• Growth to pick up marginally – GDP growth numbers for 3Q15 and 4Q15 are expected to show a slight improvement from 2Q15 on a low-base effect and the negative effects of GST implementation gradually wearing off. Full-year growth is forecasted at 5.0%-5.3% (3Q15: 5.1%, 4Q15: 4.9%-5.5%).
• Ringgit weakness – easing of intervention and re-assurance of no capital controls and re-peg of currency makes ringgit more vulnerable to market forces while political and governance issues add to higher volatility and downside risk. USDMYR projected to trade at 4.48 by year end.
• Unappealing to foreign investors – Slowing growth and exposure to the Chinese economy coupled with concerns over corporate governance, domestic politics and fiscal space combine to make for an unappealing investment destination. Malaysian equities suffered foreign net selling of RM18.0b in 9M15.
• Exports benefit from ringgit decline – Ringgit depreciation has helped keep the decline in export receipts in check. As a result, full-year export growth is expected to remain more or less flat in ringgit terms despite the 7M15 average being down 13.1% YoY in US dollar terms.
• Accommodative monetary policy – Bank Negara is expected to maintain its policy rate at the current level and is targeting full-year GDP growth of 4.5% - 5.5%. A rate hike to stem capital outflows and support the ringgit has been ruled out. The OPR is likely to remain unchanged till year-end.
• Expansionary budget – Look for an expansionary budget but no stimulus package as any move by the government to support growth will be limited by the need to maintain fiscal prudence.
• Some risk to fiscal consolidation plans – The 2015 fiscal deficit target of 3.2% (revised in January from 3.0%) is likely to be met on better-than-expected GST collections. However the ongoing deficit reduction effort might be put on hold or scaled back in 2016 on lower petroleum-derived revenue.
• Inflation is of little concern – Inflation is rising but manageable. Imported inflation will increase as manufacturers are forced to pass on higher cost of imports. It helps that cost-push inflation from GST implementation turned out less severe than anticipated.
• Beyond 2015 – A US Federal Reserve rate hike by year end is a certainty despite the date constantly being pushed back from mid-year. Once the initial impact of the rate hike is out of the way, the emerging market is expected to benefit from less volatility in global financial markets. Only then can the medicine of low interest rates take effect. Barring any unforeseen risks to growth, GDP growth will pick up pace to 5.5% next year.

Source: Kenanga Research - 6 Oct 2015