Malaysian economy likely to moderate this year, MYR to weaken against USD towards 4.25

The Malaysian economy continued to grow at a decent pace of 5 percent in 2015, as compared with 6 percent in the previous year, despite the MYR depreciating 19 percent against the US dollar in 2015. Government spending and private consumption are predominantly driving the Malaysian economy. This implies certain level of resilient and diverseness beyond commodities in spite of dampening impacts on private consumption after the introduction of 6 percent goods and services tax in April 2015 and subdued exports revenue, which were weighed down by weaker commodity prices.

The Malaysian economic growth is likely to moderate to 4.4 percent for the whole of 2016; however, there are downside risks to the forecast because of subdued external demand and constraints to private consumption given increased household debt, said Commerzbank in a research note.

Meanwhile, inflation is expected to be stronger at 2.6 percent this year, as compared with 2.1 percent last year. Inflationary pressures might emerge from increased import costs from the weak Malaysian ringgit and the 11 percent to 15 percent minimum wage increment that would be executed in the second half of this year. The rises in wage are aimed to counter the effect of the GST implementation and weak commodity prices.

“Overall, inflation is not a worry for Bank Negara Malaysia (BNM) and is expected to remain within the target range of 2-3 percent near term”, added Commerzbank.

The Malaysian ringgit has been one of the best performing currencies in Asia so far in 2016. It has been helped by the recovery in oil prices, stabilization in CNY and the weaker US dollar in recent months. However, the MYR is expected to get weaker by the end of 2016 towards 4.25 against the USD on expectations of a firmer USD backdrop, according to Commerzbank.