Real GDP slowed to +3.6% YoY in 4Q19 (3Q19: +4.4% YoY), below our forecast of +3.8% YoY and the consensus estimate of +4.1% YoY. The slower growth stemmed from decline in mining, agriculture and moderation in manufacturing sector which offset the uptick in construction and services sectors. On the demand front, growth moderated on account of continued decline in public investment and deterioration in net exports. In 2019, real GDP moderated to +4.3% YoY, below our forecast of +4.5% YoY (2018: +4.7% YoY). Following the lower-than-expected growth momentum in 4Q19 GDP and new headw inds arising from Covid-2019, we downgrade our 2020 GDP forecast to 4.1% YoY (initial: 4.4% YoY) and now expect a 25bps rate cut in 1H2020.

DATA HIGHLIGHTS

In 4Q19, real GDP rose at a slower pace of +3.6% YoY (3Q19: +4.4% YoY), below our forecast of +3.8% YoY and the consensus estimate of +4.1% YoY. For the full year 2019, real GDP moderated to +4.3% YoY, below our forecast of +4.5% YoY (2018: +4.7% YoY).

On the expenditure front, growth slowed due to negative contribution from net exports (-0.7 ppt; 3Q19: +1.0 ppt) and destocking activity (-0.2 ppt; 3Q19: +0.02 ppt) as well as decline in gross fixed capital formation (-0.7% YoY; 3Q19: -3.7% YoY), albeit at a softer pace:

I. Net exports fell in 4Q19, contributing to the decline in GDP (-0.7 ppt; 3Q19: +1.0 ppt). Exports contracted at a larger pace (-3.1% YoY; 3Q19: -1.4% YoY) while imports continued to weaken (-2.3% YoY; 3Q19: -3.3% YoY). Exports were dragged by weaker commodity-related exports, while imports fell due to continued decline in capital imports;

II. Private consumption growth picked up (+8.1% YoY; 3Q19: +7.0% YoY) amid a rise in marginal propensity to consume (1.26; 3Q19: 0.94). Growth was driven by positive wage growth in manufacturing (+3.3% YoY; 3Q19: +3.2% YoY) and services sector (+4.2% YoY; 3Q19: +4.1% YoY). This was also consistent with better performance in consumption imports (+0.04% YoY; 3Q19: -0.9% YoY) during the quarter. Higher spending was seen in transport, restaurant, hotel and recreational services;

III. Gross fixed capital formation declined at a slower pace as the contraction in public investment offset the acceleration in private investment (+4.2% YoY; 3Q19: +0.3% YoY). By asset class, structure investment marginally rebounded (+0.1% YoY; 3Q19: -2.4% YoY) while machinery & equipment investment declined at a slower rate (-2.6% YoY; 3Q19: -7.4% YoY);

IV. Public investment posted a slower decline of -7.7% YoY (3Q19: -14.1% YoY) due to smaller contraction in capital spending by public corporations;

V. Public consumption increased by +1.3% YoY (3Q19: +1.0% YoY) following higher growth in emoluments.

On the sectoral front, the moderation in GDP growth was due to larger disruptions in commodity sectors (-0.7 ppt; 3Q19: -0.01 ppt) amid moderation in manufacturing sector. Import duties also declined (-3.3% YoY; 3Q19: +34.7% YoY). This offset growth improvements in construction and services sectors:

VI. The agriculture sector contracted by -5.7% YoY (3Q19: +3.7% YoY), largely due to the drop in palm production (-16.9% YoY; 3Q19: +8.4% YoY). The low production season was exacerbated by dry weather conditions and cutback in fertilizer use;

VII. Mining sector declined at a slower pace of -2.5% YoY (3Q19: -4.3% YoY) due to smaller decline in crude oil production (-6.2% YoY; 3Q19: -14.4% YoY) amid weaker natural gas production (-1.2% YoY; 3Q19: +3.7% YoY). BNM noted that the decline in both sub-sectors was due to temporary facility closure for maintenance work;

VIII. Growth in the manufacturing sector moderated to +3.0% YoY (3Q19: +3.6% YoY), dragged by lower growth in refined petroleum products (+2.4% YoY; 3Q19: +3.1% YoY), machinery & equipment (+4.5% YoY; 3Q19: +5.5% YoY), computers & peripheral equipment (-6.0% YoY; 3Q19: +11.8% YoY) and motor vehicles & transport equipment (+4.0% YoY; 3Q19: +6.9% YoY);

IX. The construction sector rebounded by +1.0% YoY (3Q19: -1.5% YoY) on the back of recovery in residential buildings (+3.0% YoY; 3Q19: -3.2% YoY) and acceleration in civil engineering (+6.8% YoY; 3Q19: +4.7% YoY);

X. The services sector edged higher (+6.1% YoY; 3Q19: +5.9% YoY), driven by consumer-related services including food & beverage (+10.7% YoY; 3Q19: +10.2% YoY), accommodation (+6.9% YoY; 3Q19: +6.5% YoY) and motor vehicles (+4.2% YoY; 3Q19: +2.4% YoY). Growth was also supported by information & communication (+6.7% YoY; 3Q19: +6.0% YoY) and finance services (+5.9% YoY; 3Q19: +4.4% YoY).

Current account (CA) surplus narrowed to RM7.6bn; 2.0% of GNI (3Q19: RM11.5bn; 3.1% of GNI) due to wider deficit in primary (-RM15.7bn; 3Q19: -RM12.2bn) and services account (-RM4.0bn; 3Q19: -RM1.6bn) amid sustained deficit in secondary income account (-RM-5.5bn; 3Q19: -RM5.5bn) which offset the slightly higher surplus in goods account (+RM32.8bn; 3Q19: +RM30.8bn). In 2019, the current account stood at RM49.7bn (3.3% of GDP; 2018: RM30.6bn; 2.1% of GDP), below our forecast of RM55.0bn. Consequently, we reduce our current account balance to RM50bn (3.5% of GDP).

HLIB’S VIEW

Following the lower-than-expected growth momentum in 4Q19 GDP and new headwinds arising from Covid-2019, we lower our 2020 GDP forecast to 4.1% YoY from our initial estimate of 4.4% YoY (2019: 4.3% YoY). This forecast takes into account the prolonged weakness arising from agriculture and mining sectors in addition to the negative impact of Covid-2019 that is expected to affect manufacturing and services sectors, especially in the 1Q20. On the demand side, despite the strong jump in private consumption in 4Q19, we do not anticipate the momentum to be sustained in 1Q20 given the cautious behaviour among consumers which may affect discretionary spending. Meanwhile, investment and trade activity are forecasted to remain weak due to uncertainty in the global economic environment and policy direction.

On fiscal space, finance minister Lim Guan Eng said a proposed stimulus package to boost the economy will be announced at end-February or early March. The fiscal package is expected to be targeted mainly at aviation, retail and tourism sectors. During the SARS outbreak, Malaysia introduced a fiscal package amounting to RM7.3bn (1.9% of GDP) with federal government contributing RM1.7bn. We think government could potentially introduce a fiscal package in the region of RM10bn (0.6% of GDP), with initiatives to encourage domestic spending and assist in tackling businesses’ cash flow issues.

On OPR, BNM said that while it is too early to ascertain the magnitude and duration of the outbreak, preliminary assessment shows that the impact to economy falls within market consensus of -0.2ppt to -1.3ppt with the maximum impact to be felt in 1Q20. While we acknowledge there are similarities to the SARS episode, the unknown impact of trading activity due to supply disruption could pose further downside risks. Hence, in an effort to strengthen policy support to the economy, we opine MPC will cut the interest rate by another 25bps in 1H2020.

Source: Hong Leong Investment Bank Research - 13 Feb 2020