Domestic demand to drive Malaysian economic growth in 2016

Malaysia’s economy continues to post strong growth in spite of low energy prices that are adversely affecting the nation’s energy sector. In Q4 2015, the real GDP expanded 4.5% y/y, while the real GDP for the entire 2015 grew 5%. In 2016, domestic demand is expected to drive activity, while private consumption is likely to hold up, underpinned by employment conditions and stable wage growth, and also the government’s fiscal measures such as tax reliefs.

Private sector outlays in services and manufacturing industries will continue to support investment, partly compensating the investment downturn in the oil and gas sector and the weak performance of export sector. Real GDP of Malaysia is expected to grow 4.5% in 2016 and 4.75% in 2017.

Meanwhile, Malaysia’s inflation is temporarily high. In January, the consumer price index was up 3.5% y/y, as compared with the average of 1.4% in H1 2015. However, price pressures are expected to ease towards the 2% y/y mark in H2 2016 as the effects of weaker currency and the GST implementation start to alleviate. The monetary policy stance of Malaysia is accommodative and supportive of economic growth.

“We expect the central bank to keep the benchmark interest rate at 3.25% through 2017. The key rate has remained unchanged since July 2014 when it was raised by 25 bps”, says Scotiabank.

The weakest link in Malaysia is public finances that are challenged by lower oil and gas revenue. In 2015, fiscal deficit is expected to have reached 3.2% of the GDP. The recalibrated Budget for 2016 kept the deficit target of 3.1% of GDP in spite of a lower oil price forecast of US$30-35 per barrel for Brent crude.  The cautious fiscal stance is possible on back of more efficient tax collection and optimization of public expenditure.

Lower oil prices have permitted Prime Minister Najib Razak to do away with fuel subsidies. Furthermore, the GST implementation will also ease fiscal pressures as it widens the tax base and diversifies government revenues away from the energy sector. Low energy prices are shown in the country’s external balance that will result in the current account surplus to shrink to 1.75% of GDP in 2016 from 4.5% in 2014.