Malaysian GDP growth may be lower than the 5-6% forecast

All eyes will be on the July trade numbers today to get a glimpse of what lies ahead as well as the central bank’s policy decision and assessment on the outlook. Firstly, export growth is likely to register a fairly healthy expansion of 9.1% YoY, up slightly from 8.6% in the previous month. Import growth is expected to record 10%, which will thus deliver a trade surplus of MYR 7.2bn.

While the headline export number may look rather rosy against the backdrop of a weak global economic outlook, positive price effect due to still high commodity prices in July continues to support overall export performance while the resumption of global electronics supply chain after the earthquake in Japan has probably added some impetus as well.

Yet, downside risks remain considering the high base last year, the currency appreciation and the weakness in global demand. This is particularly true for key electronics exports, which is expected to languish given weak demand. The US SEMI book-to-bill ratio fell back to 0.86 in July, from 0.98 in April while global semiconductor sales continued to moderate. Much will really depend on how economic situation pans out in the developed economies in the coming months.

Conversely, hope is pinned on the reconstruction effort from Japan and resilient demand in Asia to provide the much needed lift to export sales in 2H. Festive season demand towards the end of the year could also provide additional boost. In short, some improvement on the export front can be expected in the coming months despite the current sentiment driven uncertainties in the global environment. But the uplift will be modest.

Growth momentum is undeniably slowing down, especially given a weak 4% growth in the second quarter. So it is becoming increasingly difficult to justify further normalization of interest rate. Monetary policy will have to be pro-growth until global economic outlook brightens again. For now, domestic demand will be the key driver of growth in Malaysia but that by itself is also showing some signs of moderation.

Overall GDP growth this year may fall to the lower end of the official forecast range of 5-6%. Indeed, given the global uncertainties, the balance of risk has decisively shifted to growth despite persistently high inflation. That said, it is also premature to look into loosening of monetary policy as the current negative real interest rate essentially implies that monetary policy is still accommodative. Furthermore, it should be noted that Malaysia already has an expansionary fiscal policy that is inflationary in nature. 

As such, we expect Bank Negara Malaysia to stick to a steady course and keep the Overnight Policy Rate (OPR) steady at 3.00% in the coming policy meeting. This is especially so given that the central bank has initiated its interest rate normalisation process earlier than many central banks in the region and hence, it probably has enough room to pause and assess the situation before it decides the next course of action.

On that note, the central bank ended its previous statement by highlighting that it will “assess carefully the evolving economic conditions and to the extent that the growth momentum is sustained, further normalisation of monetary conditions will be considered to safeguard price stability”. In short, BNM is not fully done with its normalization process. At least another rate hike lies ahead, most likely before the end of the year. With that, we are maintaining the view that Bank Negara will eventually hike the OPR by another 25bps to 3.25% during the November meeting. Any improvement in economic data in the US and Eurozone will surely increase the odds.