MARC: M’sia’s GDP growth to average circa 4.4 pct in 2016

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Malaysia’s real GDP growth will remain below its potential, as the impact of the slowdown in domestic demand is reflected in the headline number, MARC says. — Bernama photo

Malaysia’s real GDP growth will remain below its potential, as the impact of the slowdown in domestic demand is reflected in the headline number, MARC says. — Bernama photo

Commodities to have an obvious impact on headline GDP

KUCHING: Malaysia’s gross domestic product (GDP) growth is expected to average around 4.4 per cent while headline inflation will likely rise to circa 3.2 per cent.

The Malaysian Rating Corporation Bhd (MARC) in its Economic Outlook 2016 report, believe that Malaysia’s real GDP growth will remain below its potential, as the impact of the slowdown in domestic demand is reflected in the headline number.

“Recent increases in public transportation charges (LRT, KTM Komuter, and others), toll rates, the abolishment of electricity rebates for certain segments of population, further subsidy rationalisation (Super Tempatan or ST15 rice) and the impact of ringgit depreciation will likely continue to dent private consumption as consumers become more cautious about discretionary spending.

“The pace of investments will also be affected by rising interest rates as the impact of rate hikes in the US reverberates across the globe. In addition, as domestic demand remains strongly correlated with the external sector, any significant weakness in external demand will have adverse repercussions on domestic demand.

“On that score, we are tweaking our growth forecast for private consumption and private investment to 4.2 and 6.9 per cent respectively for 2016,” it explained in the report.

The ratings agency also highlighted that commodities will have an obvious impact on Malaysia’s headline GDP.

It believed that sluggish crude oil prices which would persist in the first half of 2016 (1H16) before recovering slightly in 2H16.

“With the supply glut in the global market outpacing demand growth, oil and other commodity prices will likely remain under pressure in the near term.

“The OPEC’s recent decision not to intervene and cap its output added to the rout in their prices. Notwithstanding this, we are less pessimistic about the prospects in 2H16 as we foresee the impact of the current rout in commodities will slowly diminish by mid-2016.

“For crude oil, in particular, the possibility of its price recovering slightly and reverting to one standard deviation below its mean cannot be ruled out despite the current bleak outlook painted in the market.

“This is especially true if the growth in demand remains positive and the prospects of stability emerge in China. In addition, supply growth will likely taper off if oil prices remain at the current level.

“Such a scenario will support Malaysia’s external sector going forward,” it opined.

Meanwhile, on Malaysia’s headline inflation this year, MARC believed that cost push inflation would likely exert upward pressure on headline inflation in 2016.

“Recent increases in public transportation charges (LRT, KTM Komuter, and others), toll rates, the abolishment of electricity rebates for certain segments of the population, further subsidy rationalisation (ST15 rice) and the impact of the ringgit depreciation suggest that headline consumer price index numbers will likely edge up in 2016,” it said.

It foresee these developments to push up headline inflation to circa 3.2 per cent in 2016.

As for the movement of the ringgit, MARC opined, “The ringgit bore the brunt of the commodity rout and political noise in 2015 and the pressure remains on the downside in 2016 at least in the first half of the year.

“This view is premised on the anticipated continuing slide in crude oil prices in 1H16 as supply outstrips demand.

“The ringgit’s positive relationship with crude oil prices remains tight with an r-squared of 76 per cent between December 2012 and November 2015.

“Weak crude oil prices hit the export sector and dented the outlook on the economy. It also raises concerns on the impact on government revenue, budget deficits and consequently the sovereign rating.”

Other factors that might cap the upside of the ringgit in the near term include limited prospects of an OPR hike amid weak economic conditions, prospects of outflows of portfolio capital in view of further rate hikes in the US, and possible further devaluation of Chinese renminbi.

“Notwithstanding this, we draw some comfort on the current trend of foreign holdings of Malaysian Government Securities (MGS) which have slowly increased after dropping to a low of 43.8 per cent of total outstanding MGS in January 2015.

“The sell-offs in MGS have so far been minimal when compared to the 2005 to 2006 and 2008 to 2009 periods when foreign shareholdings dropped by almost half the amount in percentage terms,” it explained.

Aside from that, it noted that asset prices have somewhat retreated following a mild drop in equity and property prices.

“The equity index FBMKCLI has slipped by 12 per cent from its peak in July 2014 and is currently trading at a price-earnings ratio (P/E) of 17.7.

“Market capitalisation has also declined to RM1.67 trillion from the recent peak of RM1.79 trillion in August 2014.

“Notwithstanding, the current P/E level remains above its historical mean post-Asian Financial Crisis (AFC) of 16.5 times. Similarly, growth in property prices has generally retreated from the high of 12.2 per cent in the third quarter of 2014 (3Q13) to range between five and eight per cent in recent times,” it added.

Overall, MARC commented, “Recent developments in the commodity market are undoubtedly negative for the ringgit.

“Externally, the moderating export sector’s performance will mean more pressure on Malaysia’s current account (CA) balance which is expected to fall below two per cent of GDP in 2016, raising the specter of the dreaded twin deficits.

“A shrinking CA surplus on the back of possible increase budget deficits in 2016 will not augur well for the ringgit. Notwithstanding this, the sentiment on the ringgit will improve if crude oil prices start to stabilise, possibly by the middle of 2016.

“In addition, if the 2004 to 2006 US rate hike scenario unfolds where investors have more or less priced-in prior to the rate hike, the greenback may weaken across the board, benefiting the ringgit.

“Based on the past relationship between the ringgit and oil prices, and assuming a slight recovery of global crude oil prices, we foresee an average Brent price of US$40 to US$50 per barrel to be consistent with the ringgit-US dollar  exchange rate of roughly RM3.95 to RM4.15.”