Tuuli McCully, 65.6305.8313
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GLOBAL ECONOMICS | Executive Briefing: MALAYSIA December 2016
CAPITAL MARKET DYNAMICS Foreign Exchange ► Due to a broader emerging markets sell-off, the Malaysian ringgit (MYR) has been under strong depreciating pressure vis-à-vis the US dollar (USD) since the US presidential election; the currency has weakened by over 5% since November 8th. The MYR is sensitive to changes in international investors’ risk appetite due to relatively large foreign holdings of local currency government debt as well as Malaysia’s sizable share of short-term external debt. To stabilize the currency, the central bank has intervened in the foreign exchange market and implemented various measures that support the demand for the MYR, such as requiring exporters to convert 75% of their export proceeds into ringgit. We expect a gradual depreciating bias to persist, with the MYR closing 2017 at 4.48 versus the USD. Sovereign Debt & Credit Ratings ► Malaysia’s sovereign credit outlook is stable. Standard & Poor’s (S&P) and Fitch rate the country’s credit in the “A-” category and Moody’s assigns Malaysia with an equivalent “A3” rating. S&P pointed out recently that Malaysia's strong external position and monetary flexibility will offset the country’s relatively weaker public finances. Moreover, the rating agency assessed that policymaking in Malaysia will remain effective despite the political turmoil that has resulted from corruption allegations of a state-owned investment firm, 1MDB. Investor perception of Malaysia’s creditworthiness has improved over the past few weeks; the 5-year CDS spreads have decreased to 141 basis points (bps) from a high of 173 bps in November. ECONOMIC OUTLOOK Growth ► The Malaysian economy continues to record reasonably solid growth despite low — yet recovering — energy prices, which are adversely impacting the country’s energy sector. Real GDP grew by 4.3% y/y in the third quarter, up from the 4.0% gain in the April-June period. Activity is driven by domestic demand. Private consumption is underpinned by stable wage growth and employment conditions, as well as the government’s fiscal measures. Investment continues to be supported by infrastructure spending and private sector outlays in the manufacturing and services industries. Real GDP will likely expand by slightly over 4% y/y this year and accelerate to 4.4% in 2017-18 on the back of a pick-up in energy prices. Inflation & Monetary Context ► Malaysian monetary authorities assess that the current policy stance is accommodative enough to ensure that the domestic economy remains on a steady growth path along with stable inflation. We expect that the benchmark interest rate will be left unchanged at 3.0% over the coming months. The most recent rate cut took place in July 2016. Inflation will likely remain contained through 2018, yet modest upward pressure on prices is expected in 2017 due to higher global energy prices and the MYR’s recent depreciation. The headline inflation rate stood at 1.4% y/y in October. Fiscal & Current Account Balance ► Public finances are Malaysia’s weakest link, challenged by lower oil & gas revenue. The 2017 budget targets a fiscal shortfall of 3% of GDP; the government aims to balance the budget by 2020. The country’s gross public debt will likely hover at 55% of GDP through 2018, somewhat higher than the average of its regional peers. Nevertheless, fuel subsidy cuts and the introduction of the Goods and Services Tax in 2015 will help put public debt on a downward trajectory. On the external front, solid domestic demand is supporting imports, leading to a smaller trade and current account surpluses. We estimate the latter to narrow to around 1% of GDP in 2016 from 2.9% of GDP in 2015. A recovery in energy prices should strengthen Malaysia’s external position in 2017-18. INSTITUTIONAL FRAMEWORK & POLITICAL ENVIRONMENT Governance ► The Barisan Nasional coalition, led by Prime Minister Najib Razak, holds a simple majority in parliament; the next general election is due in May 2018, yet the poll may be called early. The Eleventh Malaysia Plan for 2016-2020 builds on the government’s commitment to transform Malaysia into a high-income country by 2020, focusing on innovation and productivity, human capital, infrastructure, and inclusive and green economic growth. Financial Sector ► The Malaysian central bank assesses that the country’s financial system is resilient, supported by strong capital and liquidity positions. The banking sector’s Tier 1 Capital ratio was 14.3% in October, suggesting sufficient capital adequacy, while asset quality remains solid with the non-performing loans ratio at 1.7% in mid-2016. High household indebtedness — around 90% of GDP in mid-2016 — poses a risk to the banking sector should interest rates rise or the economy lose momentum. Loan growth to households has continued to decelerate over the course of the year; lending increased by 5.4% y/y in October compared with 7.6% in January 2016. Visit our web site at scotiabank.com/economics or contact us by email at
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GLOBAL ECONOMICS | Executive Briefing: MALAYSIA December 2016
INTERNATIONAL ECONOMICS GROUP Pablo F.G. Bréard, Head 1.416.862.3876 Scotiabank Economics
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Erika Cain 1.416.866.4205 Scotiabank Economics
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Tuuli McCully 65.6305.8313 Scotiabank Economics
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Estela Molina 1.416.862.3199 Scotiabank Economics
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