Malaysia Central Bank Pledges Support as GDP Forecasts Cut

(Bloomberg) -- Malaysia lowered its economic growth forecast for 2019, and pledged to keep monetary policy accommodative as global risks weigh on the trade-reliant economy.

Gross domestic product is expected to increase 4.3 percent to 4.8 percent in 2019, with trade tensions and lower commodity prices among the biggest wildcards, Bank Negara Malaysia said in its annual report on Wednesday. The projection marks a step down from the 4.9 percent expansion estimated in the government’s budget released in November, and compares with a 4.7 percent pace recorded in 2018.

The downgrade in the growth outlook was mainly due to worsening global conditions, Governor Shamsiah Yunus told reporters in Kuala Lumpur. Growth will probably come in at the lower end of the forecast range if downside risks -- such as a sharper moderation in global demand and an escalation of trade tensions -- become reality, she said.

“Recognizing the downside risks to domestic growth, the thrust of monetary policy in 2019 is to remain accommodative to ensure supportive conditions for sustainable economic growth amid the subdued inflation outlook,” the governor wrote in the report. “The bank strives to identify and manage risks before they become destabilizing, while building policy space and buffers preemptively.”

Malaysia Central Bank Pledges Support as GDP Forecasts Cut

Bank Negara joins a growing list of central banks that are acknowledging the increasing risks to growth, as moderating exports and weakening consumption spur bets for monetary easing across the globe. The Southeast Asian economy is also trying to keep growth afloat while reining in public spending to narrow its biggest fiscal deficit in five years.

The central bank said it’s ready to delve into its tool kit to support the economy if needed, with targeted prudential policies and financial market measures among the options at its disposal. A flexible exchange rate also acts as a shock absorber, increasing the economy’s resilience when faced with external shocks, it said.

Shamsiah said interest rate decisions will be data dependent, adding that the decline in the inflation rate in the past two months doesn’t reflect deflationary conditions, she added.

“The price decline is not pervasive. she said. “In fact the recent negative inflation was mostly accounted for by lower domestic fuel prices. This is different from a severe drop in spending such that firms generally have to cut prices to attract consumers.”

Key Highlights

  • Economy will be supported by private-sector activity, stable income growth and capacity expansion by businesses. Risks include Federal Reserve policy, volatility in global oil prices, commodity supply disruptions, and an oversupply in domestic property market
  • Shamsiah said GDP growth will be at lower end of forecast range depending on downside risks, which include a sharper moderation in global demand, escalation of trade tensions, disruption in global financial markets, weaker-than-expected commodity prices and production
  • Bank Negara will continue to ensure orderly market conditions and manage excessive volatility so that the inter-mediation process isn’t disrupted; it also announced an easing in foreign exchange administration rules for businesses
  • Inflation to average 0.7 percent to 1.7 percent in 2019, with lower oil prices and a cap on domestic fuel costs keeping a lid on pressures
  • Current-account surplus is estimated at 28 billion ringgit ($6.9 billion) this year, or 1.5 percent to 2.5 percent of gross national income. The excess was 33.5 billion ringgit in 2018, or 2.4 percent of GNI
  • Private-sector expenditure likely to rise 6.2 percent this year versus 7.2 percent in 2018; public-sector expenditure forecast to drop 1.8 percent in 2019 after increasing 0.1 percent in 2018

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