Real GDP moderated to +4.5% YoY (4Q18: +4.7% YoY), slightly above our estimate of +4.4% YoY and consensus estimate of +4.3% YoY. The moderation in growth was due to decline in mining sector and moderation across other services sectors which offset the recovery in agriculture sector. On the demand side, growth was supported by higher public consumption. Despite the better than expected growth, we lower our GDP forecast for 2019 to +4.5% YoY (previous: +4.6% YoY) following greater uncertainty on the exte rnal front and weak financial market sentiment which may lead to weaker growth in 2Q19.

DATA HIGHLIGHTS

Real GDP moderated to +4.5% YoY (4Q18: +4.7% YoY), slightly above our revised estimate of +4.4% YoY and consensus estimate of +4.3% YoY.

On the expenditure front, growth moderated mainly due to moderation in domestic demand (+4.4% YoY; 4Q18: +5.7% YoY) amid slightly lower net exports contribution (+0.9 ppt; 4Q18: +1.0 ppt) and continued destocking activity (-0.5 ppt; 4Q18: -1.5 ppt).

I. Net exports moderated in 1Q19, contributing +0.9 ppt to GDP (4Q18: +1.0 ppt). Despite the fall in exports (-0.7% YoY; 4Q18: +8.1% YoY) following weaker E&E export performance, imports declined by larger pace of -2.5% YoY (4Q18: +5.7% YoY), reflecting weak private investment activity.

II. Private investment decelerated to +0.4% YoY (4Q18: +5.8% YoY) amid contractions in structure (-1.3% YoY; 4Q18: +1.3% YoY) and machinery and equipment investment (-7.4% YoY; 4Q18: -1.3% YoY). This is consistent with weak business sentiment environment (RAM Business Confidence Index: 2Q19: 53.5; 1Q19: 55.1);

III. Public investment contracted at a faster pace of -13.2% YoY (4Q18: -5.9% YoY) following the end of major projects such as RAPID. Over the longer term, the reinstatement of ECRL and Bandar Malaysia projects is anticipated to support a modest recovery in public investment;

IV. Public consumption rose +6.3% YoY (4Q18: +4.0% YoY), supported by higher spending on supplies and services;

V. Private consumption moderated to +7.6% YoY (4Q18: +8.4% YoY) as consumer spending normalised following the reintroduction of SST2.0. Nevertheless, marginal propensity to consume remained strong and increased slightly during the quarter (0.96; 4Q18: 0.95). Private consumption continued to be supported by wage growth in manufacturing (+7.0% YoY; 4Q18: +9.8% YoY) and services sector (+5.4% YoY; 4Q18: +4.6% YoY).

On the sectoral front, the moderate expansion in GDP was due to a decline in mining sector and moderation across manufacturing, construction and services sectors which offset the rebound in the agriculture sector.

VI. Agriculture sector recorded a strong rebound of +5.6% YoY (4Q18: -0.1% YoY) after three consecutive quarters of negative growth. The recovery was attributed to strong oil palm sub-sector recovery (+9.8% YoY; 4Q18: -2.7% YoY) following higher yields and better harvesting conditions as well as strong recovery in rubber sub-sector (+12.0% YoY; 4Q18: -17.6% YoY);

VII. The mining sector contracted by -2.1% YoY (4Q18: -0.7% YoY) following weak crude oil (-4.4% YoY; 4Q18: -2.9% YoY) and natural gas production (- 0.5% YoY; 4Q18: +0.7% YoY). Crude oil production may have been affected by the storm in Terengganu while natural gas production was thought to be impacted by the fire in Bintulu LNG plant. Going forward, natural gas production is anticipated to improve as production at the Kebabangan gas field in Sabah is expected to return to full capacity in 2H 2019 pending the completion of pipeline repairs;

VIII. The manufacturing sector moderated to +4.2% YoY (4Q18: +4.7% YoY). Slower growth in motor vehicles (+6.5% YoY; 4Q18: +8.5% YoY), refined petroleum products (+2.9% YoY ; 4Q18: +4.0% YoY) and electronic components & boards, communication equipment and consumer electronics (+4.5% YoY; 4Q18: +7.6% YoY) offset the rise in chemical products (+2.1% YoY; 4Q18: +1.9% YoY);

IX. The construction sector decelerated to +0.3% YoY (4Q18: +2.6% YoY) amid moderation in civil engineering projects (+7.1% YoY; 4Q18: +11.0% YoY), specialized construction activities (+2.9% YoY; 4Q18: +6.4% YoY) and weaker residential (-7.2% YoY; 4Q18: -9.2% YoY) and non-residential sub sectors (-4.0% YoY; 4Q18: +2.8% YoY);

X. The moderation in services sector (+6.4% YoY; 4Q18: +6.9% YoY) stemmed from slower growth across wholesale trade (+5.1% YoY; 4Q18: +6.9% YoY), retail trade (+9.5% YoY; 4Q18: +12.0% YoY), information and communication services (+7.2% YoY; 4Q18: +8.0% YoY) and government services (+4.3% YoY; 4Q18: +4.8% YoY).

Current account (CA) surplus widened to RM16.4bn; 4.7% of GNI (4Q18: RM10.8bn; 3.0% of GNI) due to higher goods account surplus (+RM33.8bn; 4Q18: +RM32.7bn). Meanwhile, services income deficit narrowed to -RM1.8bn (4Q18: -RM3.8bn). Primary income deficit was smaller at -RM10.1bn (4Q18: -RM12.9bn) while secondary income deficit was larger (-RM5.5bn; 4Q18: -RM5.2bn).

HLIB’S VIEW

Despite 1Q19 GDP growth being better than consensus forecast, BNM was surprised by the extent of weakness in investment and construction activity. They shared that despite the high capacity utilization, companies are reluctant to invest further due to global uncertainty. In construction sector, BNM opined that the overhang in property sector and domestic policy uncertainty may have led to temporary delay in some key projects (e.g. Pan Borneo Highway).

While they remain cautious on the growth outlook, Bank Negara shared that GDP forecast remains at 4.3-4.8% YoY, with expectation for 2H 2019 to improve following greater policy clarity from government, resumption of some key government projects, realisation of investment approvals in 2H 2019 and improvement in the supply sectors as LNG production normalises further. The existing 25% tariff on goods from US and China has already been imputed into their baseline forecast.

Despite 1Q19 GDP recording better-than-expected figures, we are downgrading our GDP forecast to +4.5% YoY (previous: +4.6% YoY) following the re-escalation of tarde war between US and China. In addition, since the start of 2Q 2019, economic data points to a worsening outlook. Leading indicators such as PMI manufacturing continue to trend downwards with output, new orders and employment increasing at marginal levels. This suggests that global manufacturing sector remain weak at the start of second quarter.

In conjunction with the 1Q 2019 GDP press release, BNM also took the opportunity to announce several financial market initiatives to enhance market liquidity. Measures can be found in this link. BNM shared that this is part of an on-going initiative to liberalise and deepen on-shore financial markets by expanding the participation pool, simplifying documentation process and lengthening trading hours for ringgit liquidity. While this is a step in the right direction to improve on-shore liquidity, it still remains to be seen if this is sufficient to avert an exclusion from WGBI in September 2019. Nevertheless, BNM said they will continue to engage with investors, index providers as part of their effort to further enhance the financial market. 

Source: Hong Leong Investment Bank Research - 17 May 2019