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Malaysia Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Ongoing weakness in the Chinese economy and domestic headwindswill continue to weigh on Malaysia's economic growth. However, weexpect accommodative monetary and fiscal policies to lend somesupport to the economy, and we forecast 2016 real GDP growth tocome in at 4.5%.The relatively successful implementation of GST in April 2015 andongoing efforts to strengthen the revenue collection system bode wellfor Malaysia's fiscal position even as petroleum revenues continueto fall. With GST's share of government revenue increasing slowly,we maintain our forecast for the country's 2016 fiscal deficit to comein at 3.1% of GDP, and note that Malaysia remains on the path ofgradual fiscal consolidation.In line with expectations, BNM kept its OPR steady at 3.25% at itsMay 19 monetary policy meeting. We maintain our forecast for ratesto remain on hold throughout the year as the central bank seeks tosupport growth against a backdrop of external headwinds.The Malaysian ringgit has traded within a tight range over the pastfew months, and we expect the currency to remain range boundamid continued uncertainty in global financial markets. As such,we maintain our 2016 average forecast at MYR4.100/USD andforecast the currency to appreciate gradually over the longer term asan undervalued real effective exchange rate and a modest currentaccount surplus provide structural support.Malaysia's ruling BN coalition's convincing victory during the two byelectionsheld on June 18 indicate that embattled PM Najib Razakstill holds a considerable degree of support from the electorate. Assuch, we maintain our view that Najib will continue to consolidate hisposition and is likely to remain as PM until the next general electionin 2018.Major Forecast ChangeWe have downgraded our 2016 end-year forecast to MYR4.050/USDfrom MYR3.950/USD previously to reflect turmoil in global financialmarkets as a result of the UK's decision to leave the EU on June 23.

Table Of Contents

Malaysia Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Change.5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Maintaining Growth Forecast Amid Headwinds8
Ongoing weakness in the Chinese economy and domestic headwinds will continue to weigh on Malaysia's economic growth. However,
we expect accommodative monetary and fiscal policies to lend some support to the economy, and we forecast 2016 real GDP growth to
come in at 4.5%.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS.9
TABLE: PRIVATE CONSUMPTION FORECASTS.. 10
TABLE: GOVERNMENT CONSUMPTION FORECASTS 10
TABLE: FIXED INVESTMENT FORECASTS. 10
TABLE: NET EXPORTS FORECASTS.. 10
Fiscal Policy And Public Debt Outlook 11
Fiscal Position Intact As GST Takes Off.11
The relatively successful implementation of GST in April 2015 and ongoing efforts to strengthen the revenue collection system bode well
for Malaysia's fiscal position, even as petroleum revenues continue to fall. With GST's share of government revenue increasing slowly,
we maintain our forecast for the country's 2016 fiscal deficit to come in at 3.1% of GDP, and note that Malaysia remains on the path of
gradual fiscal consolidation.
Structural Fiscal Position. 11
TABLE: MAIN EXPENDITURE and REVENUE CATEGORIES. 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS.. 12
Monetary Policy.. 13
Policy Stance Remains Unchanged Despite New Governor..13
In line with expectations, BNM kept its OPR steady at 3.25% during its May 19 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.
Monetary Policy Framework 14
TABLE: MONETARY POLICY FORECASTS. 14
Currency Forecast. 15
MYR: Remaining Neutral Amid Global Uncertainties..15
The Malaysian ringgit has traded within a tight range over the past few months, and we expect the currency to remain range bound amid
continued uncertainty in global financial markets. As such, we maintain our 2016 average forecast at MYR4.100/USD and forecast the
currency to appreciate gradually over the longer term as an undervalued real effective exchange rate and a modest current account
surplus provide structural support.
TABLE: BMI CURRENCY FORECAST.. 15
Outlook On External Position. 16
TABLE; MAIN IMPORTS and EXPORTS.. 16
TABLE: MAIN IMPORT and EXPORT PARTNERS. 16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.. 17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS 17
Chapter 2: 10-Year Forecast. 19
The Malaysian Economy To 2025 19
Productivity Gains To Support 4.0% Real Growth19
Owing to strong demographic trends, a continually improving business environment, and further ASEAN economic integration, we see
Malaysian real GDP having a compound annual average growth rate of 4.5% (6.5% in nominal US dollar terms) over the next decade.
While this is slightly below the 5.1% (10.5% in nominal US dollar terms) rate seen over the past decade, this largely reflects lower
growth in the working age population, while labour productivity growth is set to rise.
TABLE: LONG-TERM MACROECONOMIC FORECASTS. 19
Chapter 3: Political Outlook. 23
SWOT Analysis 23
BMI Political Risk Index. 23
Domestic Politics.. 24
By-Election Victories To Further Bolster Najib's Position..24
Malaysia's ruling BN coalition's convincing victory during the two by-elections held on June 18 indicates that embattled PM Najib Razak
still holds a considerable degree of support from the electorate. As such, we maintain our view that Najib will continue to consolidate his
position and is likely to remain as PM until the next general election in 2018.
TABLE: POLITICAL OVERVIEW.. 24
Long-Term Political Outlook.. 26
Race Relations Still Cloud The Horizon..26
Malaysia's ethnic diversity will continue to influence domestic politics, and the rise of a stronger opposition presents myriad possibilities
in the political arena over the longer term.
Chapter 4: Operational Risk. 29
SWOT Analysis 29
Operational Risk Index.. 29
Operational Risk. 30
TABLE: OPERATIONAL RISK 30
Market Size And Utilities Analysis.. 31
TABLE: ASIA - MARKET SIZE AND UTILITIES.. 32
Labour Costs 35
Latest Labour Costs Analysis36
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 37
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook. 39
Brexit Risk Casts A Long Shadow..39
TABLE: GLOBAL ASSUMPTIONS.. 39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %.. 41
TABLE: MACROECONOMIC DATA and FORECASTS. 43

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