Fitch: Sluggish external front to outweigh upside to investment

PETALING JAYA: While the gross fixed capital formation is likely to benefit as a result of the trade war, with businesses increasingly relocating away from China to Southeast Asia, the benefits to Malaysian exports are likely to take some time to feed through and not be in play in 2020, according to Fitch Solutions.

“As such, we believe that the overall drag on growth from a sluggish external sector is likely to outweigh the upside to investment,” it said in a note today.

Fitch expects Malaysia’s gross domestic product growth to slow slightly to 4.5% in 2020, compared with the 4.6% forecast for 2019, on the back of the less sanguine view on the prospects for a comprehensive and lasting resolution to the US-China trade war, despite recent signs of a thaw in trade relations.

It is maintaining the projection for Bank Negara Malaysia (BNM) to cut the benchmark Overnight Policy Rate (OPR) by 25 basis points (bps) to 2.75% next year.

“The two main factors we highlighted as being the key basis to our 2020 rate view, growth headwinds from especially the uncertain external environment, as well as benign inflation, are still likely to remain in play in 2020,” it said in a note today.

Fitch highlighted that BNM has more space to cut and support the economy, given that Malaysia now has a wider policy rate advantage against the US, where the Federal Reserve cut the Funds Rate by a further 25bps on Oct 30 to 1.5-1.75%.

Meanwhile, Malaysia’s inflation is projected to average 1.5% in 2020, said Fitch.

“This reflects our view that while in 2019, where inflation has averaged just 0.6% yoy in the first nine months of the year, is a low base from which price growth is likely to recover in 2020, the soft outlook for oil prices is likely to keep a lid on price pressures.”

It also expects oil prices to decline further to average prices of US$62/bbl and US$58/bbl in 2020 and 2021, respectively, versus the 2019 year-to-date average of US$64.13/bbl.

“This is likely to negate the inflationary effect of the government’s decision, announced during the tabling of Budget 2020 in October, to make fuel subsidies less generous and more targeted, eschewing a blanket price cap in favour of handouts to means-tested households.”

source https://www.thesundaily.my/business/fitch-sluggish-external-front-to-outweigh-upside-to-investment-EN1582251