KUALA LUMPUR, Oct 24 — Malaysia’s relatively strong and firm economic fundamentals is capable of withstanding external-driven crisis, said MIDF Amanah Investment Bank (MIDF).
While saying that the economy was driven by domestic spending and lesser exposure to external trade, the research house added that the steady pick-up in global energy prices provided additional support for private investment and employment, particularly in the mining sector.
After the global financial crisis in 2009, Malaysia gradually shifted from being export-dependent to domestic-driven economy.
“The share of exports to Gross Domestic Product (GDP) trimmed to 70.4 per cent in 2017 from 98.2 per cent in 2007, while imports’ share fell to 62.1 per cent from 76.5 per cent over the 10-year period,” it said in a research note today.
The latest exports share was at a 23-year low and imports at a 17-year low as net exports’ contribution to GDP nosedived to a 21-year low at 8.4 per cent in 2017 while private consumption stood above 50 per cent for five-consecutive years since 2013.
“Henceforth, any external shocks would have lesser impact on Malaysia compared with previous crisis amid lesser exposure to international trade,” it added.
The investment bank said Malaysia’s foreign debt and foreign-denominated debt was also at low and manageable levels.
As of 2017, close to 97 per cent of the government debt was ringgit denominated and only 3.1 per cent was foreign-denominated.
It said for every RM1 debt owned by the Malaysian government, 71 cents was domestic while 29 cents were foreign in 2017.
Even though foreign debt’s share is increasing, its growth has been moderating since 2010, with the overall government debt growing at a similar pace.
“In fact, foreign debt shrank by 3.6 per cent last year while domestic debt surged by 10.5 per cent.
“With the current structure of government debt, the risk of contagion effects is minimal due to trifling exposure to foreign debt,” it said.
MIDF said due to the insignificant foreign debt service charges, government expenditure would not be hampered if the ringgit devalued further, but shortfalls in revenue are possible in the event of global economic slowdown and drop in commodity prices.
It said the ringgit performed better in the first nine-months of 2018, averaging at RM4 against the US dollar compared with last year’s average of RM4.30.
It said based on growth rate, the ringgit has also been appreciating against various currencies in the first nine-month period, year-on-year, (y-o-y) including Australian dollar (+10.2 per cent y-o-y), Singapore dollar (up 5.1 per cent y-o-y) and Euro (up 1.5 per cent y-o-y) .
“Political stability, easing inflationary pressure, solid economic fundamentals and rising global energy prices are among factors contributing to the strengthening ringgit. We maintain our forecast that the ringgit will average at 4.00 this year,” it said.
Meanwhile, MIDF said protectionist policies involving investment flows by the United States (US) would not directly affect Malaysia as US foreign direct investment (FDI) net inflows to the country was insignificant.
It said the US’ average FDI share to Malaysia was only two per cen, post global financial crisis, in 2009, while the European Union and Southeast Asia’s share of total Malaysia’s net FDI inflows stood at 22.4 per cent and 22.9 per cent, respectively.
“On top of that, risk of contagion effect is less due to the diversification of FDI’s sources,” it said, adding that Malaysia’s trade was minimally affected by US protectionism as the country was no longer Malaysia’s top trading partner.
Total trade with the US fell from 18.7 per cent in 2000 to 8.2 per cent last year.
Nevertheless, it said the indirect effect of global trade tension was inescapable despite Malaysia’s healthy economic fundamentals.
“At least in the short-term, our financial markets cannot avoid the international portfolio flows away from the region.
“On this score, it is notable that in the second quarter of this year, which coincided with the start of
US-China trade tension, the net flow of foreign equity funds began to turn negative and the local equity market started to lose ground,” it added. — Bernama