Malaysia's 2015 real GDP growth came in at 5.0%, slightly above our forecast of 4.7%. Ongoing weakness in the Chinese economy coupled with continued headwinds in the domestic economy will continue to weigh on Malaysia's economic growth. As such, we maintain our 2016 real GDP forecast at 4.5%.
We maintain our forecast for Malaysia's 2016 fiscal deficit to come in at 3.1% of GDP, with the government having taken positive steps to increase its revenue and prioritise development projects. While we maintain our constructive outlook on Malaysia's ability to reduce its fiscal deficit, the increase in spending could present downside risks to our view should oil prices fall further.
The decision by BNM to keep its OPR steady at 3.25% during its March 9 monetary policy meeting was in line with our expectations, and we maintain our forecast for rates to remain on hold throughout the year. With inflation likely to remain manageable, the central bank will seek to support growth as the country continues to face external headwinds.
The MYR has strengthened over the past few months on the back of dollar weakness and commodity strength. As such, we have upgraded our 2016 average forecast to MYR4.100/USD (from MYR4.200/USD) to reflect the change, and believe that an undervalued real effective exchange rate and modest current account surplus should provide support to the currency.
The signing of the Citizens' Declaration and Mahathir's resignation from UMNO has strengthened the party's resolve and will prompt it to close ranks and rally behind Najib for survival. With support from the grassroots being key to Najib's power, we expect his position to remain secure for as long as he has the backing of UMNO's division heads, ensuring policy continuity.
Major Forecast Changes
We have upgraded our 2016 average forecast to MYR4.100/USD (from MYR4.200/USD) to reflect dollar weakness and commodity strength, and believe that an undervalued real effective exchange rate and modest current account surplus should provide support to the currency
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||303.0||340.2|
|Real GDP growth, % y-o-y||6.0||5.0||4.6||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||3.95||3.90|
|Budget balance, % of GDP||-3.5||-3.2||-3.0||-2.7|
|Current account balance, % of GDP||4.6||2.7||2.6||2.6|
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