Highlight Nomura: Malaysia to see more manageable impact from oil in 2016

by **Cals** Mon 18 Jan 2016, 03:21

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[size=28]Nomura: Malaysia to see more manageable impact from oil in 2016

By Law Yin-Lyn / theedgemarkets.com | January 15, 2016 : 9:10 PM MYT

KUALA LUMPUR (Jan 15): The recent drop in oil prices will have an impact on commodity-exporting Malaysia, Nomura Global Markets Research ([You must be registered and logged in to see this image.] Valuation: 2.10, Fundamental: 1.80) said, but the impact will be more manageable now than last year.

In a report today, the research house said it remains "comfortable" with its gross domestic product (GDP) growth forecast of 4% for 2016 and 5% this year, partly because of the limited fiscal adjustments needed and the fact that the pass through from low oil prices to inflation is now more direct.

"We believe this still constitutes a decent rate of growth for an economy [which is] facing numerous headwinds, both external and domestic," said Nomura.

Nomura is of the view that the sharp plunge in oil prices in 2015 had already resulted in the cancellation or postponement of most non-essential oil and gas (O&G) capital expenditure (capex), and further declines are unlikely to significantly deepen the cuts to 2016 capex.

"Mining output also rose sharply in 2015, despite the decline in oil prices, because of additional supply from the Gumusut-Kakap oilfield (offshore Sabah)," Nomura said.

Nomura added that its estimates also suggest Malaysian exports of manufactured products have generally outperformed the rest of Asean and should help buttress the economy against a moderation in domestic demand this year.

"While the capacity utilisation rates of domestic-oriented manufacturing firms have been edging down, in contrast to export-oriented firms, they also remain resilient.

"Private consumption also held up relatively well, following the implementation of the goods and services tax in April 2015, with seasonally adjusted levels broadly flat," it added.

Nomura also expects private consumption to remain supported by low unemployment rates and investment by ongoing projects under the Economic Transformation Programme.

"We note that private sector investment growth remained strong at 6.8% year-on-year (y-o-y) in the first three quarters of 2015, despite O&G capex cutbacks and weak sentiment. On that note, with political noise likely to subside in 2016, we see scope for sentiment to stabilise or even improve," it added.

However, Nomura is cutting its 2016 current account surplus forecast to 2% of GDP, from 2.7% — but still above Bank Negara Malaysia’s forecast range of 0.5%-1.5%, citing lesser drag from liquefied natural gas (LNG) and the expected recovery of palm oil prices.

“Given the recent declines in oil prices, we expect the drag to persist over the next few months, although likely to a lesser extent, given evidence of an “S-curve”, in which the sensitivity of LNG prices to oil drops at lower oil prices. In Malaysia’s case the inflection point seems to be around US$50-60 per barrel,” it said.

Meanwhile, Nomura expects inflation to fall to just 2.4% y-o-y on average, for the rest of 2016, once base effects reverse in April, which would be slightly lower than the 2.6% average from April to November 2015.

It also does not expect core inflation to experience a similar spike — likely to rise only slightly to around 3.9% in coming months, from 3.7% in November, before also falling to a 2.4% average from April to December 2016.

The research house also forecasts Bank Negara Malaysia to keep interest rates on hold throughout 2016.

On fiscal deficit, Nomura still sees the government achieving the budgeted fiscal deficit of 3.1% of GDP in 2016, from 3.2% in 2015, despite lower oil prices.

“We estimate that every US$5 below the oil price assumed in the budget will widen the deficit by about 0.1% of GDP. A revision of the oil price assumption to near current levels (US$30-35 per barrel), (from US$48 per barrel), would therefore require spending cuts of about 0.3-0.4% of GDP,” it said.

“We think there is scope to achieve this. For example, development spending is projected to rise by 5.4% in 2016.”
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