Still Credible Global Growth Despite External Headwinds

Following the escalation of global trade tensions with rising threats of protectionist measures by President Trump, both the global business sentiment and consumer confidence indexes have started to trend lower in recent months, which will likely affect the growth momentum of the global economy going into 2H18. However, the International Monetary Fund (IMF) kept its forecast for global growth unchanged at 3.9% for both 2018 and 2019, World Bank (WB) remains optimistic on the global economic outlook.

Malaysian Economic Growth Maintained at 5.3% for 2018

We are currently maintaining Malaysia’s real GDP growth at 5.3% in 2018 (5.9% in 2017), supported by domestic demand, especially from private consumption, but lower than BNM’s forecast of between 5.5-6.0%. We see Malaysia’s real GDP growth slowing to around 5% yoy for 2H18, from 5.5% estimated for 1H18, but there will be some downside risks. We believe economic uncertainty surrounding the global economy, following the global trade war tensions, may lead to some businesses cutting spending and delay their investments. This was also reflected in the MIER’s Business Confidence Index (BCI), which dropped by 2.9 points to 98.6 in 1Q18, from 101.5 in 4Q17.

Domestic Demand Holds the Key to Sustain Growth

However, the country’s domestic demand is expected to gain some momentum from higher private consumption as households increase their purchases, following the reduction of the Goods and Services Tax (GST) to 0% effective 1 June 2018. The three-month ‘tax holiday’ from the announcement of GST zero-rating in June to the reinstatement of SST in September will somewhat boost consumer spending in 2Q18 and 3Q18 as consumers are likely to front-load consumption before SST.

Private Investment Remains a Drag to GDP Growth

The Malaysian Government has indicated that it plans to review public-sector projects and cancellations of various mega projects under planning, ranging from the multi-billion Kuala Lumpur-Singapore high-speed rail (HSR) and Klang Valley Mass Rapid Transit Circle Line (MRT 3), East Coast Rail Link (ECRL) and the Gemas-JB double-tracking rail project, which will impact private investments.

Fiscal Deficit of 2.8% of GDP for 2018 Can be Achieved

The fiscal deficit target of 2.8% of GDP can be achieved for 2018, as the Government is currently expecting higher revenue, amongst others, the RM5.4bn from higher oil prices and another RM5bn from higher dividends by Government Linked Companies (GLCs) as well as expenditure rationalization exercise. We believe the 2019 Malaysian Budget, to be presented on 2 November 2018, will remain supportive of consumer spending, where the budget proposals will be generous and people-friendly, especially for the lower-income households.

Ringgit Is Likely to Strengthen Gradually Against US$ on Fundamentals

The Ringgit, which appreciated to the year high of RM3.82 against the US$ on 2 April 2018, has weakened since then by -4.0% to RM4.01/US$ recently, due to heightened uncertainties over the global trade war and international investors’ expectation of a sharper appreciation of the US dollar. However, with Malaysia’s healthy economic fundamentals, including ample current account surplus and foreign reserves, we see the Ringgit gaining strength and trade at RM3.80/US$ by end-2018, but the forecast is premised on the development in US monetary policy, such as the direction of the Fed Funds rate and reduction in the Fed’s balance sheet.

Source: Affin Hwang Research - 28 Jun 2018