Forecast for Malaysia

Transcription

1 Country Economic Forecast Highlights The n economy posted healthy growth in Q 21, despite the plunge in oil prices and heightened market volatility. When it comes to separating the winners and losers from the sharp drop in oil prices, is pinned to the wrong end of the spectrum. The economy was therefore expected to lose further momentum when the national accounts data were released last week. However, seasonally adjusted GDP grew by 2% on the quarter, pushing up annual growth slightly in Q and resulting in a 6% expansion in 21 as a whole. The driving force behind the strong outturn was robust private sector domestic demand. Consumer spending grew by 7.8% on the year, despite tightening credit conditions. Investment also picked up, with private sector capital spending rising by 11.2% year-on-year, more than offsetting a decline in government investment. Notwithstanding the buoyant end to 21, we have not changed our fundamental view on, whose position in the losers category from low oil prices is merited. Although the impact of declining oil prices on the trade balance is sometimes overplayed, as is now a net importer of petroleum products, the development will also have adverse repercussions on other commodities such as palm oil. Moreover, the government relies on the oil and gas sector for 3% of its revenue, and losses through this channel will only be partially offset by fuel subsidy reforms. Meanwhile, some of the surge in private investment in Q may have reflected commodityrelated projects that had been agreed prior to the plunge in commodity prices in late 21. And many firms may now reassess their future plans in the light of this new pricing environment. For example, statecontrolled oil company Petronas has already announced a 15-2% reduction in capex for this year. Meanwhile, consumer spending growth is expected to moderate to a more sustainable pace in, given the high debt burden, tighter credit conditions and the introduction of the goods and services tax in April. We do not think that the central bank will consider cutting interest rates, unlike others in the region. Capital outflows intensified in Q, reserves fell again in January, the trade surplus is shrinking, and the central bank already believes policy is expansionary. Forecast for (Annual percentage changes unless specified) Domestic Demand Private Consumption Fixed Investment Stockbuilding (% of GDP) Government Consumption Exports of Goods and Services Imports of Goods and Services GDP Industrial Production Consumer Prices Current Balance (% of GDP) Government Budget (% of GDP) Current Account ($bn) Trade Balance ($bn) Short-Term Interest Rates (%) Exchange Rate (Per US$)

2 Forecast Overview surprises in Q Last month, we suggested that the n economy ended 21 on a weak note affected by the sharp drop in commodity prices and the resulting 1% fall in the MYR (to its weakest level since 29). Meanwhile, confidence ebbed, and hard data on trade and industrial production failed to set the world alight. Despite this, GDP growth was surprisingly strong in Q, with the private sector leading the way. but economic headwinds will still prevail Notwithstanding this outturn, we have not changed our view on s prospects: the economy faces a number of headwinds that will slow GDP growth to.8% in. This will reflect the following factors: Moderating private consumption a tight labour market and relatively strong wage growth fuelled unexpectedly robust growth in consumer spending in 21. But this strength may fade in. A sharp rise in borrowing since 28 pushed household debt to 86.8% of GDP in 213, one of the highest levels in Asia, and although credit growth has slowed in response to macro-prudential measures, the debt ratio probably increased further in 21. A reluctance to increase leverage is expected to result in more restrained consumer spending growth this year. On the positive side, the plunge in global oil prices has more than offset the impact of abolishing fuel subsidies. As a consequence, our forecast for average CPI inflation in is now 3.2% compared to 3.7% in November. But the implementation of the new goods and services tax in April will add to the constraints on consumers purchasing power in the short term (even if most of its impact will be offset by a reduction in other indirect taxes and an increase in certain assistance programmes). Fiscal policy restraint the government all but abolished fuel subsidies back in November in favour of a managed system based on market prices. This will lead to savings of around MYR1-12bn according to estimates by the World Bank. However, it will not be enough to offset lower revenues from the oil and gas sector which accounts for some 3% of government revenue. In response, the government has recently announced further cuts to operating : contributions to annual GDP % year : Exports and external demand % year (12-month moving average) 2 Real exports 16 External demand Source: Oxford Economics : Consumer and producer prices Consumer price index Producer price index % year Consumer spending Government consumption Investment Net exports Q1-21 Q2-21 Q3-21 Q-21 Source : Department of Statistics, /Haver Analytics Forecast Forecast Source: Oxford Economics 2

3 expenditure for, and increased the deficit target from 3% of GDP to 3.2% (closer to our expectations). With the public debt burden close to the constitutional ceiling of 55% of GDP, the government in particular the Prime Minister Najib Razak (who is also the Minister of Finance) remains under pressure to rein in spending. Growth in real government consumption is forecast to slow from.% in 21 to 2% in. Investment slowdown the delay or cancellation of several large public infrastructure projects was a factor behind slower investment growth in 21, with government investment expenditure falling by.9% in real terms. And although this year new projects announced in the budget will halt the decline in public investment (providing they come to fruition), the moderating trend in investment is set to continue as spending by the private sector slows. Residential construction is expected to ease in line with a decline in housing approvals and a plateau in house prices. Meanwhile, energy-related projects are likely to be cut back in response to the plunge in oil prices, while the weakening in the exchange rate will make imported capital goods more expensive. Total capital spending is expected to grow by just 3.7% in. Some positive factors to consider we think the swing in sentiment against in recent months because of the lower oil price is somewhat overdone. We believe that the current account will remain in surplus, stabilising at a level around 3.5% of GDP. is now a small net importer of petroleum products and, though revenues from other key commodity exports such as LNG and palm oil will also decline, the depreciation of the MYR should boost the important electronics exports sector (this alone accounts for more than one-third of total goods exports). Meanwhile, tourism receipts should rise, helped by the increased spending power of consumers in advanced economies. In other respects too, the economic fundamentals are reasonable. The government has been proactive in removing wasteful subsidies, and continues to diversify away from a reliance on oil for its revenues. Moreover, there is a concerted effort to reduce spending and the budget deficit is still narrowing despite the recent revisions. And foreign reserves broadly cover the short-term external debt, while the central bank remains vigilant about debt levels building up too rapidly. : Exchange rate Ringgit per US$ 2.9 Exchange rate (LHS) depreciation 2= Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 1 Jul 1 Jan 15 Source: Haver Analytics JP Morgan nominal tradeweighted index (RHS) : Government balance and debt Government balance (LHS) % of GDP Government debt (RHS) % of GDP Source: Oxford Economics : Net exports of oil Tonnes mn (12 month sum) Forecast Source: Haver Analytics Net exports of crude oil & petroleum products (LHS) Thousand bpd (12 month avg) 6 Oil production (RHS)

4 Risk Assessment is regarded as one of Asia s success stories. The recent performance has been solid and the political background is stable. But despite these virtues, has vulnerabilities. For example, s external debt has risen in recent years and the previously very large current account surplus shrank rapidly in 212 and 213. The external position stabilised in early 21 but has come under pressure again as the oil price has slumped. Government finances are also under pressure from the lower oil price, although efforts have been made to widen the tax base. As growth momentum slows, the government will need to implement reform in order to reignite the economy if it is to achieve the goal of becoming a developed economy by 22. Emerging risks Rising household debt s household debt is worryingly high, at 86.8% of GDP in 213, up from less than 6% in 28. Bank exposure to households has increased, with up to 3% of loans tied up in residential property, prompting calls for new macro prudential measures such as ceilings on debt to income ratios or capping loan to value ratios. Some state governments have implemented such policies and the authorities are stepping up their surveillance of household borrowing. China slowdown much of Asia is susceptible to slowing demand from China, not least, with 13% of goods exports currently destined for China. Key risk scenarios Global risk off recent turmoil in financial markets has heightened risks that a much larger correction could be on the horizon. is not impervious to such swings in sentiment (nor to the recent plunge in oil prices) as the MYR has fallen over 1% against the US$ since early September. A global scenario calibrated to be three times more extreme than that which occurred in October would therefore have serious implications for, which could see growth slip to around 2% in. Eurozone and US upside the bright spark of the global economy is currently the US, and there are reasons to suggest the Eurozone could surprise on the upside in also. Such a scenario would not only have positive direct effects through trade (18% of s goods exports are destined for the US and EU) but also through indirect effects on the wider global economy, as well as strengthening sentiment and commodity prices. Risk index (=no risk, 1=highest risk) World average Sovereign risk Trade credit risk Political risk Regulatory risk GDP growth CPI inflation Current account balance Government balance Government debt External debt Risk warnings Risk scenarios GDP to moderate as domestic demand slows Low oil prices to offset subsidy cuts and new GST External surplus shrinking on falling commodity prices Lower oil revenues to offset subsidy reform Debt remains close to constitutional limit Vulnerable to swings in international sentiment Impact of scenarios on risk index Maximum impact of scenarios on risk index % year Risk off Investment standstill in China Eurozone slips into recession Russia isolated US and Eurozone upside surprise Impact of scenarios on GDP growth Baseline Investment standstill in China Risk off US and Eurozone upside surprise Source : Oxford Economics

5 Long-Term Prospects Output growth to remain over % s potential output is forecast to grow by.3% a year in This will be driven by: Investment in infrastructure the government is aiming to achieve the status of a developed nation by 22 through public and private investment, primarily in infrastructure. Although a number of projects have recently been postponed, the plan is still likely to result in higher investment in the long term. Favourable demographics s working age population is expected to rise consistently over the forecast horizon, which will aid long-term growth Improving education standards according to the World Bank, lacks an education system capable of supporting a high-income economy. The n government has allocated a large amount of funding to address this issue. This should help in lifting the existing standards of education, but problems such as policies favouring ethnic Malays over Indians and Chinese has held back previous attempts at reforms. : Real GDP and potential output MYR bn, 25 prices Potential Output Real GDP Forecast Source: Oxford Economics Potential GDP and Its Components Average Percentage Growth Potential GDP*.7.3 Employment at NAIRU Capital Stock Total Factor Productivity *ln(potential GDP)=.65*ln(Employment at NAIRU) +.35*ln(Capital Stock)+ln(Total Factor Productivity) Long-Term Forecast for (Average annual percentage change unless otherwise stated) GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (vs US$) General Government Balance (% of GDP) Short-term Interest Rates (%) Long-term Interest Rates (%) Working Population Labour Supply Participation Ratio Labour Productivity

6 Background, which borders Thailand, Indonesia, Singapore and Brunei, became a unified state in Previously, the UK had established influence in colonies in the territory from the late 18th century. The group of colonies were known as British Malaya until it was reorganised as the Malayan Union in 196. It was reorganised again as the Federation of Malaya in 198 and gained independence in Singapore, Sarawak, British North Borneo, and the Federation of Malaya merged to form in 1963 although tensions in the early years of the new union sparked an armed conflict with Indonesia, and the expulsion of Singapore in is a federal constitutional elective monarchy. The federal head of state of is the Yang di-pertuan Agong, commonly referred to as the King of. The head of state is elected for a five-year term by the nine hereditary sultans of the Malay states; the other four states, which have titular governors, do not participate in the selection. The system of government in is closely modelled on that of Westminster parliamentary system, a legacy of British colonial rule. Politics are dominated by the UMNO party, the main component of the multi-ethnic National Front coalition that has governed the country since independence in But in the March 28 election, the National Front led by Abdullah Badawi won the election for federal parliament and eight of the 13 state assemblies, yet it lost the two-thirds majority it had held since 1969, which meant it could no longer override legislation passed by states or amend the constitution. In March 29, Najib Razak became the country s sixth prime minister, replacing Badawi as leader of UMNO. The largest opposition party is the Parti Islam Se-. Between 1989 and 1996, GDP growth had been around 9% or even higher. Very rapid growth in business investment (particularly in the property sector) was fuelled by massive external borrowing, on the assumption that the ringgit (MYR) would stay broadly aligned with the US$, which in turn resulted in very strong domestic demand growth and a significant current account deficit. However, once foreign investors lost confidence in the sustainability of Thailand in 1997, the vulnerabilities of the others were quickly exposed and GDP fell by 7.5% in 1998, led by a collapse in domestic demand of over 25%. In response to the crisis, refused economic aid packages from the IMF and the World Bank and Bank Negara imposed capital controls and pegged the MYR at 3.8 to the US$. As a result of this, foreign investment in the n equity market did not return in 1999 and 2 as it did in other countries in the region. Notwithstanding these policies, s vulnerability was further exposed by the near-recession of 21, when the export sector (12% of GDP in 2, when services are included) was severely hit by the global IT slump. However, in the period 22-8 the country averaged GDP growth of 5.7%. But though this pace was very respectable, much of it was generated by consumer and government spending rather than investment, which remained sluggish until it began to pick up in 26. Investment as a proportion of GDP exceeded % in the 199s but has never recovered these levels, reaching 2% in 21. Moreover, because of this pattern of demand and the fact that the level of exports has stayed much higher than that of imports, the current account surplus has remained above 1% of GDP since the crisis, and the surge of oil prices from mid-2 onwards helped push it to over 15% of GDP during the period By 28, when the global crisis erupted, the export sector still accounted for over 1% of GDP, leaving the economy very exposed to the global recession which followed. In the first nine months of 29 GDP growth fell by 3.9%. However, the government successfully protected the economy from a deeper recession by introducing a MYR67bn stimulus package in 29, focused on providing financing for businesses, supporting workers and making further investments in public projects. In Q3 29 the economy resumed quarterly growth although the extra spending left the budget deficit at 6.8% of GDP for 29, the biggest since The authorities managed to reduce the deficit to.8% in 211 and targeted a deficit of.7% in 212 but high oil subsidies and substantial stimulus spending to offset the weak external outlook put this objective at risk. In 211 agriculture accounted for 12.1% of GDP, compared to construction s 3.2% (down from 6.6% in 1996 and 1997), and manufacturing s 25.9%. Services are responsible for the largest share of activity in total GDP, at 6.6% in 211, although also has a considerable mining sector, equal to 12.2% of GDP in 211. In 211, produced an average of 57,78 b/d of crude oil and condensates, making it the 27th largest oil producer in the world. 6

7 However, proven oil reserves are now declining. By contrast, the country s production of natural gas has continued to climb rapidly and proven reserves are still substantial. Demand from Japan for n natural gas is very substantial. By virtue of the large agricultural, mining and manufacturing sectors, the composition of goods exports appears fairly broad. In 211, manufactures accounted for 72.5% of total sales (of US$227bn), with oil providing another.6%, LNG 7.2%, and palm oil 8.7%. However, the diversity of goods within the manufacturing exports segment is quite narrow. In 211, 51.7% of these manufactured goods exports were classified as either semiconductors, electronic equipment and parts or electrical products. The other manufacturing goods export categories are relatively modest, the next largest is chemicals with 9.5% of all manufactured goods exports. Tourism is a major source of foreign exchange earnings, with one of the biggest tourist destinations in Southeast Asia. According to the WTO, There were 25.m visitors in 212, contributing MYR62.5bn in revenues (almost 7% of GDP). 7

8 Data & Forecasts Key Indicators: Percentage changes on a year earlier unless otherwise stated Industrial Man. CPI PPI Total IT MYR Trade production output exports exports Imports balance MYR (MYR mn) Dec , Jan ,355 Feb ,37 Mar ,529 Apr ,72 May ,65 Jun ,15 Jul ,639 Aug ,862 Sep ,33 Oct ,18 Nov ,127 Dec ,193 Financial Indicators: Percentage changes on a year earlier unless otherwise stated Interest Money Exchange Exchange Share Domestic Reserves Imports rate (o/n) Supply rate rate price credit (total) cover % (M3) RM/$ RM/Yen KLSE US$ mn months Jan , , Feb , , Mar , , Apr , ,7 7.3 May , , Jun , , Jul , , Aug , , Sep , , Oct , , Nov , ,3 7.9 Dec , , Jan ,757-19,2-8

9 MALAYSIA TABLE 1 SUMMARY ITEMS Annual Percentage Changes, Unless Otherwise Specified CONSUMERS TOTAL TOTAL REAL INDUSTRIAL UNEMPLOY- AVERAGE WHOLE COMPETIT- PRODUCER CONSUMER EXPENDITURE FINAL FIXED GDP PRODUCTION MENT RATE EARNINGS ECONOMY IVENESS PRICES PRICES EXPENDITURE INVESTMENT (%) PRODUCT- (28=1) IVITY (C) (TFE) (IF) (GDP) (IP) (UP) (ER) (GDP/ET) (WCR) (PPI) (CPI) YEARS BEGINNING Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV COPYRIGHT (C), OXFORD ECONOMICS MALAYSIA TABLE 2 SUMMARY ITEMS TRADE CURRENT CURRENT GOVERNMENT GOVERNMENT SHORT-TERM SPREAD REAL EQUILIBRIUM EXCHANGE BALANCE ACCOUNT ACCOUNT FINANCIAL FINANCIAL INTEREST OVER US SHORT-TERM EXCHANGE RATE PER ($ BN) ($ BN) (% OF GDP) BALANCE BALANCE RATE SHORT-TERM INTEREST RATE PER US (M$ BN) (% OF GDP) RATE RATE US DOLLAR DOLLAR (BVI$/ (BCU$/ (BCUR%) (GB/ (GB*1 (RSH) (RSH - (Note 1) (RXEQUIL) (RXD) 1) 1) 1) /GDP!) RSH US) YEARS BEGINNING Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV Note 1 : REAL INTEREST RATE = Nominal interest rate (RSH) - % change in CPI COPYRIGHT (C), OXFORD ECONOMICS 9

10 Long-Term Forecast for Annual percentage changes unless otherwise specified GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (per $) General Government Balance (% of GDP) Short-term Interest Rates (%) Long-term Interest Rates (%) Working Population Labour Supply Participation Ratio (%) Labour productivity Employment Output gap (% of potential GDP)

11 Key Facts Politics Head of state: Paramount Ruler Sultan ABDUL HALIM Head of government: Prime Minister NAJIB Razak Political system: Democracy Date of next presidential election: election by state rulers Date of next legislative election: 218 Currency: Ringgit (MYR) Long-term economic & social development * GDP per capita (US$) Inflation (%) Population (mn) Urban population (% of total) Life expectancy (years) Source : Oxford Economics & World Bank Structure of GDP by output * 213 or latest 213 available year Agriculture 9.3% Source : CIA Factbook Industry.6% Location : Southeastern Asia, peninsula bordering Thailand and Services 5.1% northern one-third of the island of Borneo, bordering Indonesia, Source : World Bank Brunei and the South China Sea, south of Vietnam (CIA Factbook) Long-term sovereign credit ratings & outlook Corruption perceptions index 21 Foreign currency Local currency Score Fitch A- (Negative) A (Negative) Developed economies (average) 75.1 Moody's A3 (Positive) A3 (Positive) Emerging economies (average) 37.8 S&P A- (Stable) A (Stable) 52. Emerging Asia 35.2 Structural economic indicators Source: Transparency International * Scoring system 1 = highly clean, = highly corrupt Current account (US$ billion) Trade balance (US$ billion) FDI (US$ billion) Composition of goods & services exports, 213 Debt service (US$ billion) Debt service (% of exports) External debt (% of GDP) Oil production ( bpd) Oil consumption ( bpd) Source : Oxford Economics / World Bank / EIA Destination of goods' exports (213) Singapore 13.9% China 13.5% Japan 11.1% European Union (28) 9.1% United States 8.1% Source : WTO Source : WTO Manufactures 51.7% Other goods exports.5% Fuels and mining products 21.7% Transportation 1.7% Travel 8.% Other commercial services 5.1% Agricultural products 11.2% 11