Economic Update

Published 25 Jan 2016

The Malaysian economy continued to expand throughout 2015, shaking off falling commodity prices, weaker growth in China and a sharp depreciation of the local currency.

The economy expanded by around 4.7% in 2015, down from 6% in 2014, but still ahead of the global average of 3.1%.

While growth eased somewhat compared to the previous year, forecasts indicate further near-term gains are likely. GDP growth is expected to decline marginally to 4.5% before rebounding to 5% per annum through to 2020, according to IMF estimates.

Exports remain solid

Growth was bolstered in part by an expanding trade surplus, which grew by 17.3% year-on-year (y-o-y) in the first 11 months of the year to RM86.3bn ($20.2bn), marking the 217th consecutive month of surplus.

Despite weakening global trade conditions, exports rose by 1.9% to RM711.7bn ($166.8bn), while imports remained fairly steady at RM625.3bn ($146.6bn). Total trade was up 1.1% over the period at RM1.34trn ($314.1bn), fuelled by stronger flows to China, the US, ASEAN, the EU, Turkey and India, according to the Malaysia External Trade Development Corporation (MATRADE).

Manufactured goods accounted for the bulk of exports and the majority of growth in 2015, averaging around RM50bn ($11.7bn) per month through November, as per MATRADE data.

Resurgent demand from recovering markets like the US could help Malaysia gain further trade momentum in 2016, supported by the added export competitiveness of a weaker ringgit, which lost 18.6% of its value against the US dollar in 2015.

Price considerations

The consumer price index (CPI) remained relatively steady throughout 2015 despite concerns that a new goods and services tax introduced in April and a rollback of some subsidies would drive up prices late in the year. As of December, the CPI was up 2.7% y-o-y, compared to 3.2% in 2014.

However, lower fuel costs may have obscured inflation in certain categories. According to local media reports, the costs of public transportation, natural gas and tolls on several highways have increased, while higher cigarette taxes also impacted the CPI in November.

Price increases could accelerate into 2016 if the government moves to cut subsidies further or increase government revenues through new or expanded taxes.

The weakening of the ringgit could also drive inflation through higher import costs, with further depreciation possible in 2016, particularly if oil prices continue to decline.

Mixed signals

Malaysia’s benchmark index, the FTSE Bursa Malaysia KLCI, finished the year down 3.9%, with investor sentiment cooled by a slowing Chinese economy and the anticipated interest rate hike by the US Federal Reserve.

Despite ending 2015 in the red, Bursa Malaysia outperformed many of its peers in the region, with Singapore’s Strait Times Index, Indonesia’s Jakarta Stock Exchange Composite Index and the Bangkok Stock Exchange of Thailand Index all posting double-digit losses.

The worst-performing sectoral index in Malaysia was the KLCI Finance index, which shed 9.8% over the 12 months as bank earnings felt the impact of weak loan growth and tighter margins.

Fiscal funding

With oil prices expected to remain subdued for much of the coming year and energy earnings accounting for around 22% of government revenue, the 2016 budget, first presented in October, has come under further pressure in the intervening months.

Initial budget estimates for 2016 were based on an oil price of $48 per barrel, but with Brent futures dipping below $30 in mid-January, Malaysia’s spending gap was expected to widen further, potentially prompting the government to tap international markets to help bridge the fiscal deficit, forecast at around 3.1% of GDP.

As a result, the government has moved to scale back planned spending, with a revised budget announced on January 28.

The new budget, which promises a mix of social support and tax restructuring, will save the government a reported RM9bn ($2.1bn), according to local media. Importantly, the revisions are based on lower baseline oil prices, of between $30 and $35 per barrel, which is more in step with current pricing.

Mohd Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia, described the recalibrated budget as “realistic”.

“We know that the government is constrained by the fall in revenue due to oil prices and the fact that it continues to adhere to its fiscal consolidation plans,” he told local media.

Early indications suggest markets were similarly receptive to the proposed spending changes, with the FTSE Bursa Malaysia KLCI finishing the day up 3% after the announcement.

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