Bank Negara sees challenging environment as Q4 slows

Bank Negara sees challenging environment as Q4 slows

Kuala Lumpur - MALAYSIA'S central bank warned on Thursday that the economy faces "a challenging operating environment in the immediate future", following a moderation in growth to 4.5 per cent in the fourth quarter of last year from 4.7 per cent in the preceding quarter.

The weakest quarter of 2015, it confirmed the trend of slowing growth. Should GDP expansion in the first quarter come in below 4 per cent, further measures might be needed to stimulate the economy, opined independent interest rate and foreign exchange strategist Suresh Ramanathan.

The full policy effect of a 50 basis points cut to the banking sector statutory reserve requirement ratio (effective Feb 1) and 3 per cent reduction in employee contribution to the pension fund (from March 1) would be seen only in the second quarter, he said. He noted that, based on sales of big-ticket items such as property and vehicles, January and February would likely be slower months than the previous three months.

Private sector demand was key to Q4 growth and although the expansion was markedly smaller than the 5.8 per cent in the same quarter of 2014, it was enough to boost full-year GDP growth to 5 per cent - within the official forecast.

On a quarter-on-quarter seasonally adjusted basis, the economy expanded 1.5 per cent in the October- December period (Q3 2015 was 0.7 per cent), Bank Negara said in a statement on Thursday.

It said growth would continue to be driven by domestic demand with some support from net exports, but warned that the pace of expansion is seen moderating. "While the growth in income and employment continues to support private consumption, it is expected to moderate as households continue to adjust to the higher cost of living," it said.

Private investment is also projected to moderate to below its long-term trend but would be supported by capital expenditure in manufacturing and services as well as the implementation of infrastructure projects.

However, the central bank cautioned that downside risks to growth would remain given the continued uncertainty in the external environment and the ongoing reforms in the domestic economy.

It said inflation as measured by the consumer price index stood at 2.6 per cent in the fourth quarter.

On the ground, the high cost of living is taking a big chunk out of salaries.

A 6 per cent consumption tax and shrinking ringgit (currently at about RM4.22 (S$1.40) to the greenback) - have significantly dampened consumer spending. Many pensioners are suffering and the middle class has cut back on discretionary spending.

Retailers have reported significantly lower sales of about 30 per cent in the Chinese New Year period while businesses say debtors are stringing out payments.

Alliance Bank economist Manokaran Mottain expects private consumption and investment to halve from about 6 per cent last year to 3 per cent.

Bank Negara said monetary conditions remain supportive of economic activity and that liquidity in the banking system is ample "despite occasional tight funding conditions". The trade surplus (Q4: RM30 billion) and international reserves (end-January: RM410 billion) remain adequate.

In the fourth quarter, private consumption grew by a subdued 4.9 per cent (Q3 2014: 4.1 per cent) while private investment moderated to 5 per cent (5.5 per cent).

Public consumption and investment grew at a slower pace of 3.3 per cent (3.5 per cent) and 0.4 per cent (1.8 per cent), respectively.

Putrajaya expects growth to decelerate to between 4 and 4.5 per cent this year owing to the slump in global oil prices and slowdown in the Chinese economy. In January, it had revised the budget to reflect more realistic oil price assumptions of US$30-35 per barrel and announced optional cuts to employee pension contributions in an effort to free an additional RM8 billion (S$2.7 billion) into the economy.

Ambank group chief economist Anthony Dass said the local economy was now supported by diversified sources of growth owing to structural adjustments over the years. The flexible exchange rate, deep and more mature financial markets and solid financial institutions would ensure shocks including volatile capital flows are well intermediated, "therefore minimising spillovers to the real economy".

This article was first published on February 19, 2016.
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