Malaysia’s 1Q18 GDP moderates to 5.4%

• Economy moderated to 5.4% in 1Q18

• Private consumption remains as the main catalyst

• Public consumption decelerated to 0.4%; the slowest growth since 1Q13

• Deceleration in investment and public consumption prompted weaker domestic demand

• Current account surplus widened to RM15.0bn in 1Q18

• Higher net inflow for FDI

• A slower but steady start for 2018

Malaysia’s GDP growth in 1Q18 grew at a slower pace of 5.4% yoy as compared to 5.9% recorded in the previous quarter. Despite the slowdown, the GDP growth was still healthy as it was led by a robust private consumption expenditure from the demand side. Nevertheless, the public consumption decelerated to 0.4% yoy after rising significantly at 6.8% in the last quarter. It was the slowest growth since 1Q13 (0.2%). On the production side, services and manufacturing sector remains as the key driver of the growth. Furthermore, the moderating growth was also reflected from the slower exports of goods and services in 1Q18 which eased to 3.7% yoy from 7.1% posted in the preceding month.

On a qoq seasonally adjusted basis, the economy increased 1.4% (4Q17: 0.9%).

Deceleration in investment and public consumption prompted weaker domestic demand

Domestic demand recorded a moderate growth of 4.1% (4Q17: 6.2%), due to lower growth of private sector expenditure (1Q18: 5.2%; 4Q17: 7.4%) and a marginal decline in public sector spending (1Q18: -0.1%; 4Q17: +3.4%). Economic growth for 1Q18 was mainly contributed by private consumption which grew solidly by 6.9% yoy (4Q17: 7.0%), supported by continued strength in wage and employment growth. On the flip side, public consumption growth was lower at 0.4% (4Q17: 6.8%), its slowest growth in 5 years (1Q13: 0.2%) as a result of lower expenditure on supplies and services by the Federal Government. Apart from that, the slower domestic demand was also pressured by weaker investment in both public and private sector. Public investment declined 1.0% yoy in 1Q18 following a 1.4% drop in the quarter before. The decrease was mainly due to the contraction in fixed assets spending by public corporation as the near completion of a few large-scale projects. Growth of private investment moderated to 0.5% (4Q17: 9.2%), weighed down by lesser capital spending in structures, specifically in residential and commercial properties, as well as machinery and equipment during the quarter. As a result of the weaker investment in both sector, gross fixed capital formation (GFCF) eased to 0.1% yoy (4Q17: 4.3%). On the external factor, export posted a modest growth at 3.7% yoy in 1Q18 from 7.1% in the preceding quarter while import plunged 2.0% yoy (4Q17: 7.4%).

Services and manufacturing sector remain as the main catalyst of the production side growth

Services and manufacturing sector remain as the major catalysts on the production side. Services sector picked up to 6.5% yoy in 1Q18 from 6.2% in the prior quarter while manufacturing sector grew marginally lower at 5.3% yoy (4Q17: 5.4%). The improvement in the services sector was supported by the higher growth in finance & insurance, information & communication, and wholesale & retail trade sub-sector. For manufacturing sector, the growth was buttressed by a better export-oriented industries and construction related cluster. These offset the sharp moderation in the consumer-related clusters, which was mainly due to slower production of food-related items and transport equipment. Besides these two main sectors, the growth was also contributed by other sector which also registered a positive growth in 1Q18. For instance, mining sector rebounded to 0.1% yoy after fell by 0.3% in 4Q17; supported mainly by higher oil production. Even though agriculture and construction sector posted a positive growth in 1Q18, growth in these sectors moderated to 2.8% yoy (4Q17: 10.7%) and 4.9% yoy (4Q17: 5.9%) respectively.

Lower inflation in 1Q18

Inflation declined to 1.8% in 1Q18 (4Q17: 3.5%). The low inflation outcome reflected the smaller contribution of domestic fuel prices to headline inflation. Despite higher global oil prices during the quarter, the magnitude of increase was smaller than the previous quarter. The impact of higher global oil prices was also offset by the stronger ringgit exchange rate. Core inflation also moderated during the quarter to 1.9% (4Q17: 2.3%). Moving forward, we foresee the slowdown in inflationary pressure will persist throughout the year. We maintain our full-year inflation forecast of 2.5%-3.0% in 2018.

Current account surplus widened to RM15.0bn in 1Q18

The current account surplus widened to RM15.0bn in 1Q18 (4Q17: RM13.9bn), or 4.5% of GNI (4Q17: 4.0% of GNI), due mainly to a higher goods surplus and lower services deficit. This was the highest quarterly current account surplus since 2Q14 when it reached RM15.3bn.

The higher surplus of RM15.0bn in the current account balance for 1Q18 was largely driven by a further expansion in goods account. Continued strength in exports and more moderate imports during the quarter saw the goods surplus rose to RM35.7bn (4Q17: RM34.1bn). Total trade for 1Q18 amounted to RM441.9bn, grew by 2.6% yoy. Gross exports increased by 5.8% (4Q17: 12.4%) to RM237.6bn, supported mainly by manufactured exports, while imports fell by -0.8% (4Q17: 14.4%) to RM204.3bn. As a result trade surplus surged by 76.8% to RM33.4bn (4Q17: RM27.7bn).

Higher net inflow for FDI

Foreign Direct Investment (FDI) in Malaysia registered a large net inflow of RM12.0bn (4Q17: net inflow of RM3.4bn), due mainly to the successful formation of two joint ventures for the Refinery and Petrochemical Integrated Development (RAPID) project and continued investments by MNCs in the E&E sector.

A slower but steady start for 2018

The economy has grown by 5.4% yoy in 1Q18 GDP, a modest slowdown from 5.9% in the previous quarter, underpinned by continued expansion in private sector activity and strong support from net exports. The Malaysian economy has been doing well and local financial markets have been outperforming their emerging market counterparts since last year, for which we credit of the recovery from the trade shock partly from rising global commodity prices, particularly crude oil. The sustainability of these trends hinges on the continuity of current economic policies under the new administration. Bank Negara kept its policy rate unchanged in their recent policy review amid a wellbalanced risk between growth and inflation. Inflationary pressures have remained muted. Inflation declined to 1.8% in 1Q18 (4Q17: 3.5%, 2017: 3.8%). Indeed, the high base last year has been one of the key reasons behind the benign inflation thus far. Besides, a stronger ringgit in the first three months has kept imported inflation at bay. We reckon that while inflation has bottomed, the upward shift is expected to be gradual. However, we are maintaining our full-year inflation forecast of 2.5%-3.0% in 2018. While BNM left interest rates unchanged, the outlook for monetary policy has been thrown into considerable uncertainty following the change in government. For now, we are maintaining our view that the OPR will remain on hold until the end of the year.

Meanwhile, a surprise general election outcome, potential downside on the fiscal position and more hawkish monetary policy action from the US Fed may weigh on the ringgit. However, we do not expect the ringgit peg to be re-visited. Unlike the Asian Financial crisis in 1997, currently the FX reserves have gradually climbed to USD109.5bn as of end-Apr 2018, its highest level since Mar 2015. This week the USDMYR inched higher and was last traded at 3.9680 levels. The USD strengthened further against most of the major currencies as UST yields continued to climb. Still, we expect ringgit strength to accelerate in the medium term. Ringgit fundamentals remain well anchored by sustained current account surplus, rising FX reserves to retained imports ratio and short-term debt, sustained growth pick-up backed by consumption, investment and exports as well as higher oil prices. The change in government has so far given the impression that efforts will be taken to improve governance, accountability and transparency. In addition, the current level of ringgit remains fundamentally undervalued and we expect the ringgit to correct towards its fair value estimate in the longer term.

At this point it is too premature to revise full-year figures. We believe the 100-day promises made by Pakatan Harapan (PH) in its manifesto will be crucial for the market to check if PH and its team of Eminent Persons fulfil their objectives, in terms of execution and implementation. We will relook the numbers once we get greater clarity on fiscal policy and after more details are released. If the policies are executed well it will result in a stronger economy. Hence, we remain optimistic about the long-term outlook for the Malaysian economy under the new government that was formed following the GE14. Barring any unfriendly policy shifts, Malaysia’s sound economic fundamentals should sustain as the main positive for investors and markets. Malaysia’s growth prospects remain sanguine, but momentum will be slower compared to last year. With economic conditions normalising and inflationary pressure rising yet non-threatening, the central bank will most likely maintain a stable monetary policy. We reiterate our forecast of only a modest slowdown in Malaysia’s GDP growth this year to 5.3% from 5.9% in 2017.

Source: BIMB Securities Research - 18 May 2018