EconWatch - Malaysia well placed to weather the storm

kiasutrader

Publish date: Fri, 13 Jul 2012, 11:10 AM

- Despite heightened levels of global uncertainties, economic growth in Malaysia will remain resilient given the ample room for policy flexibility ' fiscal and monetary-wise.

- The transmission of the impact of a global economic slowdown on the Malaysian economy can be categorised into two major channels ' a demand drop-off and/or the financial effect.

- We have witnessed the impact as both IPI and trade figures have been volatile in recent months. The ringgit has depreciated significantly, while financial markets are experiencing high levels of volatility.

- While exogenous shocks remain as the biggest threat to the Malaysian economy, any severe short-falls will be cushioned by the implementation of fiscal stimulus. This could be announced through more direct routes such as the proposed continuation of the BR1M handouts as well as other social benefits.

- In this regard, cash handouts and other direct social benefits are preferable given the higher multiplier effects that can be achieved in a short span of time.

- A greater propensity among the medium- to low-income groups to consume also ensures that most of the cash will be reintroduced immediately into the economy.

- As a result of the recent GDP rebasing exercise done by the Statistics Department, additional fiscal space has been created as rising nominal GDP figures has resulted in lower levels of debt to GDP ratios.

- As such, an addition of about RM20bil in debt is now available to the government, ensuring that a substantial amount of fiscal stimulus could still be introduced in order to absorb potential external demand shocks without exceeding the 55% debt to GDP level.

- Similarly, interest rates in Malaysia continue to have a large influence on the economy, as the OPR remains far from the zero bound level.

- Nevertheless, at the current level of 3%, the OPR continues to be at an accommodative level towards promoting growth, while ensuring adequate levels of price stability. As such, in the current environment we do not expect to see any rate cut in the quarters ahead.

- However, in the event of severe financial market disruptions, there is ample room for BNM to introduce rate cuts, given a cushioning total of 130bps of positive real interest rates still available.

- In this regard, while we have trimmed our 5% GDP growth figure to around 4.5%, the amount of policy space available coupled with the continued expansion in domestic demand ensures that a strong economic growth in Malaysia remains to be on the cards.

- In terms of the currency, the ringgit will likely depreciate against the US dollar this year, ranging between RM3.15 and RM3.20 in the near term before ending the year at around RM 3.15/US dollar, depending on the global economic developments.

- Compared to ASEAN peers, however, we expect to see much stable cross rates to follow through on the back Malaysia's better growth prospects in times of uncertainties as well as higher real interest rates differentials.

Source: AmeSecurities

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