· Moderating growth – The pace of economic expansion will slow in the first half of 2015 before rebounding in the second half of the year. The worst-performing quarter is likely to be 2Q15, dragged down by GST implementation on April 1. Full-year growth is projected at 5.1%, lower than last year’s 6.0% on weaker export revenue and a slowdown in consumer spending.

· Two opposing forces – Inflation has been pushed down by low crude oil prices and is expected to register an annual increase of just 0.7% for 1Q15. For the next three quarters, however, inflation will be significantly higher and close to the long-run average of about 3.0% as GST implementation will cause a one-off increase in consumer prices, putting upwards pressure on headline inflation.

· Fiscal consolidation – The halving of crude oil prices and a subsequent fall in government revenue from oil & gas sources expected this year has lead the government to revise higher its end-2015 fiscal deficit target from 3.0% to 3.2% of GDP. The new target is still ambitious given the challenges of cutting RM5.5b from operating expenditure that the new target would entail.

· Accommodative monetary policy – At this stage, Bank Negara Malaysia is unlikely to follow other central banks in the region in easing monetary policy despite real interest rates rising to the highest in five years. The Overnight Policy Rate will stay unchanged at 3.25% this year. Nothing is set in stone, however, and the Monetary Policy Committee, now leaning ever so slightly to a rate cut, might take action if growth were to fall short of projections.

· Ringgit decline to level out – US dollar appreciation has slowed after the US Federal Reserve guided for a more gradual pace of rate hikes. While USD/MYR could continue to test levels above 3.70, with only the slightest chance of temporarily slipping past the 3.80 mark, the ringgit is not far off from finding some strength to eventually appreciate to 3.45 by year-end. In the meantime, the undervalued ringgit is a boon for export-oriented industries.

· Credit rating at risk – Fitch Ratings has indicated a more than 50% chance of a credit rating downgrade to BBB+ by late May earliest as the agency believes Malaysia sits more naturally in the BBB range given a narrowing current account balance, depleting fiscal revenue, high public debt and weak governance. The money market has mostly priced-in the downgrade but expect to see a kneejerk reaction in financial markets on the decision announcement. On Moody’s and Standard & Poor’s rating scale, Malaysia remains at A3 positive and A- stable respectively. 

Source: Kenanga