BNP Paribas expects Malaysia’s gross domestic product (GDP) in 2020 to grow at a slightly slower pace though the balance of contribution will shift toward the external sector and away from the consumer.
The external environment was not kind to Malaysia in 2019 as global growth slowed, the electronics cycle was in a slump and there was a trade war between the US and China.
This near-perfect storm put Malaysia’s export growth for the year at flat to negative, with the 11-month clip at -2%.
“It is a credit to the economy’s resilience, mainly the consumers that growth for 2019 is still likely to be close to 4.5 % (see chart below). We expect a modestly slower pace in 2020 with the balance of contribution likely to shift toward external factors,” said BNP Paribas head of Asean economics Arup Raha in its recently released report entitled Malaysia: Tailwinds are fading, but so are headwinds.
Key takeaways from the report include a friendlier external environment from the second quarter and the moderation of the previously strong private consumption.
It added that the global growth slowdown seemed to have had the largest impact on exports in 2019. In 2020, given our expectation that global growth is likely to trough in 1Q, this headwind is also likely to fade.
“Moreover, although we expect Chinese growth to slow, we think the import-intensive component of growth fixed asset investment in manufacturing capacity will have a better year. This, combined with the base effects of a poor 2019 performance, will lead to better export growth in 2020 in our view,” Raha adds.
Over 80% of Malaysian exports are manufactured goods, and about half of these are electrical and electronics products. As such, export growth relies on the technology cycle, which was another headwind in 2019. However, there are signs of the cycle turning in 2020 and in our view, the technology cycle has bottomed.
The signing of phase one of the US-China trade agreement in January is also likely to be beneficial though to what extent is not clear. Malaysia’s exports of semiconductors and processors to the US rose after the implementation of the List 2 tariffs in August 2018 suggesting there was diversion of trade due to tariffs that was helpful for Malaysia.
BNP Paribas also expects external developments to be the greater drivers of the ringgit, particularly the outlook for the US Federal Reserve, the USD and oil prices.
“Given our expectation that the Fed will cut rates twice in 1H this year and that the USD will weaken against the euro, yen and renminbi, we expect the ringgit to weaken against the USD. However, we think there could be resistance to an all-out strengthening if, as we expect, oil prices stay on the softer side from current levels. On balance, we expect a modestly stronger ringgit to end the year at close to 3.95 versus the USD,” explained Raha.
“Moreover, we note that the ringgit has been remarkably stable of late. This could be due to the reduced activity of leveraged market participants, or to stronger official oversight, but the ringgit has not been mispriced relative to our fair value models for over a year.” – Jan 17, 2020