OVERVIEW

• A challenging road to recovery ahead. Despite the signing of the Phase One agreement, 2020 will be a year of global growth consolidation on risk of continued US-China trade row and its impact on China’s economy and its major trading partners. The economic impact of the disorderly Brexit, pro-democracy rally in Hong Kong, rising tension in the Middle East and a US presidential election and possible impeachment would be a drag to any potential growth upside.

• Global monetary policy shifts lower, fiscal spending up. While escalating global risk prompts central banks to continue leaning on monetary easing, policy makers are increasingly turning to fiscal spending to support growth. This reflects the concerns of overdependence on monetary policy and its debilitating impact on the global financial system and economy.

• GDP growth to moderate further. As global trade war drags on, external demand to remain weak and could largely weigh on Malaysia’s 4Q19 GDP growth which is expected to moderate to 4.0% (3Q19: 4.4%), bringing the 2019 growth average to slow further to 4.5% from 4.7% in 2018.

• Temporary respite. Phase One US-China trade deal, the pickup in tech spending on 5G-related technology, the continued improvement of the US labour market and Fed’s decision to hold rates steady may provide a breather for the volatile global market and to a lesser extent the fragile export-oriented economies.

• Growth outlook for 2020 to remain uncertain with the likelihood for the economic slowdown to continue although fiscal and monetary policy efforts may lift domestic demand, underscoring the official forecast of 4.8%. The economy will kick off with a slower start at 3.8% in the 1Q20 with GDP growth to only pick up in the 2H20. However, with the challenging growth trend mixed with uncertainties, we maintain our base case full-year projection of 4.3%.

• Tug of war between fiscal prudence and pump priming. Despite the macroeconomic respite, we expect the slightly expansionary fiscal budget to still play a bigger part to support the economy with targeted spending on high value-added projects that would improve productivity, provide higher multiplier impact and improve the welfare of the B40. We expect announcement to be made on the revival of High-Speed Rail project and MRT3 by mid-year.

• Fiscal constrain to persist. The slower growth prospect and lower fiscal revenue coupled with the need to be more prudent to fix the burgeoning fiscal debt would impede efforts to reduce the fiscal deficit. Our base case forecast for the fiscal deficit is 3.3% of GDP for 2020 narrowing from an estimated 3.5% of GDP for this year.

• BNM to lean on easing. In the absence of demand-pull factor amid lower growth momentum, inflationary pressure is expected to remain benign well into 2020 (1.0-1.5% versus an estimated 0.7% in 2019) reflecting the gradual floating of fuel prices, planned nationwide upward adjustment in water tariffs and low base effects. Combined with a slowing economy, it would provide ample room and policy justification for BNM to embark on at least one rate cut in the near term, possibly in the 1Q20, bringing the overnight policy rate to 2.75% from the current 3.00%.

• A narrower current account surplus, improving capital flows, a relatively stronger ringgit. In line with the narrative of moderating export growth trend and relentless macroeconomic uncertainties, we project a lower CA surplus for the year at 2.2% of GDP (2019E: 3.5%). But a change of risk appetite arising from the low interest rate environment is expected to continue to attract funds back to the emerging market, lifting the value of financial assets as well as currencies. Nonetheless, we expect the financial market and the Ringgit to be more volatile and err on the upside with the USDMYR to test 4.00-level in the 1H2020. Nonetheless, our year-end target for USDMYR remains unchanged at 4.10, reflecting a bearish sentiment on domestic issues, weak growth momentum and narrowing CA surplus.

Source: Kenanga Research - 22 Jan 2020