Latest Indicators Point Towards Expansion in Private Sector Activity

Bank Negara Malaysia (BNM) decided to keep its Overnight Policy Rate (OPR) at 3.25% for the fifth consecutive MPC meetings since January 2018. Likewise, the statutory reserve requirement (SRR) remained unchanged at 3.5%, after a 50bps cut from 4% in January last year. The decision by BNM to hold rate at current level signals that the stance of monetary policy remains accommodative and supportive of Malaysia’s economy.

In the latest assessment of the global economic development, BNM noted that the global economy is showing signs of moderation, with risks tilted to the downside, as a result of the trade tensions between US and China. As highlighted in the latest Economic Report by MOF, based on the assumptions of current tariffs, it noted that the current trade dispute between US and China will likely lead to a small impact on economic growth by 0.02% from 2018-2020. However, if the trade dispute escalates further, which involves larger and higher tariffs on Chinese goods, this will likely lead to slower Malaysia’s economic growth by 0.7% for the same period. Apart from the risks from trade tension, BNM also cautioned that the continued volatility in the international financial markets and monetary policy normalisation in some advanced economies could lead to a further capital outflows and financial market adjustments in emerging economies.

On domestic economy, BNM highlighted that there are signs of expansionary momentum in private sector activity, where we believe this partly reflected that the view of private consumption benefiting from the GST abolishment (even with the reintroduction of SST), as the Government is foregoing close to RM21bn shortfall in revenue collection from indirect taxation. This will add to household disposable income, putting money into the pockets of Malaysian consumers, therefore supporting consumer spending. We believe the Government’s decision to repay the tax refunds amounting to RM37bn to the private sector in 2019 will benefit business and possibly lead to some investment and expansion activities by the private sector.

However, BNM noted that the public sector spending is likely to weigh on growth, as public investment activity is slowing due to continued reprioritisation of expenditure by the Government. BNM also noted that the country’s 2019 Budget announcement provided clarity on fiscal and economic development policies, referring to the revised higher fiscal deficit targets of 3.7% of GDP for this year and 3.4% of GDP for 2019. BNM cautioned that downside risks will be from the external front, as Malaysia remained vulnerable to an escalation in the trade tensions between US and China, while prolonged weaknesses in the mining and agricultural activity are likely to drag economic growth for this year.

On inflation front, BNM noted that the inflation will be low in 2018, while it is likely to be higher in 2019 due to the projected higher global oil prices and the floating of domestic fuel prices as Government will begin implementing targeted subsidy in April 2019. Additionally, the headline inflation will be pushed higher in JuneSeptember period next year, primarily due to the lower base effect from this year due to the change in the tax system. BNM noted that the domestic financial markets continue to experience non-resident portfolio outflows due to global developments. However, Malaysia’s underlying fundamental strength, steady economic growth, and an orderly financial markets remains intact.

Source: Affin Hwang Research - 9 Nov 2018