OCBC thinks investors shouldn't ignore Malaysia

Malaysia has been on the spot light in the business news for most of the wrong reasons recently...the low oil prices and structural changes in China are hammering the country's export revenues and the 1MDB scandal has continued to take central stage....casting doubt and uncertainties over the country's stability in politics. And yes, with the Fed rate hike more or less certain after the jobs data in October was released, we know the RM will continue to depreciate further, driving up the living costs of ordinary Malaysian folks like you and I, and yet OCBC feels that things are not as bad as it seems.

Malaysia’s GDP growth seems likely to continue ticking along at a moderate pace, helped by fiscal spending programmes. Bank Negara Malaysia is forecasting GDP growth of between 4% and 5% in 2016.

Malaysia

“That’s not great but it is nowhere near a recession,” says Wiranto, an economist from OCBC Bank, adding that Malaysia is likely to achieve the upper range of its growth projections next year.

“There are still growth opportunities in Malaysia which are being overlooked by the investment community owing to negative sentiment arising from the political situation,” Wellian says.

Penang’s tech sector, for example, is booming, while OCBC’s equity research team is currently bullish on the palm oil sector. It also has buy recommendations on selected stocks in transport and infrastructure.

RISKS ARE REAL

Of course, that is not to say the risk are not there. In fact, there is a significant risk and the risks are real....as China is transitioning from an export-led powerhouse to a more domestically-driven economy, and segments of Malaysia’s economy that formed part of the Middle Kingdom’s supply chain could face disruption.

“China is moving up the value chain and producing domestically much of what it used to outsource to places like Malaysia. This is not a temporary matter but a structural change to the Chinese economy that will impact entire supply chains,” says Wiranto.

Malaysia’s foreign exchange reserves have also been falling with the weakening ringgit. In fact, the reserves fell below US$100 billion ($142 billion) for the first time in six years in July.

As at Oct 30, BNM’s foreign reserves stood at US$94 billion as at Oct 30, which is sufficient to finance 8.7 months of retained imports and are 1.2 times the short-term external debt.

That limits Malaysia’s monetary policy options to support headline growth.

“If investors see foreign reserves continue to fall, they will likely pull out their funds as this drawdown is not sustainable. So, BNM will want to keep rates on hold while it still can to ensure stability of the ringgit,” says Wiranto.

BNM has held its policy rate unchanged at 3.25% for the time being, even as a number of other central banks have been cutting rates to boost growth.

“At 3.25%, the number of rate cuts BNM can potentially deliver is already limited by the fact that inflation is likely to stay within the 2%-3% range next year,” Wiranto says. “Against the backdrop of having to keep real rates at a fairly positive territory to prevent a worsening of Malaysia’s high level of household debt, there is not much room for them to cut rates any further at their current level.”

OCBC forecasts that the ringgit could end the year slightly stronger at RM4.22 against the US dollar, but weaken to RM4.56 by Sept 2016.

Against the Singapore dollar, the ringgit could rise to RM3.06 by year end, but fall to RM3.18 next Sept.

FOCUS ON FISCAL SPENDING

“The government is focusing on fiscal spending to keep the economy on its feet as nothing much can be done on the monetary side for now. The 2016 budget is less contractionary than normal with the focus on supporting growth and less on reducing the fiscal deficit,” says Wiranto. The economist has a growth forecast of 4.8% for Malaysia this year but expects that to rise to 5%-5.2% by the end of next year on the back of a rebound in exports.