Julia Goh
[email protected] Global Economics & Markets Research Email:
[email protected] URL: www.uob.com.sg/research Friday, 24 March 2017
Flash Notes
Malaysia: BNM 2016 Annual Report – Balanced Growth
Bank Negara Malaysia (BNM) projected GDP growth at 4.3%-4.8% (point estimate 4.6%) for 2017, a narrower range compared to the Ministry of Finance’s projected range of 4.0%-5.0% released in October last year.
While domestic demand remains the prime growth driver, there is a slight shift with private sector activity moderating and the slack picked up by higher net exports and public investments. This signals cautious spending behavior amid higher costs and continued uncertainty in the economic environment.
Headline inflation is expected to average higher at 3.0%-4.0% in 2017 (vs. 2.1% in 2016) mainly due to cost-driven factors. In the absence of strong demand conditions that limits the pass-on in costs to consumers, we expect the overnight policy rate (OPR) to stay unchanged at 3.0% this year.
BNM sees the current Ringgit performance driven by sentiment and portfolio flows. Foreign holdings of bonds have declined to 28.7% as at end-February (from a peak of 34.7% in 2016) largely due to reduction in short-term papers which are attributed to unwinding of NDF positions. The level of foreign holdings is expected to settle at a lower but more stable level in the future.
BNM Governor Muhammad Ibrahim was quoted to say the rule requiring exporters to convert proceeds into Ringgit is permanent until there is a reason to change it. BNM will also name banks which are penalized for wrong doing in foreign-exchange trading from 1 Jan 2018.
USD/MYR hovers at 4.42. There is no change to our near-term view for the pair to trade sideways within 4.41-4.45.
GDP uptick to 4.3%-4.8% in 2017. BNM set a slightly better growth forecast of 4.3%-4.8% for 2017 (vs. 4.2% in 2016). This is in line with ours (4.5%) and Bloomberg market consensus (4.4%). The positive outlook is based on improved global growth prospects despite the presence of new and prevailing risks. The contribution from net exports is expected to turn positive following two years of contractions while domestic demand will be sustained by private sector demand. Cautious consumer spending behavior. BNM acknowledged that consumers are likely to adjust spending in response to higher inflation. Nevertheless, private consumption is still expected to expand 6.0% in 2017 (6.1% in 2016) supported by stable labor market, sustained wage growth, and government support measures. The labor market is expected to stay soft in 2017 with unemployment rate at 3.6%-3.8% (vs. 3.5% in 2016) though the number of layoffs has come off to 37,699 in 2016 from a peak of 44,343 in 2015. Employers continue to adopt a cautious hiring stance and thus the pace is insufficient to absorb new labour market entrants. The Malaysian Employers Federation survey reports expected annual salary increments at 5.4% in 2017 (vs. 5.5% in 2016). Government support measures to cushion disposable incomes include cash transfers, reduction in employee’s contribution to EPF by 3% pts until end-2017, assistance for civil servants, tax incentives, and higher commodity prices to support rural incomes. Public consumption is expected to contract 0.2% in 2017 (+1.0% in 2016) owing to reprioritized government spending and reduction in non-critical expenditure. The more prudent spending on supplies and services is expected to weigh on overall growth despite continued expansion in emoluments. Modest investments. Private investment growth is projected to moderate to 4.1% in 2017 (4.4% in 2016). Firms are generally cautious amid uncertainties in the economic environment and higher cost of doing business. Nevertheless private investment activity will be supported by on-going and new projects in the services and manufacturing industries. Key sectors include telecommunications, residential real estate, storage and transportation, E&E and resource-based sub-sectors. Public investment is projected to turnaround to expand 1.5% in 2017 (-0.5% in 2016) driven by key infrastructure project spending in utilities, transportation sub-sectors and downstream oil and gas.
Flash Notes Friday, 24 March 2017
1 Page
Growth by sector. Both services and manufacturing are expected to moderate. The slack will be picked up a turnaround in agriculture as CPO yields recover from adverse weather conditions, and higher construction activity driven mainly by new and existing civil engineering projects in the utilities, transportation and petrochemical segments. Services growth will be underpinned by rebound in tourist arrivals, improvement in trade activity, information and communication thanks to strong internet and digital services. Finance and insurance is anticipated to remain subdued in tandem with moderate loan growth. Manufacturing sector to grow alongside improved export activity. Mining sector expansion to sustain thanks to acceleration of natural gas production from existing and new oil fields. The voluntary 20,000 barrels per day crude oil supply adjustment by Petronas is expected to dampen performance in 1H 2017. Higher inflation at 3.0%-4.0%. Headline inflation is projected to rise to 3.0%-4.0% this year (2.1% in 2016) mainly due to cost-driven factors particularly the pass-through from higher oil prices as well as food prices. This is in line with our revised inflation projection of 3.6% for this year (vs. 2.8% previously) based on Brent crude oil assumption of US$50-55/bbl. The spillover to the broader price trends are expected to remain contained in the absence of strong demand conditions. However the inflation outlook is subject to the path of global oil prices, Ringgit, and degree of pass-through to domestic prices. OPR expected to stay unchanged. Despite higher inflation pressures which are cost-push, we expect the overnight policy rate (OPR) to stay unchanged at 3.0% this year given lingering growth risks, the absence of strong demand conditions, and abating financial imbalance risks. The presence of a narrow output gap (potential output of 4.5%-5.0%) indicates that the pressure on prices from demand is expected to remain benign. Private demand is projected to moderate (5.6% in 2017 vs. 5.7% in 2016). BNM emphasized that that there is continuing uncertainty surrounding the outlook for domestic growth and inflation. There is also consideration for financial imbalance risks when setting interest rates, though these have largely remained contained guided by the moderation in loan growth and household debt. Household debt grew at a slower rate of 5.4% to MYR1.1tr or 88.4% of GDP in 2016 (89.1% in 2015). This marks the first time since 2010 household debt grew at a slower pace relative to nominal GDP, marking a potential turning point for adjustments in household leverage. This comes on the back of scaled back borrowings in line with loan affordability. It also reflects the effect of macroprudential measures introduced since 2012 and responsible lending standards that has helped mitigate risks in the household sector. The debt burden of households eased in line with slower growth of average house prices which rose 5.3% in Jan-Sep 2016 compared to an average of 9.5% during 2010-2015. The house price adjustments are associated with a scaling back of investment purchase particularly in the higher priced segments, while developers concentrate on the affordable housing segments that continue to see strong demand. The capacity of households to service debt has remained firm with average income growth of 5.5% (5.7% in 2015), redundancies confined to specific industries with the oil and gas most affected, and households having strong financial buffers. Also 84% of housing loan borrowers have only one outstanding housing loan, thus they are incentivized to maintain loan repayments in event of financial stress or negative equity on their homes. Meanwhile growth of borrowers with three or more outstanding home loans (as a proxy for speculative buyers) slowed further to 1.4% (3.1% in 2015 and 15.8% in 2010) to account for only 2.8% of total housing loan borrowers. Thus the household impaired loan ratio has been fairly stable at 1.1 in 2015-2016 (vs. 1.2 in 2014). Strong household balance sheet with financial asset coverage ratio of 2.1 times. Household financial assets rose by 5.4% to MYR2.2tr or 181% of GDP in 2016, with 43% of household financial assets held in the form of deposits and deposit-like instruments that provides flexibility to adjust to unexpected changes in income or expenditures. When imputing housing wealth, the ratio of household asset to debt rises to 3.5 times. Noteworthy is BNM published the distribution of household debt by income segments that sheds light on the more vulnerable lower income segments (bottom 40 income group) that account for 11.4% of total debt while the largest share of debt (about 40%) is owed by the top 20 income group. BNM highlights that risks remained heightened in the office space and shopping complex segments, with new supply outstripping recent historical trends despite signs of softer tenant demand. Nevertheless direct risk to banks from this segment remains small (3.4% of banks’ total outstanding loans).
Projecting Sustained Current Account Surplus Albeit Narrower Amid Push For Higher Investments MYR bn
%
120
12.0
100
10.0
80
8.0
60
6.0
40
4.0
20
2.0
-
2011
2012
2013
Current account
2014
2015
2016
2017f
0.0
% of GDP (RHS)
Source: BNM, UOB Global Economics & Markets Research Current account surplus of 1.0% - 2.0% of GNI (2.1% in 2016). BNM projects a sustained current account surplus of MYR17.4bn in 2017 (MYR25.2bn in 2016) amid stronger trade underpinned by improved global growth, commodity prices, and sustained domestic demand. However guidance is to expect a narrower surplus going forward amid the drive of investments to raise Malaysia’s long-term productive capacity and efficiency levels. Prospects for commodity prices returning to previous highs are also low.
Flash Notes Friday, 24 March 2017
2 Page
Private Sector Demand Moderates As Net Exports Turns Around Annual change % 7 5.7 6
All Key Sector Projected To Expand Albeit Slower Growth For Services And Manufacturing GDP Growth By Sectors
Annual change (%)
GDP Growth By Demand 5.6
8.0 7.4
Construction
5.3
5
Agriculture
4
4.0
-5.1
3 2 0.4
1
2.7 2.7
Mining and quarrying
0.5
0
4.3 4.4
Manufacturing
-1 -2
-1.8
-3
Private sector expenditure
Public sector expenditure
2016p
4.9 5.6
Services
Net Exports of Goods and Services
-6 -4 2017F
2017f
Source: BNM, UOB Global Economics & Markets Research
-2
0
2
4 2016P
6
8
10
Source: BNM, UOB Global Economics & Markets Research
Project Pipeline (>MYR1bn) For Manufacturing And Services
Household Debt Slows RM (bn) 1200 1000 800
877.6
960.2
1,030.6
1,086.2
12
782.3
10 8
600
6
400
4
200 0
14
2 2012
2013
2014 Year
2015
HH Debt (RM billion)
2016p
0
Annual Growth
Source: BNM, UOB Global Economics & Markets Research
Source: BNM, News flow
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