Malaysia economy: A monetary-fiscal policy mix likely in 2020 - MARC

The Malaysian economy grew by an inflation-adjusted 4.3% in 2019. According to Bank Negara Malaysia (BNM) which released the figures yesterday, growth in 4Q2019 slipped to 3.6% from 4.4% in the preceding quarter, its slowest quarterly growth since 2009. The weaker growth was partly attributed to a slowdown in the external sector whereby net trade subtracted 0.7 percentage point from overall growth. Of note was the lacklustre performance of public investments which continued to contract by 7.7%.

The 4.3% annual GDP growth recorded in 2019 was the slowest since 2009 and stood below Malaysia’s potential growth of 4.75% as estimated by the International Monetary Fund (IMF) in 2019. The overall moderation of the economy in 2019 was a reflection of the weaker global economy following lacklustre growth in global trade, supply-side disruption and falling business capex. All these took place against a backdrop of increasing uncertainties – US-China trade tensions and rising geopolitical risks – Brexit, North Korean missile tests as well as political events in the Middle East, to name a few.

Notwithstanding this, Malaysia’s private consumption (consumer spending) supported the economy in 2019. Statistics indicate that private consumption contributed roughly 100% of the overall growth in 2019. It also represented a good 59% of the overall economy. The relatively upbeat mood among consumers prevented the economy from moderating further in 2019.

Investments, however, dragged the headline growth, taking off 0.5 percentage point for the whole of 2019. The primary reasons for this were uncertainties among businesses and investors due to the challenging global economy and slower momentum in domestic activity, particularly public investments. This led them to hold back their future spending plans.  Malaysia’s public investments contracted by 10.8% in 2019, after contracting by 5% in the preceding year. The rationalisation of public investments is viewed as necessary in order to better manage government expenditures and the debt level.

The road forward could be bumpy, especially with the expected pronounced impact of the novel coronavirus (COVID-19) outbreak on the global and domestic economies. As some estimates suggest that China’s headline GDP growth could likely slip to between 5.0% and 5.5% this year - its lowest since 1990 – repercussions on global growth prospects cannot be underestimated. This is in view of China’s growth contribution that currently represents about one-third of global economic growth.

A slowdown in global economic activity will most likely affect Malaysia’s growth in 2020 given that it is an open economy. Statistics suggest that there is a strong 80% correlation between global economic growth and Malaysia’s GDP growth between 2010 and 2018. Our estimate shows that Malaysia’s GDP growth could moderate by roughly 0.3%, if the world economic growth falls from 3.3% as currently estimated by the IMF, to 3%. 

The relationship between China’s economic growth and that of the Malaysian economy is also too close for comfort, judging by statistics between 2010 and 2018. An estimate suggests that a 0.5% contraction of China’s economy is associated with a 0.2% decline in the growth of the Malaysian economy.

Given the material impact of the COVID-19 outbreak on the Chinese and global economies, Malaysia will likely arm itself with both fiscal and monetary arsenals in 2020. On the fiscal side, the government is already planning to introduce a stimulus package in the near term. In our view, these efforts should be applauded.

On the monetary side, BNM has been rightfully cautious about adjusting the policy rate to ensure sufficient ammunition is available at a time when the economy needs it the most. It also has to take into consideration the effectiveness of such a policy given the diminishing impact of lowering interest rates on the economy. This is in line with the current view of many global central banks. Having said this, it is worth noting that the recent COVID-19 outbreak has the potential of impacting the global economy in a manner greater than initially anticipated. Firstly, the severity of the outbreak exceeds the previous SARS outbreak in 2003. Secondly, the size and contribution of the Chinese economy to the world economy is far greater now than before.

Hence, given the increasing downside risk of the Malaysian economy, we think that another policy rate adjustment by BNM is now looking more certain. Both fiscal and monetary policies will act to prevent further downside to the country’s growth in 2020.

Copyright Press Releases 2020