UBS Investment Bank said “frontload spending” in consumption activities ahead of the impending Goods and Services Tax should support Malaysia’s economic growth early next year.
The soft oil prices, which have given a negative income shock to the economy, meant that Bank Negara Malaysia was likely to cut its policy rate by 25 basis points and back to three per cent next year, said USB senior economist for Asean and India, Edward Teather, in a teleconference yesterday.
UBS expects a sharp slowing of Malaysia’s economic growth to 4.5 per cent from its earlier five per cent forecast for next year and 4.7 per cent in 2016.
Consumption activities have propped up the economy for the past quarters, even as investments and export growth dwindled during the year.
“Lower oil prices have added fuel to the fire. At US$70 (RM244.3) a barrel next year, the price will transmit reduced business confidence and lower exports to the wider Malaysian economy,” he said, adding that consumption would not be able to outperform the other sectors.
The research house expects inflation to post a slower 3.9 per cent growth, below the official four to five per cent forecast for next year.
“GST will push prices up but at a lower base, given the lower oil prices and costs and subdued economy,”
The 10 per cent increase in prices of subsidised fuel in October will push inflation back above three per cent while the introduction of GST will send it to above four per cent.
Teather said the country’s high household debt ratio also meant that Bank Negara would not have to embark on a rate-cutting cycle.
Policy rates are likely to be on hold through 2016, he added.
While the normalisation of the United States Federal Reserve policy will likely take its rate from zero-0.25 per cent to three per cent by end 2016, UBS believes the impact on Malaysia’s economy and financial markets to be relatively muted in an Asean context as Malaysia’s yield curve is already close to its historically normal levels.
Like other economists, Teather said the government’s bid to cut its budget deficit to three per cent of gross domestic product would be challenging if oil prices stayed low.
“The good news is that the low oil price will provide relief to non-oil exports, which should rise, but we are also looking for a shift in the economy from oil (dependence).”
At US$70 to US$75 a barrel, the government would be able to manage its fiscal target but he agreed that the target could be missed if prices average US$60 a barrel with no reduction in subsidies.
Another noticeable aspect of
the low oil prices is the impact
on currencies and Teather estimates the ringgit and other regional currencies may weaken against the US dollar.
“The ringgit may overshoot against the trend but the stabilising of oil prices and Malaysians’ efforts to bring capital home can stabilise the currency.”
UBS has projected the ringgit to reach RM3.50 versus the dollar at the end of next year.