We have downgraded Malaysia's 2016 and 2017 real GDP forecasts to 4.1% and 4.7% respectively from 4.5% and 5.0% previously, as the economic headwinds in Q216 are unlikely to abate over the coming quarters. Ongoing weakness in the Chinese economy and domestic headwinds will continue to weigh on growth. However, we expect the stabilisation of oil prices to lend some support to the economy over the coming quarters.
While we maintain our forecast for Malaysia's 2016 fiscal deficit to come in at 3.1% of GDP, we note that continually elevated levels of government spending on wages and pensions presents downside risks to our forecast. However, the stabilisation and recovery of oil prices and the government's successful implementation of GST will lend a degree of support to the government's revenue stream, enabling the fiscal deficit to narrow over the coming years.
In line with expectations, BNM kept its OPR steady at 3.00% during its September 7 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, but note that the risks to our forecast are firmly to the downside. We have also pared back our forecast for one rate hike in 2017 as the external environment will remain challenging, and now expect rates to remain on hold at 3.00% throughout 2017.
We have downgraded our 2016 end-year forecast slightly to MYR4.100 from MYR4.050/USD previously to reflect recent weakness. Over the longer term, we expect the currency to appreciate gradually as the recovery in hydrocarbon prices and an undervalued real effective exchange rate provide structural support.
The establishment of the new bumiputera party Parti Pribumi Bersatu Malaysia (PPBM) does not present an immediate threat to the dominant position of the ruling Barisan Nasional (BN) coalition, due to the fragmented nature of the opposition. However, the opposition would be able to pose a credible threat to BN during the next general elections that must be held by 2018 if it is able to leverage PPBM's strengths and make inroads into BN's powerbase.
Major Forecast Changes
We have downgraded our 2016 end-year forecast slightly to MYR4.100 from MYR4.050/USD previously to reflect recent weakness.
We have downgraded Malaysia's 2016 and 2017 real GDP forecasts to 4.1% and 4.7% respectively from 4.5% and 5.0% previously, as the economic headwinds in Q216 are unlikely to abate over the coming quarters.
We have also pared back our forecast for one rate hike in 2017 as the external environment will remain challenging, and now expect rates to remain on hold at 3.00% throughout 2017.
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||301.6||331.3|
|Real GDP growth, % y-o-y||6.0||5.0||4.1||4.7|
|Consumer price inflation, % y-o-y, eop||2.7||2.7||2.7||2.1|
|Exchange rate MYR/USD, eop||3.50||4.29||4.10||3.90|
|Budget balance, % of GDP||-3.5||-3.2||-3.1||-2.8|
|Current account balance, % of GDP||4.6||2.7||2.7||2.6|
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