Malaysia Economics >>> Call It a (Deeper) Recession

Malaysia Economics
Call It a (Deeper) Recession

 We cut our GDP forecasts for 2009 and 2010 to -1.5% (from 0.5%) and 3.5% (4.2%), respectively — This is in line with recent forecast downgrades by our G3 economists and dismal trade data for Asia. With cushion from commodity prices evaporated, Malaysia’s growth will likely converge with other Asian tech exporters, all of which have seen significant contractions. Risks to our belowconsensus forecasts probably remain to the downside.

 We anticipate a deeper and more prolonged recession, with the economy to contract 2-3% from a year ago in 1H09. The trough is more likely to be in 2Q09 at the earliest — A return to positive YoY growth is not likely till 4Q09, when base effects kick in and the pace of manufacturing contraction abates.

 External demand headwinds remain formidable, which will deepen the recession and limit the pace and sustainability of any recovery — Chief is the structural increase in the US household savings rate. The near-term impact of the Obama stimulus plan should also not be overstated. Neither will an expected recovery in Chinese domestic demand be of much help, as exports for China’s domestic demand contributed less than 10% of Malaysia’s export growth in 2008.

 Domestic demand resilience giving way – Both domestic and export-oriented IP have fallen recently, while retail sales have also been falling. The largest drag on domestic demand is probably the deteriorating labour market. We expect the unemployment rate to rise to c.5%, with risks to the upside. A significant rise in unemployment would thwart other policy efforts to help the consumer.

 Credit constraints rising, as seen in falling loan disbursements to households and overall loan approvals – Despite moral suasion and other efforts to increase credit availability, banks probably have little incentive to increase lending at a time when credit risk is rising. Household balance sheets are relatively stretched, with household debt to GDP ratio (67%), higher than many Asian economies of comparable GDP/capita. The high debt service ratio (~40%) will further drag spending, especially if interest rates are not lowered further.

 Prospect of a full-year GDP contraction could prompt BNM to cut the OPR a further 50bps in 2Q09 – Monetary easing may also be needed to anchor backend yields and accommodate looser fiscal stance. The Second Stimulus Package (10 Mar) may include possible targeted tax incentives, cuts in EPF contribution rates, and liberalization of the services sector. The size of the package remains unclear, and could likely be as large as RM30bn (~5% of GDP vs. our previous expectation of RM10bn-15bn). This would bring the fiscal deficit to 10% of GDP, raising supply risk in the MGS market and likely leading to a sovereign credit ratings downgrade, and further sell-off by foreign investors. We see upside risks to our end 2Q08 USDMYR forecast of 3.73 and 5Y MGS forecast of 2.8%.