New Market Research Report: Malaysia Business Forecast Report Q3 2014

Malaysia's once-bloated current account surplus is coming under pressure from a combination of income account outflows and a dwindling trade surplus. We expect the narrowing of the surplus to continue, forecasting it to come in at 2.5% of GDP in 2014 and 1.6% in 2015. However, the risks are weighted to the downside, with the emergence of a current account deficit over the next few years increasingly likely.

Over recent years Malaysia's fiscal accounts have exhibited some worrying trends, with spending rising as a share of GDP, subsidy spending rising as a share of total spending, and indirect tax revenues declining. Going forward, we are optimistic that these trends will be halted as subsidy spending is reduced and a Goods & Services Tax is implemented, which should help stabilise Malaysia's debt metrics and support private sector real GDP growth.

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Bank Negara Malaysia will find itself under increasing pressure to hike interest rates over the coming months as consumer price inflation (CPI) pressures mount following the reduction of fuel and electricity subsidies. However, we expect the central bank to maintain the policy rate at 3.00% amid growing disinflationary signs emanating from weakening money supply growth, which should see CPI pressures ease in H214.

Major Forecast Changes

We have revised down Malaysia's current account surplus for 2014 and 2015, forecasting it to come in at 2.5% of GDP in 2014 and 1.6% in 2015, rather than the 3.5% and 2.7% previously expected. Even with these revisions, the risks are weighted to the downside as the pickup in domestic investment activity and the still-wide consolidated public deficit pose risks of a current account deficit over the coming years.

Key Risks To Outlook

Malaysia's economic outlook remains vulnerable to external shocks. This is compounded by increased public spending on welfare subsidies in recent years. We caution that the government's failure to address its fiscal imbalances after the general election risks triggering a wave of downgrades by rating agencies on its debt. Should Malaysia's long-held current account surplus flip into a deficit, this would raise the prospect of the financial instability in the country in the event of regional capital outflows. Such a scenario would likely result in higher debt servicing costs as investors demand higher yields, further complicating efforts to cut public spending.

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