KUCHING: Regional and local investors are mainly positive about Malaysia’s economic outlook, but some have expressed their concerns on the country’s household spending and high overall public debt.
After recent meetings with several regional investors, CIMB Investment Bank Bhd’s research firm (CIMB Research) pointed out that investors were in general underweighted about Malaysia.
It added, the lukewarm view could also potentially be due to the uninspiring Kuala Lumpur Composite Index’s (KLCI) performance, year to date.
“Most investors we met concurred that Malaysia’s economic outlook remained favourable, and did not refute our robust growth estimates of 5.5 per cent for 2014 and 5.2 per cent for 2015.
“There was some debate about Malaysia’s growth drivers, whereby a few clients were hesitant on household spending in view of the rising costs of living, high household leverage, the government’s subsidy rationalisation plans and downside risks from the implementation of the goods and services tax (GST),” it explained.
“For Malaysia, the macro picture is strong but the risk is that household leverage (at 86.6 per cent of gross domestic product in 2013) and overall public debt (including contingent liabilities) are high.
“The risk of a reversal in asset prices would be that the effect on household consumption and growth will be more significant now than in the past given that Malaysia’s household balance sheet has evolved to include a higher accumulation of property and financial assets, with housing wealth the largest component of household assets.
“As such, household spending will also be more vulnerable to interest rates, income and wealth shocks,” CIMB Research highlighted.
The research firm viewed, that while household consumption will slow down as a result of rising inflation and the introduction of the GST, it also opined that it is temporary and the effect will gradually dissipate as consumers adjust to the new price conditions.
“This period of adjustment may take at least two quarters before consumer spending normalises. Meanwhile, the medium to long-term gains from these measures include strengthening the government’s finances and paving the way for fiscal consolidation.
“The success of the Economic Transformation Programme (ETP) in sustaining private investment growth will also fuel gains in employment and income,” CIMB Research said.
“We kept our strong conviction that the pulse of private investment growth will stay strong, underpinned by the ongoing implementation of ETP projects, supportive government policies, strong inflows of foreign direct investment (FDI) and positive spillover to domestic-oriented investments,” it said.
The research firm projected private investment growth of 13.3 per cent in 2014 and 13.4 per cent in 2015 (versus 13.1 per cent in 2013).
It explained, in 2013, a total of 1,400 projects were approved with total investments amounting to RM83.3 billion, almost all of which (97.4 per cent) came from domestic sources. This is in comparison with 2012, when a total of 1,704 projects were approved, with investments amounting to RM58.8 billion, it added.
CIMB Research also highlighted that Malaysia is likely to be one of the key beneficiaries of the global upswing.
“ Malaysia’s strong year-to-date export performance of 13.5 per cent year-on-year (y-o-y) in the first five months of 2014 (5M14) is impressive considering the fact that the global economy is only at the preliminary stage of the recovery cycle.
“The World Bank attributes the robust export performance to revitalised exports of high-technology products and commodity-related exports that stabilised after declining through most of 2013 and the political crisis in Thailand which may have contributed to the shift in the production of electrical and electronics (E&E) to Malaysia.
“In the E&E segment, growth is driven mainly by higher demand for semiconductors, especially for final use in mobile devices, tablets and automobiles.
“We also highlighted that Malaysia’s export sector has undergone a further diversification of its resource-based industries, whereby resource-based industries (RBI) have been the biggest growth driver of the manufacturing sector over the past decade, encompassing mainly the manufacturing of petrochemicals, oleochemicals, refined petroleum, palm oil, rubber gloves, tyres and prophylactics products,” it explained, noting that RBI grew by 6.8 per cent on a compounded annual growth rate (CAGR) basis between 2002 and 2012, outpacing growth of the E&E subsector of 1.7 per cent, to become the largest manufacturing subsector from 2005 onwards.
It added, one of the benefits of the diversification has been in moderating the influence of commodity price volatility on export revenue and the economy.
Meanwhile, on government efforts to boost Malaysia’s economy, CIMB Research pointed out that the government has kept up with measures to strengthen the fiscal balance and public debt, including the introduction of the GST next year, subsidy rationalisation and improved cost management for government spending programmes.
“We think that the government is unlikely to backtrack on the GST at this point, and the GST implementation is estimated to be net positive for government revenue to the tune of RM3.9 billion in 9M15 and RM9 billion in 2016, after taking into consideration the reduction in personal income tax (for 2015) and corporate income tax (for 2016).
“It will also help to reduce the dependence on oil and gas revenue to below 30 per cent of total government revenue (versus 30 per cent in 2013 and 39.6 per cent in 2008), and is estimated to be 28.9 per cent this year,” it said.
Nevertheless, CIMB Research noted that rating agencies are neutral to positive on the impact of these measures thus far, and any decision to upgrade Malaysia’s sovereign ratings will depend on the stability of new government revenue sources, the continued rollout of subsidy rationalisation measures and the effective allocation and utilisation of government revenue.
The research firm also highlighted the issue of Malaysia’s rising contingent liabilities that bears watching, though the bulk of government guaranteed debt, or 96 per cent, is domestic debt and only four per cent is external debt.
Aside from that, CIMB Research outlined that price pressures are likely to remain elevated in view of further subsidy rationalisation (a possible fuel price hike in 2H14), and it anticipated a temporary spike in inflation come 2Q15 when the GST is introduced.
“We forecast full-year inflation to average three per cent this year, and 3.5 per cent in 2015. As such, the upward adjustment in interest rates will help to ensure a positive real rate of return on deposit savings, and deter households from engaging in riskier investments that could lead to a further build-up of financial imbalances,” it added.
Meanwhile, CIMB Research pointed out high foreign ownership of Malaysia’s government bonds spells greater risk of capital reversals, financial volatility and downside bias for the ringgit in the event of heightened global risk aversion.
“With most foreign funds underweighted in Malaysia and even local funds relatively neutral, downside selling pressure is limited while inflows into the market could give the KLCI a boost,” it added.
The research firm maintained its end-2014 KLCI target of 2,030 percentage points, based on the bottom-up approach.
“We also continue to prefer cyclical sectors over defensive ones and our top sector picks remain the ETP winners, such as the oil and gas, construction and property sectors,” it said.