Malaysian economic growth to moderate in 2016; weaker foreign demand to pose as headwinds

The Malaysian economic growth is likely to slow this year. There are downside risks to the growth because of subdued foreign demand and limited private consumption given high household debt. In 2015 and 2014, the Malaysian economy had expanded 5 percent and 6 percent respectively in spite of MYR depreciating almost 19 percent against the US dollar in 2015.

Government spending and private consumption are the key growth drivers. This implies there is certain degree of resilience and diversity beyond commodities in spite of dampening impacts on private consumption and subdued exports revenue dragged down by weaker commodity prices, noted Commerzbank in a research report.

“For 2016, we see growth moderating to 4.4 percent”, added Commerzbank.

Meanwhile, inflation in the country is likely to be stronger at 2.9 percent this year as compared with 2.1 percent in 2015. Higher import costs from weaker MYR and the 11 percent-15 percent minimum wage increment to be implemented in H2 2016 will help in raising inflationary pressures.

The rises in wage are aimed to counter the effect of the implementation of goods and service tax and weak commodity prices. In all, the Bank Negara Malaysia is not concerned about inflation, which is likely to be within the target rate of 2 percent-3 percent in near term.

The Malaysian central bank had cut rates to 2 percent during the height of global financial crisis. The BNM started normalizing in early 2010 and raised rates to 3 percent by mid-2011. In mid-2014, the central bank hiked rates slightly by 25 basis points to 3.25 percent.

However, it has remained on the sidelines. Even if inflation has accelerated, the central bank has been hesitant in hiking rates further on concern of hurting the economy that was coming under pressure from the decline in global commodity prices, increasing political risks and weakening domestic demand.

“We expect rates to be left unchanged at 3.25 percent for all of 2016, particularly if inflation remains contained and MYR is relatively stable”, noted Commerzbank.

Meanwhile, the Malaysian ringgit is one of the best performing Asian currencies this year so far. The currency is being helped by recovery in oil prices, CNY’s recent stabilization and the weaker US dollar. The MYR is expected to weaken towards 4.25 against the US dollar on the likelihood of a stronger US dollar, according to Commerzbank.