Domestic demand in Malaysia to be weak in 2016, inflation likely to accelerate

The balance of risks for Malaysia is tilted towards fiscal slippage and growth disappointment in 2016, while inflationary pressures are of secondary concern, according to ANZ. Private consumption is expected to moderate considerably as consumers in the country dissave, added ANZ. But with monetary and fiscal constraints, the Malaysian government has restricted cyclical space to react to cyclical weakness. This supports the view that domestic demand will be weak in 2016, said ANZ.

“Already, we have shaded our 2016 GDP lower to 4.2%”, noted ANZ.

In the first quarter, inflation is likely to accelerate because of supply side adjustment and will be higher in 2016 than it was in 2015. Malaysian central bank has kept rates steady, without changing the reserve requirement ratio (RRR). The recent stabilization in local currency deposit outflows’ pace might have resulted in the central bank to safeguard space in SRR toolbox.

The uncertainty regarding central bank governor Zeti Akhtar Aziz’s replacement when her term ends in April is not likely to sidetrack the BNM from its attention on economic management as a recent recovery in oil prices and Malaysian currency gives the country a chance to stock up foreign reserve, according to ANZ.

However, there is some scope for the central bank to take measures through policy rates. There are risks for additional cuts of SRR, particularly if liquidity tightens, added ANZ. Already, Malaysian economy has been slowing in recent months due to depleting fixed deposits. The central bank last lowered the RRR by 50bps to 3.5% in January that assisted in releasing liquidity worth around MYR 5-6 billion in banking system. But if SRR is cut to record low of 1%, it might considerably affect the market since this action might stimulate liquidity worth MYR 25-30 billion, noted ANZ. The range is nearly equivalent to the degree of drop in deposits from its peak in March 2015.

The likelihood of the central bank lowering the rate in future has increased due to growing headwinds for growth and curbed inflation that will peak in H1 2016, amidst decelerating US Fed rate hike cycle, added ANZ. If such situation comes, it might occur during monetary policy meetings in May or July after the change in leadership of central bank is complete and when the nation’s Q1 GDP growth clarity is obtained.