The 3.6% real GDP growth in 4Q2019 is the lowest since 3Q2009 and below both our and market expectations. The drag came from agriculture, mining and net exports with slower manufacturing. It was services and private consumption that supported growth. Hence, the full-year GDP turned out to be 4.3%, lower than our base-case projection of 4.5% but slightly higher than our downside projection of 4%.

Despite a slower 4Q2019 real GDP, importantly, the nominal GDP rose faster by 4.4% y/y from 3.9% y/y in 3Q2019. This brings the full-year nominal GDP growth to 4.4%. With a healthy nominal GDP, it would help ease downgrading risk by foreign rating agencies as it will ease some pressure on the targets set for fiscal deficit/GDP, public debt/GDP and help contain upwards pressure on household debt/GDP.

Looking at 2020, the downside on growth is high partly due to the coronavirus outbreak. Although the impact is more likely to be felt in the near term, the downside will depend on first, the potential fiscal stimulus measures to help contain the adverse impact from the outbreak, and second, the monetary policy. Thus, the economy is more likely to hover around 4% in 2020, which is our base case with the downside around 3% should adverse external shocks become more significant.

• 4Q2019 real GDP slowed down to 3.6% y/y — the slowest since 3Q2009’s of -1.1% (3Q2019: 4.4% y/y). The economy grew well below market expectation of 4.1% and our base case of 4.0%. This brings the full-year growth to 4.3% which is at the lower end of BNM’s target of 4.3%–4.8% and below our base-case projection of 4.5% while our downside growth is 4.0%.

• The drag came from agriculture which shrank by 5.7% y/y in 4Q2019 from 3.7% y/y in 3Q2019 and also mining which declined by 2.5% y/y in 4Q2019 versus -4.3% y/y in 3Q2019. A fall in palm oil output by -16.9% y/y from 8.6% y/y was a result of severe dry weather condition while a temporary supply disruption following an LNG facility closure affected mining output.

• At the same time, manufacturing output moderated to 3.0% y/y from 3.6% y/y in 3Q2019 following lower E&E production and a spill-over effect from disruption in the commodities sector.

• Meanwhile, the services sector continued to perform well. It grew by 6.1% y/y from 5.9% y/y in 3Q2019 supported by firm consumer-related spending. It benefitted activities in the areas like wholesale and retails, transport, storage and information communication, business services, government services and others.

• Besides, construction rebounded by 1.0% y/y from -1.5% y/y in 3Q2019. This sector has been in the negative growth trajectory for one quarter. The turnaround came from the residential sub-sector.

• On the demand side, private sector activities remained the growth anchor. In particular, private consumption spending climbed 8.1% y/y from 7.0% y/y in 3Q2019 supported by positive income and employment. Besides, private investment jumped by 4.2% y/y in 4Q2019 from 0.3% y/y in 3Q2019 as a result of higher capital expenditure from transport and construction-related activities.

• The public sector remained in the negative growth trajectory for four quarters. In 4Q2019, it shrank by 0.5%y/y from -0.9%y/y from 3Q2019. Public spending rose by 1.3% y/y from 1.0% y/y in 3Q2019 due to higher emoluments while public sector outlays fell by 7.7% y/y in 4Q2019 from 14.1% y/y in 3Q2019.

• The drag on the economy was also due to poor net exports. It dropped by 9.8% y/y from 15.9% y/y in 3Q2019. Poor net exports performance was due to a faster decline in exports relative to imports which is not surprising due to trade tension and global semiconductor down cycle.

• 4Q2019 current account surplus narrowed to RM7.6bil or 2.0% of GNI from RM11.5bil in 3Q2019 or 3.2% of GNI due to larger deficits in services (-RM4.0bil from –RM1.6bil) and income (-RM21.2bil from -RM17.7bil) which offset the higher goods surplus. Nevertheless, for the full year, the current account/GNI came in at 3.3% from 2.1% in 2018.

• While the real GDP slowed down in 4Q2019, the nominal GDP grew faster by 4.4% y/y from 3.9% y/y in 3Q2019 Hence, the full-year nominal growth came in at 4.4% versus 5.5% in 2018.

• The strong nominal GDP should help ease undue pressure on the fiscal deficit/GDP target for 2019 at 3.2% and public debt/GDP target at 52%. Furthermore, it should also help contain any upwards pressure on household debt/GDP which sits at 82%. On that note, it can be seen positive that the economy is more likely to maintain its “stable” rating outlook by the foreign rating agencies.

• Looking at 2020, the downside on growth remains high as a result of the coronavirus outbreak. The impact is more likely to be felt in the short term, and likely to last until 2Q2020 or may even spill into 3Q2020.

• The downside on the growth will depend on the potential fiscal stimulus measures to be rolled out to contain the adverse impact from coronavirus. Also it will depend on the monetary policy. Thus, we foresee the economy is more likely to hover around 4% in 2020, which is our base case with the downside around 3% should adverse external shocks become more significant.

Source: AmInvest Research - 13 Feb 2020