Malaysia’s domestic demand to remain weak on tighter fiscal stance

Malaysian economy faces challenges from weak global demand, especially for LNG and raw commodities, and domestic demand. Domestic demand in the country is expected to remain weak due to tighter fiscal stance, according to ANZ. Meanwhile, the central bank is expected to loosen monetary policy by lowering RRR instead of lowering interest rates that are usually more stimulatory, adds ANZ.

Malaysia’s current five year plan focuses on investment and is well-designed. But this plan will not give much boost to the economy. Admittedly, higher inflation in 2016 is restricting the overall policy space. Malaysia will be one of the economies in the Asean region to not have a disinflation trend. The country is expected to have higher inflation this year as compared to 2015, given a weaker currency and adjustments in administered prices, according to ANZ. However, persistent low commodity and energy prices will ease these aggravating factors.

Lower LNG prices that normally track Brent crude prices are expected to be headwinds for Malaysia’s current account, added ANZ. Meanwhile, the country’s trade balance will have a knock-on impact from structurally lower oil prices that will make Malaysia susceptible to twin deficits.

“Nonetheless, while the country may likely register a (narrower) fiscal deficit, we expect it to maintain a current account surplus (albeit halved from the preceding year)”, says ANZ.