Despite falling revenue from a weaker commodities market and concerns over political uncertainty, Malaysia’s economy maintained a steady growth rate in 2016, though expansion may come under pressure in the coming year.
Sustained low oil and gas prices have seen the contribution of hydrocarbons to state revenue decrease from 30% in 2014 to just 14.6% this year. However, earnings generated from a goods and services tax imposed in 2015 and solid growth should see the budgetary deficit kept close to the government’s projected 3.1% of GDP.
Debt levels should also close out the year below the 55% of GDP ceiling set by the government, a factor that helped Malaysia maintain its sovereign “A-” rating from Fitch in October.
Ringgit squeezed
US political uncertainty following President-elect Donald Trump’s win and fears over the impact of an expected US rate hike put pressure on the ringgit late in the year, with the currency coming close to 19-year low in late November, when its value fell by 6.5% to RM4.46:$1.
While some analysts forecast the downward trend will continue into 2017, others predict the ringgit will stabilise in the new year on the back of high investment ratings from credit agencies and the popularity of the central bank – Bank Negara Malaysia (BNM) – among foreign investors.
Despite the ringgit’s downturn, BNM decided to leave its overnight policy rate (OPR) untouched at 3% during its final meeting of 2016 in late November. The bank last changed its OPR in July, cutting it by 0.25% – the first reduction in seven years.
BNM has stated that its approach to the rate will ensure steady growth amid stable inflation, supported by what it said will be healthy financial intermediation in the economy.
Year-end inflation will come in at the lower end of the projected 2-2.5% bracket, according to BNM, with inflation in 2017 set to remain stable given the environment of low global energy and commodity prices.
Solid growth, risks ahead
GDP expanded by 4.05% year-on-year (y-o-y) in the first half of 2016, followed by growth of 4.15% y-o-y for the first nine months, according to the central bank.
This is in line with the IMF’s 4.3% GDP growth estimate issued at the end of October, with the fund expecting this figure to rise to 4.6% in 2017 and 5% by the end of the decade.
One suggestion that domestic growth will not make sustained gains at the end of 2016 comes from Malaysia’s banking sector, as average loan and deposit growth for the country’s leading banks posted hit a two-and-a-half-year low of 1.2% for loans and 1.8% for deposits in the third quarter of the year.
In late November Moody’s forecast that the slow pace of credit growth will continue through to 2017, and possibly beyond, reflecting what the ratings agency said was a challenging external economic environment.
A mixed picture
Construction was one of the best-performing sectors in the first half of 2016. As an area of specific focus under the 11th Malaysia Plan – which covers 2016-10 – the sector has benefitted from high levels of state spending in recent years, recording 8.9% growth in the first half of 2016.
According to data from the Department of Statistics Malaysia, the value of construction work in the third quarter reached RM31.9bn ($7.1bn), representing a 10.7% y-o-y increase.
Industrial activity, however, has not fared as well, and the November Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) – a measure of manufacturing performance – showed a slowdown in activity to 47.2 in October from 48.6 a month previously. A score of more than 50 indicates improvement in the sector. October also marked the 19th consecutive month of decreased output.
Figures from the automotive sector reflected the manufacturing sector’s weaker performance, with vehicle sales slipping 14.2% y-o-y in October to 47,879 units. Sales through to the same month totalled 466,208, down 13.9% from the same period of 2015.
Though manufacturers are hopeful of better sales rates going into 2017, it may take time for demand to shift up a gear.
Factoring in political risk
While the economic outlook is stable, there are some factors that could shake this view, including allegations that money from the state investment fund 1Malaysia Development Berhad (1MDB) was transferred into the private account of Prime Minister Najib Razak – a claim strongly denied by the premier.
Rumours of malpractice within the fund also threaten to undermine economic development by weakening investor confidence.
In late October Fitch said that while the impact of the 1MDB affair had only had a limited effect on government policymaking, political stability and public finances to date, it remained a source of concern.
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