Ongoing weakness in the Chinese economy and domestic headwinds will continue to weigh on Malaysia's economic growth. However, we expect accommodative monetary and fiscal policies to lend some support to the economy, and we forecast 2016 real GDP growth to come in at 4.5%.
The relatively successful implementation of GST in April 2015 and ongoing efforts to strengthen the revenue collection system bode well for Malaysia's fiscal position even as petroleum revenues continue to fall. With GST's share of government revenue increasing slowly, we maintain our forecast for the country's 2016 fiscal deficit to come in at 3.1% of GDP, and note that Malaysia remains on the path of gradual fiscal consolidation.
In line with expectations, BNM kept its OPR steady at 3.25% during its May 19 monetary policy meeting. We maintain our forecast for rates to remain on hold throughout the year as the central bank seeks to support growth against a backdrop of external headwinds.
The Malaysian ringgit has traded within a tight range over the past few months, and we expect the currency to remain range bound amid continued uncertainty in global financial markets. As such, we maintain our 2016 average forecast at MYR4.100/USD and forecast the currency to appreciate gradually over the longer term as an undervalued real effective exchange rate and a modest current account surplus provide structural support.
Malaysia's ruling BN coalition's convincing victory during the two by-elections held on June 18 indicate that embattled PM Najib Razak still holds a considerable degree of support from the electorate. As such, we maintain our view that Najib will continue to consolidate his position and is likely to remain as PM until the next general election in 2018.
Major Forecast Changes
We have downgraded our 2016 end-year forecast to MYR4.050/USD from MYR3.950/USD previously to reflect turmoil in global financial markets as a result of the decision of the UK to leave the EU on June 24.
Malaysia's economy is relatively well diversified and not particularly at risk from external shocks. The largest threat to the Malaysian economy comes from a rapid unwind of the household credit boom that has taken place over the past few years since the global financial crisis. This has the potential to result in a collapse in domestic demand amid declining property prices. This is not our core view, however, as debt service ratios remain manageable at current levels.
Increasing economic dependence with China could also have an adverse effect on the Malaysian economy should the Chinese economy experience an acute slowdown.
|Nominal GDP, USDbn||327.0||296.3||302.8||335.7|
|Real GDP growth, % y-o-y||6.0||5.0||4.5||5.0|
|Consumer price inflation, % y-o-y, eop||2.7||2.7||2.7||2.1|
|Exchange rate MYR/USD, eop||3.50||4.29||4.05||3.90|
|Budget balance, % of GDP||-3.5||-3.2||-3.1||-2.8|
|Current account balance, % of GDP||4.6||2.7||2.6||2.7|
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