Introduction

The global economy is currently being shaped by two widely anticipated but opposing events, which are creating a lot of economic uncertainty and sharp volatility in the global financial markets. Firstly, it is due to the expected growth slowdown in China,the world’s second largest economy and global manufacturing powerhouse and secondly to the strengthening of the US economy, boosted by strong consumer spending and recovery in the housing market. The International Monetary Fund (IMF) in its latest World Economic Outlook (WEO, October 2015), revised downward the 2015 annual growth estimate for the world economy to 3.1% (2014: 3.4%). However, growth in advanced economies is expected to be on the uptrend, growing slightly higher by 2.0%, while that in emerging market and developing economies, as a group, is projected to moderate slightly to 4.0% this year, ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam) is projected to grow at 4.6% in 2015.

Third Quarter 2015 Update

In Malaysia, the real GDP growth moderated in the third quarter of 2015, registering 4.7% year-on-year (y-o-y) compared to 4.9% in the previous quarter. Aggregate domestic demand continued to be the key engine of growth, growing by 4.0% y-o-y. Growth in external demand was improving, registering 3.3% in the third quarter of 2015. On the supply side, all economic sectors recorded positive growth rates in the third quarter of 2015, with services and manufacturing being the major contributors to the GDP with a combined share of 76.1%. The overall position of Malaysia’s balance of payments (BOP) improved in the third quarter of 2015, registering a bigger surplus of RM17.0 billion. The continuous improvement was attributed to continued strong net current account balance (NCAB), registering about RM5.1 billion. While the goods and services account increased in the third quarter, there are continued higher deficits in the primary factor income accounts of RM10.3 billion. The financial account in the third quarter of 2015 registered a deficit of RM31.2 billion, representing a sharp reversal from surplus in the previous quarter. “Other investment” recorded net outflows after having registered substantial surplus in the second quarter 2015, recoeding a deficit of RM6.4 billion. While direct investment improved in the third quarter, portfolio investment recorded a bigger deficit, amounting to RM24.4 billion, driven by continued outflows of portfolio investment during this period. Meanwhile, “net errors and omissions” recorded a huge surplus of RM43.1 billion.

While overall BOP improved dramatically on a quarterly basis in the third quarter of 2015, Bank Negara seemed to be intervening heavily in the foreign exchange market to support the ringgit level, especially in August and September 2015. This has been reflected in a steady reduction in net international reserves, which continued its downward trend, registering USD93.9 billion as at 13 November 2015, well below the “psychological threshold” of USD100 billion. But, the international reserves remain ample to facilitate international transactions without disruptions. It is sufficient to finance 8.6 months of retained imports, significantly higher than the 3-month international thresholds. Fortunately, the ratio of international reserves to short-term external debt stood at 1.1 times, marginally above the standard international threshold of 1.0.

Overall, unemployment edged upward slightly to 3.2% of the total labour force in August this year, indicating full employment (threshold at 4%) while consumer price inflation moderated slightly in October 2015, registering 2.5% year-on-year, on account of mostly policy-driven domestic cost-push factors. Price inflation was the result of cumulative direct and indirect effects of GST implementation, adjustments in fuel end-user prices in August 2015 and higher import prices, following almost across-the-board declines in bilateral ringgit exchange rates, especially against Malaysia’s major trading partners.

Gross exports registered a growth of 5.5% in the third quarter of 2015, expanding from a slower growth of 1.5% in the corresponding quarter of last year and pointing to a recovery performance of the external trade account. Gross imports also increased markedly, registering a growth of 2.9%. Trade surplus remained high in the third quarter of 2015, registering RM22.2 billion. The performance of the external trade account in the first three quarters of 2015 remained as a source of concern, albeit better performance in the months of August and September. Commodity export prices remained low. The commodity prices encompasses not only crude oil and LNG prices, but also palm oil and rubber prices.

The Monetary Policy Committee (MPC) meeting on 11 September 2015 decided to maintain the OPR at 3.25%, the same rate as last year. The stance of BNM’s monetary policy remains accommodative and supportive of economic activity. Monetary policy is specifically tailored to ensure sustainability of the overall growth prospects, while headline inflation is expected to peak early next year, following the impact of the GST and sharper-than-expected depreciation of the ringgit. In fact, bilateral ringgit exchange rate with the USD has been depreciating all the way in the last five years with rising volatility before finally breaking to sharply lower value since September 2014 until recently. Sadly for Malaysia, the ringgit has been allowed to cross the psychological threshold of RM3.80 per USD on 6 July 2015, and touched its lowest external value in the last 17 years at RM4.4725 per USD on 29 September 2015. Latest available data show that MYR per USD closed slightly higher at 4.3775 on 13 November 2015. Since end-September 2014, y-o-y, ringgit depreciated almost across-the-board against currencies of Malaysia’s major trade partners, especially with the US dollar (33.81%), Chinese Yuan (29.04%) and UK pound (25.17%). Ringgit also depreciated sharply against the Japanese Yen (19.35%), Singapore dollar (19.92%), Thai Baht (20.67%) and Euro (13.77%). However, in terms of nominal effective exchange rate (NEER), the ringgit depreciated by only 19.63% during the same period.

In the third quarter of 2015, MIER’s CSI fell not only for the fifth consecutive quarter but also all time low to 70.2 points, signaling a significant deterioration in overall consumer sentiments. The MIER’s Business Conditions Index (BCI) settled lower at 86.4 points in the third quarter of 2015. The index is made up of the Current Index (CI), which lost 9.7 points and Expectation Index (EI), which dropped 6.7 points. The Automotive Industry Index and Residential Property Index followed the trend exhibited by BCI to 74.4 points and 79.9 points, respectively. The Retail Trade Index gained 16.5 points to settle at 93.3 points. The Tourism Market Index, meanwhile, went above the 100-point threshold to settle higher at 116.5 points.

Conclusion

Given the above domestic scenario and global economic developments, the growth of Malaysia’s real GDP is projected to moderate to 4.9% this year, driven mainly by private sector expenditure. In 2016, real GDP growth is expected to remain more or less the same as 2015, registering growth of between 4.5% to 5.0%. The growth projection remains sustainable, especially with the output gap narrowing to about zero, while the consumer price inflation is expected to edge slightly to 3.0% from a relatively low inflation estimated for this year at 2.2% (remain low at monthly average of 2.0%). The prediction for unemployment rate at 3% in 2016 seems achievable, considering that rate is still below the full employment threshold (=4.0%), as labour market conditions remain healthy.