OVERVIEW

• Growth and policy divergence. Growth divergence across advanced market economies (AMEs) widened further in the beginning of 2H18 as the US economy moved north while Europe and Japan stayed stagnant. Meanwhile, plummeting currencies are leading emerging markets (EM) to tighten its policies. As overseas fund continues to pull out of EM, we expect further tightening measures in 2H18.

• Trade war and US Fed rate hikes remains the biggest concern. Following the trade spat between US and China resulting in higher tariffs imposed, we expect global growth to moderate further in 2H18 due to the rise of protectionism. To prevent further capital outflows, however, it may not prevent some EM economy to lift rates to catch up with the US Fed.

• 4Q18 GDP growth expected to slow. While exports have begun to moderate on frail global trade flows, we expect Malaysia’s 4Q18 GDP growth to slow to 4.6% following a stronger estimated growth of 4.9% in 3Q18 helped by a boost from consumer demand due to the tax holiday between June till August. As a result, the 2H18 GDP growth is expected to slow to 4.8% from 4.9% in the 1H18, bringing our full year GDP growth projection to 4.8% (2017: 5.9%).

• 2H18 onwards – uncertainty prevails. Post 14th General Election invariably present both macroeconomic and policy risk as the new government faces unprecedented challenges both internally (high debt, rising fiscal deficit, etc) and externally (trade war, US Fed monetary tightening, peak tech demand cycle, global economic slowdown etc). The “adjustment” period of the new government will continue to weigh on the economy for at least another year. Coupled with a less sanguine global GDP growth outlook next year, we expect GDP growth to remain weak at 4.7% in 2019.

• Fiscal policy limitations. We see the government’s planned cut in opex spending and its pre GE14 pledge to remove the Goods and Services Tax (GST) and to reintroduce fuel subsidy to weigh down on the government’s balance sheet. This would limit its fiscal policy option and resources to support the economy despite higher oil revenue. Hence, we expect the Federal Budget for 2019 to be less expansionary and the fiscal deficit to exceed 3.0% for this year and 2019.

• OPR likely to stay put. Given the choice between stemming the outflow of capital and ensuring a sustainable growth trend, we see BNM to err on supporting the economy with an accommodative monetary stance. Hence, we expect BNM to maintain the overnight policy rate (OPR) at 3.25% for the rest of the year. Unless the expectation of a slower growth reverses in 2019, we expect BNM to maintain the OPR at the current level.

• Receding inflationary pressure. While headline inflation is projected to average higher in 4Q18, we see little upside to inflationary pressure in spite of oil prices peaking above USD80/barrel. We thus maintain our full year CPI forecast at 1.0%-1.5% (2017: 3.7%). In the absence of demand pull element and lower growth momentum, inflationary pressure would remain subdued next year allowing BNM to maintain its accommodative monetary policy.

• A narrower current account surplus, capital outflows, weaker ringgit. In line with the narrative of moderating export growth trend and a slew of macroeconomic uncertainties, we maintain our projection of a lower CA surplus for the year at 2.0% of GDP (2017: 3.0%). With the continued EM market rout, the Ringgit is expected to remain under pressure, and USDMYR would test RM4.20 in the short term before settling around RM4.15 (revised from 4.05) by year end. Given the less sanguine outlook on the global economy next year we are revising our USDMYR projection to 4.10 from 3.85.

Source: Kenanga Research - 25 Oct 2018