GDP Growth to Pick Up Gradually in 2H20 But Downside Risks Remain

Bank Negara Malaysia (BNM) cut its Overnight Policy Rate (OPR) by another 25bps from 2.75% to 2.50%, the lowest level since June 2010. This was in line with our expectations. Similarly, the ceiling and floor rate of the corridor of the OPR were also lowered to 2.75% and 2.25% respectively. BNM guided that its decision to lower the OPR was to “provide a more accommodative monetary environment to support the projected improvement in economic growth and price stability.” This latest MPC statement differs slightly from the reasoning in January, where it noted that the 25bps cut was a pre-emptive measure to secure the improving growth trajectory. Nevertheless, in its latest assessment of the global economy, BNM’s tone has turned more dovish as it guided that the Covid19 outbreak has weakened global economic conditions particularly for production and travel activity. BNM also noted that downside risks to the global growth outlook have increased, which may lead to tighter financial conditions and a resurgence in financial market volatility. Recently, IMF cautioned that global GDP growth will be revised lower in its next World Economic Outlook report for 2020, due to expectations that China’s real GDP growth may slow sharply to a revised 5.6% in 2020 (previous forecast of 6%).

As for the domestic economy, BNM expects economic growth in 1Q20 to be weighed down by the outbreak mainly in the tourism-related and manufacturing sectors as well as the persistent weakness in the agriculture sector. For the full year, growth is expected to be bolstered by household spending albeit at a slower pace amid moderate employment and income growth. Furthermore, investment activity is expected to register a modest turnaround amid ongoing and new projects. However, BNM also noted that the recent RM20bn stimulus package should be supportive of economic activity in 2020, which we believe indicates that the implementation of the stimulus measures will be carried out as scheduled by the Government without further delay. Going forward, BNM anticipates some gradual improvement in economic growth in 2H20, but also highlighted the risk of the prolonged impact of Covid-19 and sustained weakness in commodity-related sectors. On the inflation front, BNM projects headline inflation to average higher but remain modest in 2020 (0.7% in 2019), which hinges on global oil and commodity prices and the timing of the removal of retail fuel price ceilings.

We believe Malaysia’s economic growth is likely to slow down sharply in 1H20, with the impact on tourism-related sectors, translating into slower domestic demand (especially private consumption). The Covid-19 outbreak has also impacted the country’s manufacturing sector, as reflected in the manufacturing PMI, which fell from 48.8 in January to 48.5 in February. The sharp drop in China’s Caixin manufacturing PMI to a 16-year low of 40.3 (51.5 in January), suggests weaker trade performance amid slower economic activity. Due to the rising number of confirmed cases outside of China (e.g. Japan and South Korea), the downside risk from disruption in the global supply chain could be prolonged. However, going into 2H20, we believe Malaysia’s accommodative monetary policy alongside the expansionary fiscal policy will be supportive of domestic demand and consumer spending in 2020. We maintain our real GDP growth 4.0% projected for 2020 (4.3% in 2019), within the government’s growth forecast range of 3.2-4.2%. Looking ahead, we believe BNM will likely adopt a wait-and-see approach in assessing its future monetary policy moves (or further cuts), especially in view of the outcome of the outbreak and the extent of its impact on the Malaysian economy.

Source: Affin Hwang Research - 4 Mar 2020