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Malaysia Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

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 the goods and services tax (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 overnight policy rate 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/USD 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/USD 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.

Table Of Contents

Malaysia Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Downgrading Growth Amid Persistent Headwinds......................................................................................................................8
We are downgrading 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.
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
Generous Civil Service Wages Presents Downside Risks........................................................................................................11
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.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN EXPENDITURE and REVENUE CATEGORIES..................................................................................................................................12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
Monetary Policy........................................................................................................................................................ 13
Paring Back 2017 Rate Hike Expectations..................................................................................................................................13
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.
Monetary Policy Framework.................................................................................................................................... 14
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................15
Currency Forecast.................................................................................................................................................... 15
MYR: Slight Downgrade Amid Weak Technicals........................................................................................................................15
We have downgraded our 2016 end-year forecast slightly to MYR4.100/USD 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.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................16
External Trade And Investment Outlook ............................................................................................................... 16
Tech Demand To Support Export Growth...................................................................................................................................16
Export figures from Malaysia indicate that the country is unlikely to exhibit strong economic growth in H216, as China's slowdown
continues to undermine growth in the export sector. However, we maintain our 2016 and 2017 real GDP forecasts of 4.1% and 4.7%,
respectively, as we expect the gradual pick-up in the global tech sector to lend some support.
Outlook On External Position.................................................................................................................................. 17
TABLE: MAIN IMPORTS and EXPORTS....................................................................................................................................................................18
TABLE: MAIN IMPORT and EXPORT PARTNERS....................................................................................................................................................18
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................18
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................19
Chapter 2: 10-Year Forecast................................................................................................................... 21
The Malaysian Economy To 2025........................................................................................................................... 21
Productivity Gains To Support 4.0% Real Growth ....................................................................................................................21
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. The lofty level of household debt and uncertainty
regarding the fiscal trajectory are both risks, but are not likely to derail the economy's strong prospects.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................21
Chapter 3: Political Outlook................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
BMI Political Risk Index........................................................................................................................................... 25
Domestic Politics..................................................................................................................................................... 26
New Opposition Party No Threat To Government's Position....................................................................................................26
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 if it is able to leverage PPBM's strengths and make
inroads into BN's powerbase.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................26
Long-Term Political Outlook................................................................................................................................... 28
Race Relations Still Cloud The Horizon......................................................................................................................................28
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................................................................................................................... 31
SWOT Analysis......................................................................................................................................................... 31
Operational Risk Index............................................................................................................................................ 31
Operational Risk ...................................................................................................................................................... 32
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 32
Business Crime ....................................................................................................................................................... 33
TABLE: BUSINESS RESPONSE TO RISK IN MALAYSIA...................................................................................................................................... 34
Government Intervention......................................................................................................................................... 36
TABLE: BUSINESS TAXES..................................................................................................................................................................................... 36
TABLE: PERSONAL and INCOME TAX BRACKETS................................................................................................................................................. 37
Chapter 5: BMI Global Macro Outlook................................................................................................... 41
Global Macro Outlook.............................................................................................................................................. 41
Broad Recovery But Three Notes Of Caution.............................................................................................................................41
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %................................................................................................................................... 43
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................45

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