall to around the government’s 4.8% projection and our lower end of the range which is also 4.8%–5.0%. For 2019, we project growth to hover at 4.5%–4.8% supported by capital investment spending in services and manufacturing as well as private consumption.

On the monetary policy, we maintain our vote that the OPR will remain at 3.25% until 1H2019. Thereafter, the movement of the OPR will be more data dependent. There is some room for rates to go up by 25bps in 2H2019 should potential inflationary pressure kick in hard.

Our key challenges are still the vulnerability to external shocks, risk of potential downgrade due to a prolonged domestic fiscal deficit and the still-high domestic public debt. More so with the oil price weakening. Should oil price stay below US$60 per barrel, we expect the government to recalibrate Budget 2019.

• The economy slowed down to 4.4% y/y in 3Q2018 from 4.5% y/y in 2Q2018 versus our expectation of 4.8% y/y and consensus’ 4.6% y/y. The drag continued to come from commodity shocks i.e. from both mining and agriculture.

• The mining sector recorded a negative growth of 4.6% y/y in 3Q2018 from -2.2% y/y in 2Q2018 due to unplanned supply outages and pipeline repairs in East Malaysia facilities while the agriculture sector fell - 1.4% y/y from -2.5% y/y in 2Q2018 owing to adverse weather and production constraints.

• Meanwhile, services and manufacturing sectors continued to drive growth as they rose 7.2% y/y and 5.0% y/y in 3Q2018 compared to 6.5% y/y and 4.9% y/y in 2Q2018, respectively. The growth in the services sector was largely due to the benefit of the absence of the GST while the continuous demand in the E&E sector continued to support the manufacturing sector. Construction on the other hand, grew 4.6% y/y from 4.7% y/y in 2Q2018 supported by existing transportation, petrochemical and power plant projects.

• The private sector continued to perform firmly with private consumption accelerating by 9.0% y/y in 3Q2018 from 8.0% y/y in 2Q2018 due to the tax holiday period. Besides, positive growth was seen in private investment, expanding further by 6.9% y/y 3Q2018 from 6.1% y/y in 2Q2018 owing to capital investment in manufacturing and services sector.

• Public consumption grew by 5.2% y/y in 3Q2018 from 3.1% y/y in 2Q2018 due to higher spending on supplies and services but public investment contracted albeit at slower pace to -5.5% y/y compared to -9.8% y/y in 2Q2018 on the back of improvements in general government capital spending.

• We noticed further improvements in gross fixed capital formation (GFCF) as it rose at 3.2% y/y in 3Q2018 compared to 2.2% y/y in 2Q2018, underpinned by private sector spending i.e. machinery and equipment which recorded a growth of 5.9% y/y versus 3.6% y/y in 2Q2018. However, investment in structures slowed to 1.8% y/y from 2.1% y/y in 2Q2018 primarily due to continuous weak investments in residential property.

• Meanwhile, the current account as a percentage of GNI eased to 1.1% in 3Q2018 compared with 1.2% in 2Q2018 following a larger deficit in the primary income account of RM15bil compared with RM11.2bil in 2Q2018.

• Given the slower GDP print in the third quarter, we feel the 2018’s growth could fall around the government’s 4.8% projection and our lower end of the range which is also 4.8%–5.0%.

• For 2019, we project growth to hover at 4.5%-4.8%, lower than the official’s projection at 4.9%. We expect growth will be supported by private consumption on the back of healthy labour market, stable inflation, conducive financing, higher minimum wages.

• Private investment i.e. services and manufacturing will continue to play a key role. Focus on private investment i.e. capital spending on services sector will be on moving up the value chain & forge strong linkages with other sectors; AI, big data analytics, fintech, R&D as well as commercialization & innovation.

• In the case of private investment in the capital spending for manufacturing, the focus will be on technology -intensive areas to help improve productivity, digital technologies & Industrial Revolution (IR) – the Internet of Things (IOT); software; advanced electronics; smart machinery; automation & robotics.

• On the monetary policy, we maintain our vote that the OPR will remain at 3.25% until 1H2019. Thereafter the movement of the OPR will be more data dependent. There is some room for rates to go up by 25bps in 2H2019 should potential inflationary pressure kick in hard.

• Our key challenges are still the vulnerability to external shocks, risk of potential downgrade due to prolonged domestic fiscal deficit and the still-high domestic public debt. More so with the oil price weakening. Should oil price stay below US$60 per barrel, we expect the government to recalibrate Budget 2019.

Source: AmInvest Research - 19 Nov 2018