Malaysia introduces measures to promote economic growth

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While the first six months of 2016 have brought mixed results, Malaysia’s economy is expected to give an improved performance in the second half of the year, especially as remedial measures introduced by the government gain momentum.

Current challenges

The past two years have been challenging for Malaysia, with low export prices and turbulent foreign exchange markets, including an economic slowdown in China, dampening foreign investment and driving down the Malaysian ringgit.

Home-grown issues, such as weaker domestic fundamentals and questions about the government’s sovereign wealth fund, 1Malaysia Development Berhad (1MDB), have also added to the challenges.

In July AllianceDBS lowered its initial annual GDP growth forecast for Malaysia from 4.5% to 4.1%, citing the difficult economic climate.

As Asia’s only major net exporter of oil – with crude accounting for 22% of government revenue – weak demand for commodities and fluctuating oil and gas prices present a particular challenge for Malaysia.

Low global oil prices have taken their toll, with the currency sinking to a 17-year low of RM4.46 against the dollar in September 2015, before bottoming out again in January at RM4.42.

Mixed results

In January the government announced a revised budget, which included restructuring measures designed to both save RM9bn ($2.2bn) and boost domestic demand.

Steps included reducing employee pension contributions, tax relief for low earners and a return to prioritising development projects.

The first three months of 2016 brought good news in the form of a recovery in oil and gas prices, which saw the ringgit surge 10.1% in the first quarter, representing its largest jump since 1973.

Growth, meanwhile, stood at 4.2% year-on-year (y-o-y) in the first quarter, surpassing a forecast of 4.1 y-o-y%, but down slightly from 4.5% y-o-y growth at the end of 2015.

The gains proved to be short-lived, however, as oil prices faltered in the second quarter, leading to weaker exports and an easing in private investment. The ringgit declined 3.3% in the second quarter, despite having outperformed all other regional currencies in the first quarter of the year.

Taking measures

In mid-July the central bank cut its overnight policy rate 25 basis points to 3%, the first interest rate cut in seven years. According to press reports, the central bank noted that the rate cute would help Malaysia stay on a "steady growth path".

Previously, the bank had moved to reduce the amount of cash that banks are obliged to set aside as reserves. Muhammad Ibrahim, the newly appointed governor of the central bank, told media that the reduction in the statutory reserve requirement has paved the way for an increase in inter-bank lending.

In a separate development, 1MDB’s pledge to sell energy assets and repay RM6bn ($1.5bn) of debt helped to allay concerns over financial mismanagement and calm investors. In their findings, Swiss investigators reported that as much as $4bn could have gone missing from the entity.

Exports remain a concern

The government’s remedial measures have proved to be key in keeping the current account deficit target on track, with the central bank forecasting growth to improve in the second half of 2016.

Higher civil servant wages, increased capacity in the manufacturing sector and improved palm oil production are expected to help, although growth will be largely determined by commodity prices.

Malaysia is the world’s second-largest exporter of palm oil. Palm oil futures fell to a 10-month low in July on forecasts of weaker demand for vegetable oils and improved production in the wake of El Niño.

Oil prices have also wobbled in recent weeks and are now hovering at around $48 per barrel, after hitting a high of $53 on June 9.

Ian Taylor, CEO of Vitol Group, an independent oil trading house, told media in early July that a glut in supply meant oil was likely to remain “not too far away from where we are today”, before rising to about $60 by the end of 2017.

If accurate, such forecasts would produce a moderate rebound in GDP growth in Malaysia for the second half of 2016.

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