BNM projected 2020 GDP at -2.0 to +0.5% YoY (2019: +4.3% YoY) following weak global growth forecast, output loss from MCO and continued supply disruptions in the commodities sector. Inflation is anticipated to be subdued at -1.5 to +0.5% YoY (2019: +0.7% YoY) on account of lower global oil and commodity price expectations. Maintain 2020 GDP forecast at -2.0% and expectations for MPC to reduce OPR by another 50bps to 2.00% as soon as 5th May MPC meeting.

DATA HIGHLIGHTS

BNM’s projection of 2020 GDP is at -2.0 to +0.5% YoY, lower than MOF’s latest projection of +3.2 to +4.2% YoY (announced on 27 Feb 2020). While BNM did not provide their point estimate, based on the GDP table, we estimate it at -1.2% YoY. On growth trajectory, BNM expects GDP to contract very sharply in 1H20 with the assumption that Covid-2019 infection will peak in Apr. In 2H20, BNM expects a gradual recovery, aided by economic stimulus package (+2.8ppt), infrastructure projects (+1.0 ppt), recovery in commodity sectors and OPR cuts.

On the demand side, BNM expects private consumption to grow by +4.2% YoY (2019: +7.6% YoY), weighed by weak labour market conditions, mobility restrictions and subdued sentiments in the first half of the year. BNM expects unemployment rate to rise to 4.0% (current: 3.2%), higher than GFC peak of 3.7%. Weak business sentiment and demand are expected to weigh on private investment, which is projected to decline by -9.7% YoY (2019: +1.5% YoY). On the external front, exports are anticipated to drop by -13.6% YoY (2019: -1.1% YoY) reflecting weaker global demand conditions while imports are also expected to deteriorate by -11.9% YoY (2019: -2.3% YoY), reflecting weaker global and domestic demand. On the supply side, BNM expects service growth to slow drastically (+2.3% YoY; 2019: +6.1% YoY) due to the suspension of non-essential service operations. This will be especially acute for the tourism-related sectors (hotels, retail trade, food and beverage and transport services). Manufacturing production will also be negatively influenced due to disruption in the global supply chain (-8.6% YoY; 2019: +3.8% YoY). BNM forecasts agriculture and mining production to also be affected by sector specific supply issues.

Despite subdued external demand and lower commodity prices, BNM expects current account to remain in surplus position at +1.0 to +2.0% of GDP (2019: 3.3% of GDP), due to contraction in gross imports as well.

BNM expects inflation to average -1.5 to +0.5% YoY (2019: +0.7% YoY), reflecting lower global oil prices (USD25-35/pb; 2019: USD64/pb) and weak demand. Nevertheless, core inflation is anticipated to remain positive (+0.8% to +1.3% YoY).

BNM notes that the economic impact of this outbreak remains uncertain at this juncture and is highly contingent on severity and duration of the outbreak and the corresponding measures undertaken to contain this global health crisis.

HLIB’s VIEW

The absence of a point estimate provided by BNM reflects the uncertainty brought about by Covid-19. Our 2020 GDP projection of -2.0% YoY sits at the lowest end of BNM’s GDP forecast range (-2.0% to +0.5% YoY). On monetary policy, BNM also said future policy considerations will continue to be guided by the balance of risks surrounding the outlook for domestic growth and inflation, which are continuously evolving. In addition, BNM noted that the output gap is projected to turn negative in 2020. Hence, we maintain our expectation that MPC will reduce the OPR by 50bps as soon as 5th May 2020 MPC meeting.

Source: Hong Leong Investment Bank Research - 6 Apr 2020