General market tone: Risk-off
Risk off tone continued to dominate as global growth concerns trumped still robust growth numbers out from the United States
Sweeping policy changes under the Malaysian government’s drive to improve people's standard of living and drive out political corruption have strained public finances. We expect this to push the fiscal deficit above 3% and keep it there through 2019
The Mid-term Review of the 11th Malaysia Plan 2016-2020 (11MP) unveiled by Prime Minister Mahathir earlier this month (18 October) sets a clear tone for the upcoming Federal Budget for 2019 – a derailed fiscal consolidation. The first budget of the Pakatan Harapan [Alliance of Hope] coalition government will be presented to the parliament by Finance Minister Lim Guan Eng on Friday next week, 2 November.
As per the 11MP review, the fiscal policy by the new administration will be driven by objectives of an ‘inclusive growth and sustained development’. As tighter fiscal stance and risk from global trade tension slam the breaks on the economy, the government has downgraded GDP growth target for the remaining plan period, 2018-2020, by half a percentage point, from 5-6% in the original plan to 4.5-5.5%. The target for inflation is also revised slightly from 2.5-3% to 2-3%. And, contrary to the earlier target of a balanced budget by 2020, the fiscal deficit is now projected at 3% of GDP over the plan period.
Notwithstanding its drive to rein in high public debt the focus remains on continued fiscal consolidation. Yet the year 2018 will see the trend of steadily falling fiscal deficit underway since 2009 coming to an end; the deficit hit a record 6.7% of GDP in 2009 and has more than halved to 3% by 2007 (see below). The initial budget for 2018 under the previous administration had projected a further fall in the deficit to 2.8% this year. That's not going to materialise.
Persistent low inflation allows for some policy balance, by letting the central bank (BNM) maintain an accommodative monetary policy stance as the government has now embarked on fiscal tightening to rein in the large public debt burden
Low inflation, increased downside growth risks and yet an outperforming Malaysian ringgit (MYR) have been the factors behind our view that the central bank (Bank Negara Malaysia) will be under no urgency to change monetary policy anytime soon.
The MYR has weakened to almost a year-low level against the USD of 4.18 on growing fiscal jitters ahead of the 2019 budget presentation next week. However, with sufficiently positive real interest rates the MYR should retain its year-to-date Asian outperformer position over the rest of the year. We consider our end-2018 USD/MYR forecast of 4.20 subject to upside risk.
The launch of the Sales and Services Tax (SST) in the last month in place of the Goods and Services Tax (GST) that was repealed in June didn’t come as a big push to consumer price inflation. Inflation of 0.3% year-on-year in September was only a tiny uptick from August’s 0.2% print, and below our estimate of 0.5% and that of consensus of 0.5%.
As the chart below shows the SST impact was negligible across most CPI components, except communication and recreation though these also failed to offset the GST related dip in June and the year-on-year increase in both these components continued to be negative.
Among other things keeping inflation subdued are the high base effects in the key CPI components of food and transport prices. Year-on-year food inflation is running at its lowest level in almost two decades, 0.5%, while transport inflation dipped to 0.3% in September from 2.1% in August. At 0.3%, core CPI inflation remained converged on the headline inflation.
The year-to-date inflation rate of 1.2% YoY is a significant deceleration from 3.9% a year ago. Inflation may have bottomed, though there isn’t going to be an upward thrust emerging until the consumption tax impact moves out of the base of comparison. That's unlikely to happen until after mid-2019.
We consider our 1.0% full-year 2018 inflation forecast at risk of a downside miss. And we expect inflation in 2019 to remain close to the low end of the 2-3% official medium-term forecast. Persistent low inflation allows for some policy balance, by letting the central bank (BNM) maintain an accommodative monetary policy stance, as the government has now embarked on fiscal tightening to rein in the large public debt burden
After a good run in recent months, a decline in pharmaceuticals production of 11.1%YoY was not the only drag on Singapore's production growth in September. Semiconductor production also fell (the broader electronics category also registered falls), and petrochemicals fell 14.3%YoY worsening a 2.3% fall in August.
The breadth of the weakness in September 2018 industrial production is surprising mainly in that it hasn't happened earlier. There have been clear signs of a slowdown in many production sectors in recent months, but until now, there has usually been one sector, or sometimes two, that put in a heroic performance and kept the overall index from slumping on the month.
But not this month. The big change was pharmaceuticals. This has been the clear outperformer this year, but it has finally dipped sharply. With few other sectors picking up the slack (a massive percentage leap in marine engineering is unfortunately too small in absolute terms to overturn the outcome) the result was a disappointing 4.9%MoM decline for a -0.2%YoY growth rate.
The consensus estimate for this figure had been a 3.5%YoY increase. Our own forecast was closer to the mark (ING f -1.0%YoY) which derived from the earlier softness of non-oil domestic exports, which provides an unreliable, but in this case accurate lead over the production figures.
Plugging in the new production data into our GDP estimates, we now think that the preliminary 2.6%YoY estimate for 3Q18 GDP will be revised down to 2.4%. Assuming that Singapore grows at a similar pace in 4Q18, we now see full-year growth of 3.3%, consistent with the MAS' forecast of growth for 2018 in the top half of a 2.5% to 3.5% range. However, next year, we anticipate growth slowing to only 2.2% as trade frictions bite.
A further end-of-week drop in US stocks sets a poor tone to the start of the week in Asia. German politics adds to concern over the direction of Europe's leading economy, but signs of a mechanism to get Iranian oil back on the market could help keep local interest rates down.