Highlight HSBC less positive on Malaysia's 2017 outlook post-Brexit, cuts growth forecast to 3.8%

by **Cals** Sat 09 Jul 2016, 18:28

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[size=28]HSBC less positive on Malaysia's 2017 outlook post-Brexit, cuts growth forecast to 3.8%

By Supriya Surendran / theedgemarkets.com | July 8, 2016 : 3:45 PM MYT

KUALA LUMPUR (July 8): HSBC Global Research has lowered its 2017 growth forecast for Malaysia to 3.8%, from 4.3% earlier, as the firm noted that the country's economic fundamentals have not materially improved and policy options to tackle the slowdown remain limited.

It also thinks Bank Negara Malaysia (BNM) may trim the Overnight Policy Rate (OPR) by 25 basis points (bps) to 3% this year, perhaps as soon as the Sept 7 Monetary Policy Committee meeting, according to its Asian Economics quarterly report, which was released today.

"As the impact of the United Kingdom (UK)'s European Union referendum on Malaysia's economy becomes more apparent — our 3.8% growth forecast for 2017 is below the official forecast range of 4% to 4.5% — we think BNM may feel compelled to ease for the first time since the Global Financial Crisis.

"The window for easing appears to be widening, given lower-than-expected headline inflationary pressure, and our expectation that the US Federal Reserve (Fed) will only hike again in 2017," said HSBC.

The firm added that BNM may also continue to cut the Statutory Reserve Requirement (SRR), which it unexpectedly reduced in January by 50bps to 3.5%.

"However, another reduction would be aimed at further narrowing the term premium between interbank rates and the OPR, rather than signal an easing in its monetary policy stance. That spread has so far been slowly closing, with the three-month Kuala Lumpur Interbank Offered Rate down 20bps year to date, suggesting no need for SRR cuts for now," said HSBC.

But the firm noted that BNM's foreign exchange reserves remain thin, which, along with the high level of household debt, is a factor that is likely to keep the central bank from easing aggressively.

"However, it also suggests that, in the event of a spike in global risk aversion, BNM may have a less than desirable level of control over capital outflows. This is an easy risk factor to forget, particularly now that Fed has turned more dovish.

"On the political front, the noise level surrounding 1MDB (1Malaysia Development Bhd) could increase. Nevertheless, near-term political change remains unlikely, with PM Najib's (Prime Minister Datuk Seri Najib Razak) ruling UMNO (United Malays National Organisation) party showing little inclination to push in that direction for now," said HSBC.

Meanwhile, the firm noted that for the second straight quarter, gross domestic product (GDP) growth for Malaysia in the first quarter of 2016 (1Q16) slowed less than expected, expanding 1% quarter-on-quarter (q-o-q) versus HSBC's and market expectations for growth of 0.6% to 0.7% q-o-q. But it still expects a full year 2016 growth of 4%.

Though it noted private consumer spending in Malaysia has proven to be extremely robust not just in 1Q16, but also in 4Q15 — surging by 2.6% q-o-q on average over the two quarters (non-annualised) — it does not believe this will be sustainable.

"Consumer sentiment remains weak, with the rebound in 1Q16 following an all-time low in 4Q15. Labour market softness, as evidenced by rising unemployment and falling real wages, is likely to worsen in line with the economic slowdown. Household balance sheets also remain stretched, at nearly 89%," said HSBC.

The firm noted that Malaysia's household debt-to-GDP ratio is the highest in Asia.

"Against this backdrop, government efforts to put more cash in consumers' pockets via a 3% reduction in pension contributions until December 2017, as well an 11% to 15% hike in minimum wages from July 2016 are likely to help only at the margin, as households' preference for accumulating more precautionary savings in the uncertain environment is likely to rise.

"Inventories, which contributed significantly to the 1Q16 GDP out-turn, are also likely to get pared down in time," said HSBC.

However, the firm noted that one bright spark for Malaysia will be investment.

"Despite the pull-back in 1Q16, this component has — and will likely continue to be — an important driver of growth, as private sector activity related to the multi-year infrastructure projects under the Economic Transformation Programme remains buoyant.

"That said, for 2017, we are pencilling in a less pronounced pick-up in capital outlays, as Europe and China — key investors in Malaysia — are expected to more fully feel the brunt of Brexit and report slower growth," said HSBC.

For the same reasons, HSBC is now expecting a smaller recovery in exports in 2017, following a likely contraction this year.

"Although oil prices have been rising so far this year, they remain below last year's average; furthermore only about 15% of Malaysia's shipments are liquefied natural gas or oil related, with the remaining exports still weighed down by tepid growth in the key markets.

"Lastly, with the UK's EU referendum now having cast a pall over global growth, oil price gains are likely to be constrained," said HSBC.

Aside from trying to keep private investment buoyant through infrastructure projects, HSBC said there isn't much else policy-makers can do to tackle the slowdown.

"State revenues remain under pressure from slower growth and depressed oil prices. The government said in January that its revised assumption for oil at US$30-35/bbl (RM121.20-141.38/bbl) versus October's US$48/bbl would reduce revenue by RM7 billion to RM9 billion.

"However, equivalent cuts in operational and development expenditure will likely keep the overall budget deficit unchanged at 3.1% of GDP versus a projected 3.2% for 2015," said the firm.

In short, assuming the expenditure cutbacks are adhered to, HSBC said no fiscal impulse can be expected this year.

"This may help to keep the ratings agencies at bay, but it is not the best antidote for the economy," said the firm.
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