Growth projections remain intact, Ringgit “significantly undervalued”

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Malaysia’s exports rose 6.4% yoy last year.Malaysia’s exports rose 6.4% yoy last year.Malaysia’s exports rose 6.4% yoy last year.

Bank Negara Malaysia (BNM) in its 2014 Annual Report reiterated its growth projections of 4.5-5.5% for the country in 2015 (6.0% in 2014; 4.7% in 2013), in line with growth targets presented by the Ministry of Finance (MOF) in January during the revised 2015 Budget.

BNM expects growth in 2015 to be sustained by expansion in domestic demand amid strong domestic fundamentals and a resilient export sector. Domestic demand will be driven by private sector spending, projected to grow by a strong 9.0% in 2015, versus 11.0% in 2014. It also expects private consumption to hold up relatively well at 6.0% (7.1% in 2014). BNM is of the view that although the implementation of the goods and services tax (GST) may have some effect on household spending, it will likely be mitigated by an increase in the payout of Bantuan Rakyat 1 Malaysia (1BRIM), lower fuel prices, lower inflation and favourable labour market conditions.

BNM annual report 2014 1

BNM annual report 2014 1

However, to account for lower oil prices, BNM has downgraded its assessment of inflation in 2015 to average 2-3%, from 4-5% earlier (3.2% in 2014),  below the historical average (average over 1991-2014: ~3%).This forecast is lower than the previous official projection of 2.5-3.5% by MOF but in line with the general consensus that inflation this year will be lower than last year despite the introduction of the goods and services tax (GST) due to the steep drop in oil prices in the earlier part of the year and a high base effect from last year.

Monetary policy in 2015 will focus on supporting the steady growth of the economy, amid a contained inflation outlook, and the risks of destabilising financial imbalances will continue to be monitored. BNM stressed that the Malaysia’s monetary policy stance remains sufficiently accommodative for its economy.

BNM annual report 2014 2

BNM annual report 2014 2

On the ringgit, Governor Tan Sri Zeti Akhtar Aziz highlighted that the local currency was “significantly undervalued” and does not reflect Malaysia’s strong fundamentals. Even as the currency approaches the psychological RM3.80/USD level, she reiterated that the country has moved on from the days of capital controls and there is no looking back. BNM has ample foreign reserves with a wide range of monetary policy instruments to deal with capital flows.

Although many central banks in the region have loosened monetary policy, economists do not think BNM will be one of them at this juncture. BNM had at a recent briefing maintained a status quo bias for interest rates and signalled that it will continue to adopt a wait-and-see stance as the nation’s current growth and inflation outlook do not warrant a rate cut.

Bank Negara Malaysia

Bank Negara Malaysia

RHB economist Peck Boon Soon said that, given the lower-than-expected inflation projected by the Central Bank for 2015 and the downside risks to economic growth highlighted, “we are of the view that the Central Bank will likely keep the OPR [overnight policy rate] stable at 3.25% in 2015 as the strength of economic growth will be a more important consideration relative to inflation for monetary policy decision in 2015.”

CIMB economists noted that “unlike other countries like India and Indonesia, which raised interest rates by 75-200bp between 2013 and 2014, partly to support their currencies, BNM raised rates by only 25bp in July 2014. As such, the other central banks have more leeway to lower interest rates.”

Barclays regional economist Rahul Bajoria said the central bank’s report “indicates to us that BNM does not see any immediate deflation or growth risks in the economy. The central bank also indicates that the monetary stance is consistent with the sustainability of growth, as inflation appears to be a lesser risk at this point. While we see risks of BNM keeping rates on hold through 2015, we maintain our base forecast of a 25bp hike in Q4 2015.”

RHB’s forecasts for both public investment and consumer spending are less robust compared with the projections made by BNM. It projects consumer spending softening to 5.2% in 2015. It also sees BNM’s inflation forecast as optimistic.

“Apart from the sharp fall in crude oil prices, the impending implementation of the GST on 1 April will likely affect domestic demand as well, as it will likely lead to higher inflationary pressure and hurt consumer and business confidence. As a result, we expect economic activities to slow down in 2Q and 3Q, before it gradually normalises towards the end of the year. If consumers and businesses were to over-react post GST implementation, it could pose downside risk to the economic growth.”

RHB expects the ringgit to stay weak and trade at around RM3.65-3.75/USD in the short term, but could worsen and trade towards RM3.80/USD.

Malaysia’s exports rose 6.4% yoy last year (up 2.5% in 2013), due mainly to the strong performance in the E&E sector, but recorded a 0.6% yoy decline in January, primarily because of a drop in oil-related exports. BNM projects export growth of 1.5% this year (6.4% in 2014), which is lower than CIMB’s forecast of 4.1% and RHB’s 4.2%.

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