Asia > South-Eastern Asia > Malaysia > GDP expanded by 4.05% year-on-time(y-o-y) in the initial half of 2016,

Malaysia: GDP expanded by 4.05% year-on-time(y-o-y) in the initial half of 2016,


Despite falling revenue from a weaker commodities market and concerns over political uncertainty, Malaysia’s economy maintained a steady increase rate in 2016, though expansion may come under pressure in the coming year.

Sustained low oil and gas prices have seen the contribution of hydrocarbons to national revenue decrease from 30% in 2014 to just 14.6% this year. However, earnings generated from a goods and services tax imposed in 2015 and solid increase should see the budgetary deficit kept close to the government’s projected 3.1% of GDP.

Deficit levels should as well close out the year below the 55% of GDP ceiling set by the government, a factor that helped Malaysia maintain its sovereign “A-” rating from Fitch in October.

Ringgit squeezed

US political uncertainty following President-elect Donald Trump’s win and fears over the impact of an expected US rate hike put pressure on the ringgit late in the year, with the currency coming close to 19-year low in late November, at the same time as its price fell by 6.5% to RM4.46:$1.

While some analysts estimate the downward trend will continue into 2017, others predict the ringgit will stabilise in the new year on the back of high investment ratings from credit agencies and the popularity of the central bank – Bank Negara Malaysia (BNM) – part foreign investors.

Despite the ringgit’s downturn, BNM decided to leave its overnight policy rate (OPR) untouched at 3% during its final conference of 2016 in late November. The bank last changed its OPR in July, cutting it by 0.25% – the initial reduction in seven years.

BNM has stated that its approach to the rate will ensure steady increase amid stable inflation, supported by what it said will be healthy financial intermediation in the economy.

Year-end inflation will come in at the lower end of the projected 2-2.5% bracket, according to BNM, with inflation in 2017 set to remain stable given the environment of low world energy and commodity prices.

Solid increase, risks ahead

GDP expanded by 4.05% year-on-time(y-o-y) in the initial half of 2016, followed by increase of 4.15% y-o-y for the initial nine months, according to the central bank.

This is in line with the IMF’s 4.3% GDP increase estimate issued at the end of October, with the fund expecting this figure to rise to 4.6% in 2017 and 5% by the end of the decade.

One invitation that domestic increase will not make sustained gains at the end of 2016 comes from Malaysia’s banking sector, as average loan and deposit increase for the country’s leading banks posted hit a two-and-a-half-year low of 1.2% for loans and 1.8% for deposits in the third quarter of the year.

In late November Moody’s estimate that the slow pace of credit increase will continue through to 2017, and possibly beyond, reflecting what the ratings agency said was a challenging external economic environment.

A mixed picture

Construction was one of the best-performing sectors in the initial half of 2016. As an area of specific focus under the 11th Malaysia Plan – which covers 2016-10 – the sector has benefitted from high levels of national spending in recent years, recording 8.9% increase in the initial half of 2016.

According to data from the Department of Statistics Malaysia, the price of construction work in the third quarter reached RM31.9bn ($7.1bn), representing a 10.7% y-o-y increase.

Industrial activity, however, has not fared as well, and the November Nikkei Malaysia Manufacturing Purchasing Managers’ Index (PMI) – a measure of manufacturing performance – showed a slowdown in activity to 47.2 in October from 48.6 a month before. A score of additional than 50 indicates development in the sector. October as well marked the 19th consecutive month of decreased output.

Figures from the automotive sector reflected the manufacturing sector’s weaker performance, with vehicle sales slipping 14.2% y-o-y in October to 47,879 units. Sales through to the same month totalled 466,208, down 13.9% from the same period of 2015.

Though manufacturers are hopeful of better sales rates going into 2017, it may take time for request to shift up a gear.

Factoring in political risk

While the economic outlook is stable, there are some factors that could shake this view, inclunding allegations that money from the national investment fund 1Malaysia Development Berhad (1MDB) was transferred into the private account of Prime Minister Najib Razak – a claim strongly denied by the premier.

Rumours of malpractice within the fund as well threaten to undermine economic development by weakening investor confidence.

In late October Fitch said that while the impact of the 1MDB affair had only had a limited result on government policymaking, political stability and public finances to date, it remained a source of concern.

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