KUALA LUMPUR: Malaysia will likely implement measures to support its overall economy in the near term given increasing external risks and weak investment growth, said Malaysia Rating Corp Bhd chief economist Nor Zahidi Alias.
This is despite the stronger gross domestic product (GDP) growth of 4.9 per cent recorded in second quarter of 2019.
Nor Zahidi said Bank Negara Malaysia would likely keep its options open before committing to further downward adjustments in the overnight policy rate (OPR).
But MARC felt that the rate cut could happen in the first half of next year if macroeconomic conditions deteriorate in the near term.
“Having said this, we do not expect the reduction to lead to a series of rate cuts akin to the one we saw during the global financial crisis in 2008-2009 where the OPR was reduced to two per cent,” he wrote in a report today.
Although Malaysia’s high household debt of 83 per cent of GDP calls for measures that prevent households’ balance sheets from deteriorating, he thinks that another 25 basis points reduction in the OPR, if necessary, will not do much harm to the economy.
This is because the household debt profile had improved in recent years.
“The share of borrowings by the so-called vulnerable group (monthly income level of RM5,000 and below) continued to fall to 39.8 per cent in 2018 from 46.4 per cent in 2014,” he noted.
On the fiscal side, the recent rhetoric from the government suggested that the fiscal policy could be relaxed slightly to avert a faster-than-expected deceleration in economic growth,” Nor Zahidi said.
He noted that budget deficits had already declined by 39 per cent in the first five months of 2019 to RM21.4 billion from RM35.0 billion in the corresponding period in 2018. This is despite a 13.4 per cent increase in net development expenditure during the period.
“Going forward, we now expect development expenditure to be further increased and budget deficits for 2020 will remain circa 3.2 per cent of GDP, a shade higher than the original target of 3.0 per cent of GDP.”
MARC does not think a slight uptick in the budget deficit ratio, if it happens, would cause much concern among international credit rating agencies.
This is given that the overall macro backdrop was not expected to deteriorate to the levels seen during the Asian financial crisis in 1998 or during the global crisis in 2008.
“Even during the 2008 global financial crisis, Malaysia’s sovereign rating was not revised by international credit ratings agencies,” Nor Zahidi said.
MARC also feels that the possible economic support from both the monetary and fiscal sides would generally be positive for the financial market in the near term, alleviating the pressure arising from foreign capital outflows that the market has experienced since 2016.
This is despite some outflows that could possibly take place due to investors’ anxiety over FTSE Russell’s decision of whether to exclude Malaysian government bonds in its global index in Septemberm Nor Zahidi said.
Downside risks would, however, emerge from a possible sustained depreciation in the Chinese renminbi and a faster-than-expected deceleration in the headline GDP growth, he added.