Analysts: Malaysia’s economy set to bounce back in 2H19

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Malaysia’s economy is expected to bounce back in 2H19, as it benefits from higher oil prices and the kick-starting of 121 construction projects by the PH government. — Bernama photo

KUCHING: Malaysia’s economy is expected to bounce back in the second half of 2019 (2H19), as it benefits from higher oil prices and the kick-starting of 121 construction projects by the Pakatan Harapan (PH) government.

According to AmInvestment Bank Bhd (AmInvestment Bank) in its latest Thematic report, the economy should bounce back in 2H19 after it was expected to register the lowest first quarter of 2019 (1Q19) gross domestic product (GDP) by taking into consideration the recent data.

“It should be the slowest quarterly expansion since 2Q16,” the research firm said.

On the Brent, AmInvestment Bank noted that it posted its best quarterly performance in a decade since 2Q09.

“Though our base case oil projection for Brent is US$62 to US$65 a barrel on average, if the current trend persists, it could touch our best case which is US$65 to US$68 a barrel on average for 2019.”

The research firm further noted that the West Texas Intermediate (WTI) is projected to trade at around US$5 per barrel discount against the Brent.

“Besides, the economy is expected to benefit from the kick-starting of 121 construction projects that were valued at RM13.93 billion by the PH government after having saved RM805.99 million.

“These exclude mega projects like the Light Rail Transit 3 (LRT3) now costing RM16.63 billion and Mass Rapid Transit 2 (MRT2) RM30.53 billion from their original costs of RM31.65 billion and RM39.35 billion respectively. Cost savings from both the projects amounted to RM23.84 billion.

“Also, the revival of the ECRL project that now costs RM44 billion from RM65.5 billion previously, added with the Penang Light Rail Transit and the Pan Island Link 1 will provide positive impetus to growth.”

AmInvestment Bank went on to highlight that the government’s commitment to consolidate its fiscal consolidation, it implies that private expenditure would continue to spearhead growth.

It pointed out that while the public sector undergoes rationalisation and exports moderating despite supportive measures from China gaining traction and should somewhat cushion our softening exports, the policy measures will continue to support private spending.

“Hence, the 2019 GDP should grow around 4.5 per cent for 2019 with 1H19 likely to average at 4.2 per cent and 2H19 at 4.8 per cent. Inflation is projected at one per cent for 2019.”

As for the monetary policy, AmInvestment Bank highlighted that with slower growth and softer inflation, it will remain accommodative.

“Room for monetary easing biasness remains, especially if business and consumer sentiments remain weak. As such the ringgit against the US dollar is unlikely to appreciate sharply vis-a-vis its regional peers.”

The research firm expected the ringgit to be around 4.10.

“With the currency still being undervalued against the US dollar, it should provide relief for exporters.”

AmInvestment Bank noted that for the bond segment, despite emerging markets (EMs) growth facing some downward pressure, the risk is low with increasing signs of stabilisation.

The research firm also noted that cyclical indicators such as fiscal and current account balances remain well behaved, with lower inflationary pressure providing room for monetary easing.

“More so with the US Fed pausing on rate hikes and the European Central Bank (ECB) extending its targeted lending programme. It will soften the economic headwinds in emerging markets while easing US dollar appreciation and reducing the driver of the yuan’s depreciation.

“But clear risks include deteriorating US-China relations and slower global growth. So we remain neutral with focus on quality papers in investment grades in India, China and high yields in Indonesia.

“At the same time, we are cautious on the Chinese government debt despite its inclusion in global indexes from April as we see rising funding needs outstripping foreign inflows.”

On Malaysia’s bond yields, AmInvestment Bank said that these will be supported by healthy macro fundamentals like steady growth, healthy reserves, current account surplus, low inflation and real money flows.

The research firm expected the gross issuance of Malaysian Government Securities (MGS)/Government Investment Issues (GII) in the primary market for 2019 to hover around RM120 billion and RN125 billion while the corporate bond and sukuk market is expected to see a total issuance of RM80 billion to RM 85 billion.

“We project Malaysia’s 10-year MGS yield at 3.75 per cent to 3.8 per cent as our ‘prudent’ levels with room to reach 3.70 per cent if a 25 basis points (bps) overnight policy rate (OPR) rate cut is instituted.

“In the event there is no rate cut, we expect the 10-year yield to move back to our original levels of 3.9 per cent to four per cent.”