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Malaysia Country Risk Report Q2 2016

Malaysia Country Risk Report Q2 2016

Core Views

Malaysia's Q315 real GDP grew by 4.7% y-o-y, reflecting theeconomy's slowest growth rate in nine quarters. We maintain ourforecasts for 2015 and 2016 real GDP growth to come in at 4.7%and 4.5% respectively, as we expect both the domestic and externalsectors to face continued headwinds over the coming quarters.

Although most of the measures raised in Malaysia proposed 2016budget are largely aimed at tackling short-term problems, the countryhas retained its commitment to fiscal consolidation, informing ourforecast for the deficit in 2016 to come in at 3.1% of GDP.

The decision by Bank Negara Malaysia to keep its overnight policyrate steady at 3.25% during its November 5 monetary policy meetingwas in line with our expectations and we forecast interest ratesto remain unchanged through H116. The central bank will seek tosupport growth while providing financial stability as internal andexternal events continue to undermine investor confidence.

Despite a weak technical picture, an undervalued real effectiveexchange rate, modest current account surplus and positive realinterest rates should provide support to the ringgit following its aggressivesell-off of around 20% in 2015. We therefore remain largelyneutral on the MYR against the US dollar with a slightly appreciatorybias over the coming years, and forecast the unit to end 2016 atMYR4.1000/USD.

While embattled Malaysian Prime Minister Najib Razak appears tohave continued to consolidate his position following United MalaysNational Organisation's general assembly (8-12 Dec), the aggressiveactions used to secure party discipline suggest that he is notas secure as he appears. State elections in Sarawak also meanthat existing problems could come to the fore once again duringcampaigning, with the opposition Democratic Action Party havingmade steady inroads.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Domestic Headwinds To Continue Undermining Growth
Malaysia's Q315 real GDP grew by 4.7% y-o-y, reflecting the economy's slowest growth rate in nine quarters. We maintain our forecasts
for 2015 and 2016 real GDP growth to come in at 4.7% and 4.5% respectively, as we expect both the domestic and external sectors to
face continued headwinds over the coming quarters.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Thoughts On The 2016 Budget
Although most of the measures raised in Malaysia's proposed 2016 budget are largely aimed at tackling short-term problems, the
country has retained its commitment to fiscal consolidation, informing our forecast for the deficit in 2016 to come in at 3.1% of GDP.
Structural Fiscal Position
Monetary Policy
Rates To Remain On Hold Through H116
The decision by BNM to keep its overnight policy rate steady at 3.25% during its November 5 monetary policy meeting was in line with
our expectations and we forecast interest rates to remain unchanged through H116. The central bank will seek to support growth while
providing financial stability as internal and external events continue to undermine investor confidence.
TABLE: MAIN EXPENDITURE & REVENUE CATEGORIES
Monetary Policy Framework
Currency Forecast
MYR: Remaining Neutral Despite Ongoing Headwinds
Despite a weak technical picture, an undervalued real effective exchange rate, modest current account surplus and positive real interest
rates should provide support to the ringgit following its aggressive sell-off of around 20% in 2015. We therefore remain largely neutral on
the MYR against the US dollar, with a slightly appreciatory bias over the coming years, and forecast the unit to end 2016 at MYR4.1000/
USD.
TABLE: BMI CURRENCY FORECAST
Outlook On External Position
TABLE: MAIN IMPORTS & EXPORTS
TABLE: MAIN IMPORT & EXPORT PARTNERS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Chapter 2: 10-Year Forecast
The Malaysian Economy To 2025
Productivity Gains To Support 4.0% Real Growth
Owing to strong demographic trends, a continually improving business environment and further ASEAN economic integration, we see
Malaysian real GDP seeing a compound annual average growth rate of 4.5% (6.5% in nominal US dollar terms) over the next decade.
While this is slightly below the 5.1% (10.5% in nominal US dollar terms) rate seen over the past decade, this largely reflects lower
growth in the working age population, while labour productivity growth is set to rise.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Najib Consolidates Power, But Dissent Persists
While embattled Malaysian Prime Minister Najib Razak appears to have continued to consolidate his position following UMNO's general
assembly (8-12 Dec), the aggressive actions used to secure party discipline suggest that he is not as secure as he appears. State
elections in Sarawak also mean that existing problems could come to the fore once again during campaigning, with the opposition DAP
having made steady inroads.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Race Relations Still Cloud The Horizon
Malaysia's ethnic diversity will continue to influence domestic politics, and the rise of a stronger opposition presents myriad possibilities
in the political arena over the longer term.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
TABLE: ASIA – TRADE PROCEDURES AND GOVERNANCE
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MALAYSIA – MACROECONOMIC DATA & FORECASTS

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