Malaysia is expected to maintain its credit rating with an improved fiscal position and deficit coming in at 3.5% of GDP according to ICAEW’s latest Economic Insight: South-East Asia report. 

Malaysia’s economic growth is expected to moderate in 2019 to 4.5%, down from 4.8% in 2018.

Cooling Chinese import demand and trade protectionism are projected to weigh on exports, notwithstanding any temporary boost to exports, as mining production normalises from an export growth fall of 0.8% year-on-year in Q3 2018.

Malaysia has friendly trade ties with China, with total exports to the latter accounting for 10.7% of GDP in 2017. Of this, more than half were to meet Chinese domestic demand.

“In line with our simulation of US-China tariffs, we expect economies with the closest ties to China to experience the hardest hit in a trade war – whether through direct or indirect export.

“Against a challenging global backdrop, we expect that the knock-on impact of the US-China trade war will be felt more strongly in 2019, resulting in a trimmed growth forecast for Malaysia next year, with the global macroeconomic context still reasonably constructive,” said ICAEW Economic Advisor & Oxford Economics Lead Asia Economist, Sian Fenner.

Domestic demand in Malaysia will provide some relief amid the more challenging outlook for exports, although some of the factors underpinning the strong growth in household spending seen in 2018 are set to fade.

Higher inflation and tightening of policy rates, as well as financial stability considerations, arising from higher US interest rates or internal developments, are also likely to moderate demand.

Malaysia’s fiscal position is expected to improve, with the deficit estimated to come in at 3.5% of GDP in 2019, slightly higher than the government’s target of 3.4%.

This forecast reflects a more cautious outlook for GDP growth over 2019 – 2020, and a likely delayed effect of a potential boost to revenues from new taxes announced in Budget 2019.

Despite the higher fiscal projections, Malaysia is expected to maintain its credit rating, a reflection of efforts to restore public finances and debt in terms of the fiscal deficit over the medium term.

Other factors supporting Malaysia’s positive credit ratings include lower interest rate payments as a share of revenue following the announcement that Japan will guarantee JPY200 billion of 10-year Samurai bonds at an indicative coupon of 0.65%, which will be used to roll over maturing debt; and improved transparency and governance standards.

However, the tail risk of a downgrade has risen, given the government’s increased reliance on oil prices as well as implementation risks and revenue uncertainties.

ICAEW Head of Malaysia, Loh Wei Yuen, said, “Although domestic demand has held up well this year, it is unlikely to reach the stellar pace achieved in 2018, partly due to lower monetary policy support.

“Combined with a moderation in export growth – despite its resilience against rising trade tensions – we expect GDP growth in Malaysia to ease next year, as a result of the ongoing US-China trade conflict and tighter global monetary conditions.”

GDP growth across South-East Asia is also set to slow next year, as many of the region’s economies are small, open and heavily dependent on exports to China, due to both supply-chain linkages as well as meeting Chinese domestic demand. Amongst South-East Asia economies, Singapore is expected to experience the sharpest slowdown, with the country’s GDP growth set to moderate from an expected 3.3% in 2018 to 2.5% in 2019.

On the other hand, Indonesia and the Philippines, which have less trade with China, will be the least affected. As such, while growth is set to ease in Vietnam, Indonesia and the Philippines in 2019, they will still be amongst the top ten fastest growing economies globally.

The report also revealed that South-East Asia’s GDP growth forecast to slow in 2019 amid trade war.

“US-China tensions and the resulting slowdown in Chinese demand will weigh significantly on SEA growth, especially for export-dependent economies with a high level of exports to China.

“Amongst SEA economies, Singapore is expected to experience the sharpest slowdown, with the country’s GDP growth set to moderate from an expected 3.3% in 2018 to 2.5% in 2019.”

Domestic demand will likely provide some relief amid the more difficult outlook for exports. However, monetary policy is set to become less supportive moving forward as most of the region’s central banks have started normalising their monetary policy by raising interest rates this year.

Overall, economic growth across the region is expected to slow in 2019 to 5%, after an estimated 5.3% in 2018, as a result of the ongoing US-China trade conflict and tighter global monetary conditions.

In addition, the report also finds that the Indonesia’s GDP growth to slow slightly to 5.1% in 2018 and 2019.

GDP growth slowed slightly in Q3 to 5.2% year-on-year, from 5.3% in Q2, as private consumption growth edged marginally lower to 5.1% year-on-year.

“This, and adverse changes in stock building and the statistical discrepancy, drove the slight deceleration in overall growth.
“Reflecting these developments, imports moderated more than exports, reducing the drag to GDP from net exports.

“Domestic demand will continue to be the key driver of growth in 2019, although higher interest rates will likely weigh on investment and private consumption.”

Furthermore, slowing government infrastructure ahead of the next general election in April 2019 and delays to certain projects and capital imports is likely to more than offset any boost from higher pre-election public spending. As such, Indonesia’s growth forecast is maintained at grow 5.1% in 2018 and 2019.

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