Malaysian economy to moderate this year, MYR likely to decline to 4.25 vs USD by 2016-end

In 2015, the Malaysian economy expanded 5%, as compared with 6% in 2014, in spite of the MYR depreciating almost 19% against the USD last year. Government spending and private consumption are the main growth drivers of the economy. This implies that there is certain degree of diverseness and resilience outside of commodities in spite of the impacts on private consumption after the 6% goods and service tax was implemented in last April and weaker revenue of exports due to decreased commodity prices.

Malaysia’s economy is likely to moderate to 4.4% in 2016; however, weak external demand and limitations to private consumption pose downside risks to the economic growth, according to Commerzbank.

“We expect inflation to be firmer at 2.9% in 2016 vs 2.1% in 2015”, noted Commerzbank.

Weaker Malaysian Ringgit resulting in higher import costs and the rise in minimum wage by 11%-15% to be executed in H2 2016 might lead to increase in inflationary pressures. The rises in wages are intended to counter the GST’s effects and weak commodity prices. The central bank is not concerned regarding the overall inflation, which is likely to be in the central bank’s 2%-3% target range in the near term, added Commerzbank.

Meanwhile, CNY’s stabilization in recent months, weaker USD and the recovery in oil prices have helped the MYR to be one of the best performing currencies in Asia in 2016. The currency is likely to depreciate to 4.25 against the USD by the end of 2016 as the USD is likely to be stronger, according to Commerzbank.