Posted on 30 Dec 2015
“Recent increases in public transportation costs, toll rates, abolishment of rebates for electricity charges and continuing subsidy rationalisation suggest that headline CPI numbers will likely edge up in 2016,” its chief economist Nor Zahidi Alias said in the “Economic Outlook 2016: On the Verge of an Inflection Point?” report.
He said this will also likely continue to dent private consumption as consumers become more cautious about discretionary spending.
Nor Zahidi views that Malaysia’s real gross domestic product (GDP) growth will remain below its potential as the impact of the slowdown in domestic demand is reflected in the headline number, with an expectation that GDP growth will likely settle at around 4.7% in 2015 and moderate further to 4.4% in 2016.
As domestic demand remains strongly correlated with the external sector, he said any significant weakness in external demand will have adverse repercussions on domestic demand.
“On that score, we are tweaking our growth forecast for private consumption and private investment to 4.2% and 6.9% respectively for 2016,” he said, adding that the pace of investments will be affected by rising interest rates as the impact of rate hikes in the US reverberates across the globe.
Nor Zahidi stressed that the more obvious impact on headline GDP in 2016 will likely be from sluggish crude oil prices, which are expected to persist in 1H2016 before recovering slightly in 2H2016.
“We are less pessimistic about the prospects in 2H2016 as we foresee the impact of the current rout in commodities will slowly diminish by mid-2016,” he said, noting that supply growth will likely taper off if oil prices remain at the current level.
Going forward, Nor Zahidi anticipates that the oil price slump will exert additional pressure, as petroleum-related exports will likely experience further negative growth, but there will be support from the electronics and electrical and palm oil segments, which have benefited from improved demand and the lower ringgit.
He said that a sustained crude oil price level below US$35 (RM150.15) per barrel could induce the government to consider a revision for its oil price assumption of US$48 per barrel for Budget 2016.
Meanwhile, he expects the monetary policy to remain stable in 2016 as the expected weakness in headline GDP growth is not likely to induce Bank Negara to loosen its monetary stance, unless the economy weakens dramatically.
“While there is currently limited fiscal space, Bank Negara will not likely risk implementing any measures that may cause further macroeconomic imbalances (i.e. high household debt). As such, we expect the overnight policy rate to remain at the current level of 3.25% in 2016,” he said.
Nor Zahidi added that Malaysia’s fiscal policy space is limited by its budget deficits, which have yet to decline to below 3% of GDP.
While the government is expected to achieve its deficit target in 2015, declining oil prices and decelerating nominal GDP growth have made it more challenging for the government to reach its target in 2016.
On the currency front, Nor Zahidi said the downward pressure on the ringgit will likely remain at least in 1H2016, premised on the anticipated continuing slide in crude oil prices in 1H2016 as supply outstrips demand.
