Higher Domestic Demand But Dragged by Negative Net Exports in 3Q18

Malaysia’s real GDP growth slowed from 4.5% yoy in 2Q18 to 4.4% in 3Q18, lower than market expectations of 4.6%, due mainly to the sharp decline in net real export of goods and services, which dragged GDP growth significantly by -0.6 percentage points (+1.5% percentage points in 2Q18). However, growth in domestic demand rose sharply from 5.6% yoy in 2Q18 to 6.9% in 3Q18, attributed to higher private consumption growth. This brought the average GDP growth to 4.8% yoy in the first three quarters of 2018 (compared with an average of 5.9% in the corresponding period of last year). When measured against the previous quarter, real GDP rose sharply by 3.8% qoq in 3Q18 (1.7% in 2Q18), the second consecutive positive quarter since 1Q18. Growth in domestic demand was supported mainly by a strong growth in private consumption, which rose sharply from 8% yoy in 2Q18 to 9% in 3Q18, the highest yoy growth in six years, as a result of the ‘tax holiday’ period from June to August 2018, following the zerorisation of the Goods and Services Tax (GST) rate, from 1 June 2018 to 31 August 2018. This was reflected in higher growth of durable goods such as motor vehicles and furnishings, as well as food and beverages. Growth in private investment increased further from 6.1% yoy in 2Q18 to 6.9% in 3Q18 (from a low of 0.5% in 1Q18), underpinned mainly by capital spending in the manufacturing and services sectors. Going forward, we believe firms will continue to expand on their capacity through increasing machinery and equipment spending in anticipation of healthy demand, as well as supported by positive sentiment towards receiving the tax refunds from Government under GST and income tax of RM37bn for companies and individuals from early 2019.

Growth in public investment declined by 5.5% yoy in 3Q18 (-9.8% in 2Q18), as capital spending by public corporations was lower as some projects were near completion. Overall, growth in gross fixed capital formation (GFCF) increased from 2.2% yoy in 2Q18 to 3.2% in 3Q18, supported mainly by continued private sector capital spending. On external demand, growth in real exports of goods and services turned negative for the first time in eight quarters, declining by -0.8% yoy in 3Q18 (2% in 2Q18), while growth in imports slowed from 2.1% yoy in 2Q18 to 0.1% in 3Q18. As a result, the declining exports relative to imports led to a lower net balance of RM24.6bn in 3Q18, 7.5% lower from the corresponding quarter from last year, which led to a negative contribution of net exports to the GDP at -0.7 percentage points, the lowest level in six quarters.

Growth in Manufacturing and Services Sector Expanded Steadily

On the supply side, growth in the services sector rose by 7.2% yoy in 3Q18 (6.5% in 2Q18), supported by the retail trade sub-sector, which expanded by 12.3% yoy, as reflected in higher sales of motor vehicle, which also benefitted the finance and insurance sub-sector, with higher consumer loans disbursements and insurance premium payments recorded during the quarter. Growth in the manufacturing sector rose from 4.9% yoy in 2Q18 to 5% in 3Q18, supported by electrical and electronic (E&E) and consumerrelated clusters. Growth in E&E sector increased from 6.2% yoy in 2Q18 to 6.4% in 3Q18, while growth in transport equipment and other manufactures improved from 6.5% yoy in 2Q18 to 8% in 3Q18, following higher spending on durable goods during the tax holiday period.

Growth in mining & quarrying sector contracted further from -2.2% yoy in 2Q18 to -4.6% in 3Q18, as natural gas production continued to be affected by unplanned supply outages and pipeline repairs in East Malaysian facilities, as well as a high base effect from last year. Growth in agriculture sector remained weak due to the protracted recovery in crude palm oil production from adverse weather and production constraints in the previous quarter. Despite the on-going review of several mega projects, growth in construction sector rose by 4.6% yoy in 3Q18 (4.7% in 2Q18), underpinned by steady progress in existing transportation, petrochemical and power plant projects.

Revising Our Real GDP Growth Forecast to 4.8% for 2018

We believe growth in net real export of goods and services will likely recover in 4Q18, as gross imports growth was distorted in 3Q18 by higher consumption imports, due to the surge in domestic spending during the tax holiday period. Bank Negara Malaysia (BNM) in the report noted that economic growth is expected to improve and benefit from the gradual recovery in commodity production, partly due to improvements in commodity exports. We believe growth in domestic demand to remain supportive of GDP growth, albeit slower, as private consumption will be supported by healthy expansion in income and steady employment as well as the abolishment of GST. However, we expect some slowing down in the E&E sector, as global trade dispute between US and China already have repercussion on the sector. Semiconductor Industry Association (SIA) noted in its latest release that the global semiconductor sales in 3Q18 expanded by 13.8% yoy, significantly lower from 20.5% in the previous quarter. According to BNM, trade protectionism measures implemented since the beginning of this year are expected to weigh down on Malaysia’s gross exports by 0.6 – 1.0 ppt. However, with the accumulated average GDP growth of 4.8% yoy in the first three quarters of 2018, and in view of healthy private consumption and private investment, we are tweaking and revising lower our real GDP growth projection to 4.8% for 2018, from an earlier estimate of 5%, which was in line with the official estimate

As for full year 2019, despite the downside risk from the external factors, particularly the trade tension between US and China and the risk of a lower oil prices, we are maintaining our GDP growth projection of 5% for next year (as compared to official estimate of 4.9%), following the discussion outcome between US President and Chinese President at the Group of 20 summit in Argentina later this month. With higher projected global oil prices, as well as the RM37bn in repayment of GST and income tax refunds, and the 2019 Budget measures to support domestic demand, we believe the country’s domestic economic situation can withstand the vulnerability to external influences. However, this is barring any unexpected development, where trade tensions intensify further, as weaker trade activity would weigh on private sector spending mainly through the income and investment channels.

Current Account Surplus Narrowed Further to RM3.8bn in 3Q18

From the balance of payment (BOP), Malaysia’s current account surplus narrowed for another quarter, from RM3.9bn in 2Q18 to RM3.8bn in 3Q18 (1.1% of GNI). This was the narrowest quarterly surplus since 2Q16 due to higher deficit in primary income, but services account registered a lower deficit of RM3.3bn in 3Q18 (-RM6.2bn in 2Q18), supported by higher contribution from manufacturing services on physical goods and travel services, which attributed from the higher number of tourist arrival.

Financial Account Recorded Net Inflows for the Fourth Quarter

Malaysia’s financial account recorded a lower net inflow of RM0.2bn in 3Q18 (RM9.2bn in 2Q18), but it remained as net inflows for fourth straight quarter since 4Q17. Due to lower current account surplus and softer net inflow in financial account, the overall balance of payments recorded a larger deficit of RM3.4bn in 3Q18 (RM0.9bn in 2Q18). Malaysia’s international reserves also fell from US$104.7bn as at end-2Q18 to US$103.0bn as at end-3Q18, but sufficient to cover 7.4 months of retained imports and 0.9 times short-term external debt. For 2018 as a whole, we believe that the trade surplus will remain healthy in a range of RM95-98bn (RM97.2bn in 2017). Nonetheless, the downside risk remains on global trade uncertainties, further drop in price for agriculture products, particularly palm oil as well as weak demand for mining goods, which can contribute to lower current account surplus. Hence, we believe the country’s current account will likely to narrow to a range of between RM25-RM27bn, from initial estimate of RM30-35bn range projected for 2018 (RM40.3bn or 3.3% of GNI in 2017).

Source: Affin Hwang Research - 19 Nov 2018