Highlight Malaysia 'particularly exposed' to slowdown in China, says Deloitte

by **Cals** Mon 21 Dec 2015, 22:02

Highlight

[size=28]Malaysia 'particularly exposed' to slowdown in China, says Deloitte

By Danial Idraki / theedgemarkets.com | December 21, 2015 : 8:22 PM MYT

KUALA LUMPUR (Dec 21): Malaysia's growth is expected to slow to 4.7% in 2015 and 2016 and pick up mildly towards 5% in 2017, helped by strengthening exports, according to Deloitte's first Malaysia Economic Outlook: Winning in a changing world report issued today.

However, the report highlights that Malaysia would be significantly impacted by China's continuing economic slowdown in 2016, given that the country trades intensively with the world's second-largest economy.

"China accounts for over 9% of total Malaysian exports, and it may have a negative impact on the Malaysian economy if it continues to contract," the consulting and advisory firm's report wrote.

It added that Malaysia is "particularly exposed", as measured by the Chinese market share of its total output.

China's growth moderation and rebalancing has already exerted a significant negative impact on international commodity prices with repercussions on Malaysia's terms of trade, exports and growth as a major commodity producer, it added.

Meanwhile, the report said the country's private consumption is expected to face sustained headwinds from lagging consumer confidence, the goods and services tax (GST), declining growth in credit to households, and signs of softening in the labour market.

The current account balance, however, is projected to hold at approximately its recent level (2.5% of gross domestic product (GDP) in 2015), while ongoing moderation in domestic demand and global commodity prices should help to cap inflation below 3% in 2015.

"In 2016, investment is projected to strengthen on prospects for improved economic growth in the major industrial economies and some improvement in demand for oil and commodities," it noted.

The report also noted that Malaysia's external debt as a percentage of GDP rose to 53.8% in the second quarter of 2015 from 51.4% a year earlier (June 2014 to June 2015), and that most of the debt is categorised as medium-long term and is to be serviced by Malaysian currency.

"Government debt limit is expected to remain at 54% in 2015 and 55% in 2016, as against 52.7% in 2014," it said.

The depreciation of the ringgit, meanwhile, will have a limited direct impact on the ability of the government to service its debt, since only 3% of Malaysian government debt is denominated in foreign currency, it added.

The ringgit crossed the "psychological threshold" of RM3.80 against the US dollar on July 6, 2015, and touched its lowest external value in the last 17 years at RM4.4725 to the greenback on Sept 29, 2015, it noted.

In a statement, country managing partner Tan Theng Hooi said that besides a slowing Chinese economy, Malaysia is also facing a challenging environment due to a continued plunge in commodity export prices, and foreign exchange market turbulence.

"On the domestic front, depreciation of the ringgit, increased federal government and household debts, and rising probability of default present a cloudy economic outlook. However, according to the World Bank, Malaysia's domestic demand is projected to grow, as it remains the main driver of growth in a context of soft global demand," Tan added.

Tan noted that so far this year business sentiment has been hurt by dampening prospects for exports, a sharp depreciation of the ringgit, slide in stock prices, and spare manufacturing capacity, so a rebound in export activity in 2016 will bring much cheer to investors.

The ringgit ended the trading hours today at 4.2945 against the US dollar.

In the same statement, Deloitte Malaysia's Energy and resources leader Nizar Najib commented that falling oil prices have resulted in reduced investments and slower production rates, and the industry can expect "some consolidation" to tackle the pervasive low oil prices in the short to medium term.

"Falling oil prices are forcing oil and gas companies to seriously review the economics or defer these capital-intensive projects," Nizar said.

He added that the cost of doing business is set to increase as most producing fields in Malaysia are moving towards maturity and production levels are projected to decline, while the increase in minimum wages will also add to the overall cost of operations for oil and gas companies.
[/size]