GDP Growth to Remain Stable Despite Challenging Global Environment

Bank Negara Malaysia (BNM), in its 2018 Annual Report, revised lower the country’s real GDP growth target for 2019 to be in the range of between 4.3% to 4.8% (4.7% in 2018), as compared to the government's earlier projection of 4.9%. However, taking the computations at mid-point, calculated based on GDP at constant price, BNM maintains the country’s underlying real GDP growth to remain stable at 4.7% for 2019, nearer to the higher end of its growth target range, in line with our expectation.

Global GDP Growth Likely to Remain Healthy in 2019

Our optimism on trade is based on the possibility that the trade tensions between the US and China will reach some form of trade compromise by 1H19, without the possible escalation of reimposition of tariffs on both US and China goods. We also expect China’s economic growth to stabilise and improve in 2H19, supported by China’s government recent economic stimulus efforts (such as the cut in value added tax across sectors and reduction in reserve requirement ratio). The International Monetary Fund (IMF) expects global GDP growth to expand by 3.5% in 2019, lower than 3.7% in 2018, but still within the long-term average range of 3.5%.

Private Consumption Will Remain An Anchor of GDP Growth

Growth in domestic demand is projected to expand by 4.4% in 2019, albeit slower than 5.6% in 2018. BNM expects growth in private consumption to rise by 6.6% in 2019, albeit lower than 8.1% in 2018, as the household spending is anticipated to normalise closer to its long term average of 6.7%. The healthy labour market and sustained wage growth will be supportive of the growth. BNM projects growth in private investment to expand by 4.9% in 2019 (4.5% in 2018), in line with our growth forecast of 5.0%.

Current Account Surplus to Narrow But Remain Healthy in 2019

On the current account balance, BNM expects the surplus position to narrow for the second consecutive year to RM28bn or 1.5-2.5% of gross national income (GNI) in 2019 (RM33.5bn or 2.4% of GNI in 2018), in tandem with our expectations of current account balance of around RM30bn in 2019.

Headline Inflation Target Revised Lower in 2019

BNM lowered its inflation target to a range of between 0.7-1.7% in 2019, as compared to the earlier government’s forecast of 2.5-3.5% (1% in 2018), where upward inflationary pressure is expected to be contained by the expectation of lower global oil prices as well as recent implementation on the cap on prices of RON95 and diesel at RM2.08/litre and RM2.18/litre, respectively until the middle of 2019.

Monetary Policy to Remain Accommodative Amid Healthy GDP Growth

We maintain our view that BNM will likely keep its monetary policy accommodative, where OPR is anticipated to remain unchanged at 3.25% throughout 2019. Nevertheless, BNM's future decisions on the direction of OPR will be data-dependent. No emerging markets, including Malaysia, can escape fully the downside risks to the global growth, especially when global GDP growth could be distorted further by prolonged protectionist policies (i.e. trade tensions between US and China), which may lead to disruption to the global trade channel. However, BNM is of the view that other measures are needed to further support and sustain domestic growth in the medium term, most pertinently structural reforms (i.e. reference to fiscal, structural and institutional reforms) that would boost potential growth.

Source: Affin Hwang Research - 28 Mar 2019