Real GDP moderated to +4.4% YoY in 3Q19 (2Q19: +4.9% YoY), in line with our forecast and consensus estimate. The moderation in growth was due to decline in mining and construction sector and broad based moderation in other sectors. On the demand front, growth moderated on account of steeper decline in investment and slower private consumption. We maintain our 2019 GDP forecast at 4.5% YoY (2018: 4.7% YoY).

DATA HIGHLIGHTS

Real GDP rose at a moderate pace of +4.4% YoY (2Q19: +4.9% YoY), matching our forecast and the consensus estimate.

On the expenditure front, growth slowed due to moderation in domestic demand (+3.5% YoY; 2Q19: +4.6% YoY) amid lower contribution from net exports (+1.0 ppt; 2Q19: +1.4 ppt) and restocking activity (+0.02 ppt; 2Q19: -0.7 ppt).

I. Private consumption slowed to +7.0% YoY (2Q19: +7.8% YoY) due to high base effect during the tax holiday period in 3Q18. Growth was supported by positive wage growth in manufacturing (+3.2% YoY; 2Q19: +3.9% YoY) and services sector (+5.2% YoY; 2Q19: +6.2% YoY), albeit at a slower pace;

II. Private investment decelerated to +0.3% YoY (2Q19: +1.8% YoY), weighed down by contraction in structure (-2.4% YoY; 2Q19: +1.2% YoY) and machinery and equipment investment (-7.4% YoY; 2Q19: -4.2% YoY) amid weak investor sentiment;

III. Public investment recorded a sharper drop of -14.1% YoY (2Q19: -9.0% YoY) due to completion of mega projects and on-going review of other projects that are yet to be implemented;

IV. Public consumption picked up (+1.0% YoY; 2Q19: +0.3% YoY) following higher spending in supplies and services;

V. Net exports was higher in 3Q19, but contributed less to GDP (+1.0 ppt; 2Q19: +1.4 ppt) due to deterioration in exports (-1.4% YoY; 2Q19: +0.1% YoY) and imports (-3.3% YoY; 2Q19: -2.1% YoY). The steeper drop in imports were mainly attributed to lower capital imports during the quarter.

On the sectoral front, the moderation in GDP growth was due to decline in mining and construction sector and broad-based moderation in agriculture, manufacturing and services sector, which offset the surge in import duties due to low base effect (+34.7% YoY; 2Q19: -4.3% YoY).

VI. The agriculture sector moderated to +3.7% YoY (2Q19: +4.2% YoY), due to softer oil palm production (+8.4% YoY; 2Q19: +9.5% YoY) and steeper decline in forestry and logging (-12.3% YoY; 2Q19: -5.7% YoY) which offset the surge in rubber production (+7.3% YoY; 2Q19: +2.1% YoY);

VII. Mining sector declined by -4.3% YoY (2Q19: +2.9% YoY) due to double-digit decline in crude oil production (-14.4% YoY; 2Q19: -4.2% YoY) amid deceleration in natural gas production (+3.7% YoY; 2Q19: +9.4% YoY). The weak crude oil production followed the temporary closure of Gumusut-Kakap oilfield for maintenance works in early 3Q19;

VIII. In the manufacturing sector, growth moderated to +3.6% YoY (2Q19: +4.3% YoY). Weaker growth in E&E products such as electrical equipment (-0.1% YoY; 2Q19: +2.5% YoY) and electronic components & boards, communication equipment and consumer electronics (+2.3% YoY; 2Q19: +4.1% YoY), motor vehicles (+6.9% YoY; 2Q19: +7.3% YoY) as well as furniture (+7.1% YoY; 2Q19: +8.3% YoY) offset stronger growth in machinery and equipment (+5.5% YoY; 2Q19: +3.0% YoY) and wood products (+5.9% YoY; 2Q19: +4.6% YoY);

IX. The construction sector contracted by -1.5% YoY (2Q19: +0.5% YoY) for the first time since 2011 owing to steeper decline in residential (-3.2% YoY; 2Q19: -1.1% YoY) and non-residential buildings (-12.0% YoY; 2Q19: -9.1% YoY) amid moderation in civil engineering activity (+4.7% YoY; 2Q19: +5.4% YoY);

X. The softer growth in services sector (+5.9% YoY; 2Q19: +6.1% YoY) stemmed from moderation in retail trade (+8.0% YoY; 2Q19: +9.2% YoY), information and communication (+6.0% YoY; 2Q19: +6.3% YoY), finance (+4.4% YoY; 2Q19: +5.7% YoY) and government services (+3.1% YoY; 2Q19: +3.7% YoY). This offset gains in wholesale trade (+6.2% YoY; 2Q19: +4.8% YoY).

Current account (CA) surplus narrowed to RM11.5bn; 3.1% of GNI (2Q19: RM14.3bn; 3.9% of GNI) due to larger deficit in primary account (-RM12.2bn; 2Q19: -RM5.5bn) following higher profits earned by foreign companies and lower income earned by Malaysian firms abroad. Deficit in the secondary income account widened slightly (- RM-5.5bn; 2Q19: -RM4.9bn). Meanwhile, goods account surplus expanded (+RM30.8bn; 2Q19: +RM28.1bn) while the services account deficit narrowed to – RM1.6bn (2Q19: -RM3.4bn).

HLIB’S VIEW

3Q19 GDP growth moderated, as expected. BNM shared that despite the fall in commodity sector following maintenance in crude oil fields, they expect a recovery in the subsequent quarters. On the demand side, most indicators performed within expectations. Going forward, BNM shared they expect growth to remain sustained, supported by private sector spending, recovery in commodity production and resumption of large transportation projects. While BNM sees the current monetary policy stance as being consistent with the growth outlook, it also acknowledges that downside risks remain considerable, emanating from global growth front. Further escalation in trade disputes, heightened geopolitical tensions, tech cycle, and volatility in commodity prices and production could weigh on growth prospects. On the Statutory Reserve Requirement Ratio (SRR), BNM shared that the decision to reduce SRR was aimed at managing liquidity on a structural basis. We saw that the excess liquidity placed with BNM diminished over time to RM171.2bn from RM300bn RM400bn experienced during the large capital inflow period (2011-2013). The end of advanced economies’ quantitative easing plans had led to withdrawal of capital from Malaysia, consequently lowering the excess liquidity placed with BNM over time. Hence, BNM felt it was appropriate to release permanent liquidity into the banking system amounting to RM7.4bn. They also shared that this tool is used alongside other shorter-term liquidity tools such as swaps and repo instruments.

While we agree that mining sector is anticipated to see a recovery as supply concerns ease, we expect agriculture to moderate as palm oil is anticipated to enter into low production season in the near-term. We also opine that manufacturing and services sector remain susceptible to adverse impacts of unresolved trade tensions which would lead to further pullback in investment and trade activities. Against this environment, we anticipate growth to remain modest. This is also corroborated with the slower momentum seen in Malaysia’s quarter-on-quarter growth (+0.9%; 2Q19: 1.0%; 1Q19: 1.5%) and moderation in wage growth in both manufacturing (3.2% YoY; 2Q19: 3.9% YoY) and services sectors (4.1% YoY; 2Q19: 4,4% YoY). We maintain our 2019 GDP forecast at 4.5% YoY (2018: 4.7% YoY). We also retain our expectation that BNM will reduce the OPR by 25bps by end-1Q 2020 as global economy continues to exhibit signs of vulnerability while volatility in financial market may affect investment prospects.

Source: Hong Leong Investment Bank Research - 18 Nov 2019