Malaysia's Q315 real GDP grew by 4.7% y-o-y, reflecting the economy's slowest growth rate in nine quarters. We maintain our forecasts for 2015 and 2016 real GDP growth to come in at 4.7% and 4.5% respectively, as we expect the both the domestic and external sectors to face continued headwinds over the coming quarters.
Although most of the measures raised in Malaysia proposed 2016 budget are largely aimed at tackling short-term problems, the country has retained its commitment to fiscal consolidation, informing our forecast for the deficit in 2016 to come in at 3.1% of GDP.
The decision by BNM to keep its Overnight Policy Rate (OPR) steady at 3.25% during its November 5 monetary policy meeting was in line with our expectations and we forecast interest rates to remain unchanged through H116. The central bank will seek to support growth while providing financial stability as internal and external events continue to undermine investor confidence.
Despite a weak technical picture, an undervalued real effective exchange rate, modest current account surplus, and positive real interest rates should provide support to the ringgit following its aggressive sell-off of around 20% in 2015. We therefore remain largely neutral on the MYR against the US dollar with a slightly appreciatory bias over the coming years, and forecast the unit to end 2016 at MYR4.1000/USD.
While embattled Malaysian Prime Minister Najib Razak appears to have continued to consolidate his position following UMNO's general assembly (8-12 Dec), the aggressive actions used to secure party discipline suggest that he is not as secure as he appears. State elections in Sarawak also mean that existing problems could come to the fore once again during campaigning, with the opposition DAP having made steady inroads.
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||287.1||287.8||322.4|
|Real GDP growth, % y-o-y||6.0||4.7||4.5||5.0|
|Consumer price inflation, % y-o-y, eop||2.7||3.0||2.7||2.1|
|Exchange rate MYR/USD, eop||3.50||4.29||4.10||3.95|
|Budget balance, % of GDP||-3.5||-3.2||-3.0||-2.7|
|Current account balance, % of GDP||4.6||2.5||2.4||2.5|
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