Press Release 2016
UOB Malaysia's Economic Outlook for Malaysia: Government and Private Sector Investments to Drive Moderate Growth
In the following interview, Julia Goh, Economist at UOB Malaysia discusses the economic outlook for Malaysia over the next 12 months and the impact of slower Asian growth on the domestic economy
What is the broad outlook for Malaysia over the next 12 months?
We expect Malaysia's Gross Domestic Product to grow moderately in 2016 supported by export demand, implementation of the public sector's Economic Transformation Projects, and private capital spending. Meanwhile, bearish commodity prices and currency volatility will continue to pose challenges to the economy. We anticipate weaker private consumption growth in light of rising costs, weaker sentiment and negative wealth effects. Over the longer term, Malaysia's economy continues to look attractive given its solid fundamentals and ongoing policy reforms to stimulate economic growth by improving labour productivity.
You expect government and private sector projects to fuel the economy in 2016, which industries will drive growth?
Both the manufacturing and service industries will remain the prime drivers of growth. Within manufacturing, export-related sectors will benefit from the weaker Malaysian Ringgit (MYR) and domestic-related sectors will likely gain from ongoing infrastructure development and import-substitution. Within the services industry, we expect growth to come from a range of sources. For instance, retail sales and food and beverage services will likely benefit as domestic tourism picks up. Other sectors that will spur growth include healthcare, education, information and communication, insurance and transportation.
The construction sector will stand out as a key beneficiary of the mega transportation and highway projects announced in the 2016 Budget. Meanwhile, the mining sector will face challenges amid the ongoing oil rout, while agriculture is likely to be affected by weaker palm oil output.
Against a backdrop of weaker consumer sentiment, can we expect private spending levels to contract in 2016?
At UOB Malaysia, we expect private spending to slow down but not to fall off the cliff. This is due to Malaysia's low unemployment and positive wage growth. The unemployment rate is expected to hover below 3.5 per cent, which signals the economy is near full-employment. In addition, government measures to alleviate the cost burden, particularly for lower and middle income households, will be positive. However, this does not mean there are no headwinds. Bearish oil prices, China's slowdown, monetary policy normalisation by the United States (US) Federal Reserve, developments with the Renminbi (RMB) and geopolitical risks will continue to weigh on growth.
What is driving the slowdown in growth in Asia, especially China?
There is a structural rebalancing going on in China with emphasis on paring down excess capacity, especially in traditional industries that have seen heavy investments in the past. The Chinese government is now focused on lifting domestic consumption and expanding services, enhancing productivity and innovation as well as introducing market liberalisation measures. China's growth will likely moderate as the manufacturing sector slows, but we expect the service sector to be fuelled by growth in tourism and e-commerce. We think fears of a hard landing in China are unfounded and expect monetary and fiscal easing to prevent a further slide in growth. Given Malaysia is an open economy and relatively small, its growth trajectory will continue to be affected by external developments and closely track the region's performance.
China's largest trading partner in ASEAN is Malaysia. How will China's slowdown impact the Malaysian economy?
We should expect China's slowdown to have some negative impact in the near-term. However, a boost in the number of Chinese tourists and Chinese participation in landmark projects and asset acquisitions in Malaysia will help spur investments and cushion the domestic economy. Malaysia's bond market has stabilised following China's commitment to purchase more Malaysian government bonds. This is a welcome announcement given foreigners' hold more than 47 per cent of Malaysian government securities. China's growing interest in the ASEAN region and regional initiatives such as the One Belt, One Road (OBOR) initiative, the establishment of the Asian Infrastructure Bank (AIIB) and the Regional Comprehensive Economic Partnership (RCEP), will lend further support to growth in the region. China's pledge to lend US$10 billion to ASEAN states to fund infrastructure spending is being viewed positively by the markets.
What is UOB Malaysia's forecast for currency and monetary policy rates in the coming months?
We expect more volatility for the USD/MYR pair in the first half of 2016. The MYR may be able to revert to lower levels once there is greater certainty over the US Federal Reserve's rate revision path. We also expect the MYR to benefit from potential capital inflows from repatriated funds and receipts from local and foreign asset sales. However, falling oil prices, geopolitical risks, a weakening RMB, and weaker confidence levels will continue to hinder the MYR's recovery.
Inflation is expected to edge higher this year due to low base effects and cost-related adjustments. As such, we continue to expect the policy rate to remain on hold this year.
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