Saturday, January 10, 2015

Malaysia's Economy in 2015 & 2016 (Part 2)

I have no reason to change my prognosis of the Malaysian economy for 2015 and 2016. Oil prices have dropped below US$50 a barrel and Malaysia is the fifth hardest hit country in the world according to a report in Daily Express two days ago, losing almost 1.8% of its GDP. Malaysia's revenue depends on 30% oil and gas products. The currency has fallen to 3.60 Ringgit to the dollar and foreign funds are running dry as US economy picks up. With already more than 2 billion ringgit in loss over the floods and 5 billion handouts in BR1M, it is hard to see how the country could recope this expenditure despite the 6% GST coming into effect 1st April. I think Malaysia will be lucky to achieve 4% GDP growth this year and should the oil price remains below US$60.00 per barrel in 2016, whatever growth in 2015 might just evaporate with the real possibility of negative growth or recession in 2016.
Once the economy shrinks and wages stagnate but inflation increases, the purchasing power of the Ringgit might fall 20% due to its weakness against US dollar against more expensive imports. Due to more than US$100 billion in reserves, any external shocks might be mitigated in the short term but as Russia's ruble collapse showed, there is only as much the Reserve Bank could do to defend its currency and after that interest rates would have to be raised substantially but that would be nightmare for mortgagees as household debt per GDP in Malaysia is among the highest in the region. All these do not augur well for the country's economy going into the 2nd half of 2015. Three air disasters last year would have dented not just the airlines' profitability but tourism as a whole is hit hard, being one of the main contributors in GDP growth. When homeowners cannot service their loans, foreclosures will rise and by 2016, we may yet see the first decline in house prices in more than 2 decades.

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