Global Economic, Financial Landscape To Remain Challenging, Says Malaysia's Central Bank

KUALA LUMPUR, March 23 (Bernama) -- The international economic and financial landscape is likely to remain challenging and will be a key factor influencing the prospects of the Malaysian economy in 2016, says Bank Negara Malaysia (BNM or Malaysia's Central Bank). Malaysia's economic growth, which is expected to expand at a moderate pace of 4.0-4.5 per cent this year, will derive strength from the trajectory of global economic and global oil prices, BNM said. One of the key sources of risks to the growth forecast continues to be the momentum of growth in China, as the country progresses with its economic rebalancing, the central bank said in its 2015 Annual Report released Wednesday. "Nevertheless, Malaysia will face these challenges from a position of strength, afforded by the country's diversified structure, strong fundamentals and policy flexibility," it added. The central bank noted that financial intermediation is expected to remain supportive of growth, underpinned by the strength of the financial institutions and the deep and well-developed financial markets. While subdued prices will continue to weigh on commodity exports, Malaysia's exports are expected to be supported by the gradual improvement in the advanced economies and continued growth in the regional economies. In line with the projected improvement in external demand, Malaysia's export performance is likely to remain positive in 2016, it said. Gross exports are forecast to expand by 2.4 per cent in 2016, sustained by a modest improvement in demand from the advanced economies and continued growth in the regional economies. Subdued commodity prices will continue to weigh on Malaysia’s exports but to a smaller extent than in 2015, said Bank Negara. Gross import growth is projected to increase to 4.9 per cent in 2016 from 0.4 per cent in 2015. The contribution of oil-related revenue to total revenues declined to 21.5 per cent in 2015 compared to 30 per cent in 2014 and is expected to further decline to between 13 per cent and 14 per cent in 2016. Reflecting largely the continued household adjustments to an environment of higher prices and greater uncertainty, private consumption growth is projected to moderate to 5.1 per cent in 2016 from 6.0 per cent in 2015. Bank Negara said private consumption growth is projected to trend below its long-term average, as households continue to make expenditure adjustments in response to the lingering effects of the Goods and Services Tax (GST) implementation, and changes in administered prices. It said household spending will also be affected by weaker consumer sentiments due to the uncertain conditions in the labour and financial markets. "These moderating effects, however, will be partially offset by continued growth in income, employment and some support from government measures targeted at enhancing households' disposable income," it added. While growth in the first half of the year is expected to be more moderate, the central bank said consumer spending is projected to register a gradual improvement as the impact of the GST lapses. Given the continued environment of uncertainty and the cautious business sentiments, private investment growth is projected to trend below its long-term average and grow by 5.5 per cent in 2016. Meanwhile, public investment is projected to turn around to register a positive growth of 1.1 per cent, said Bank Negara. "While the Federal Government has announced a scale back in expenditure and reprioritisation of development projects, the total spending on fixed assets would still be higher in 2016 compared with the previous year," it added. Public corporations, meanwhile, are expected to continue the positive investment momentum recorded in the second half of 2015 after registering negative growth since 2014. Public consumption growth is expected to moderate to 2.0 per cent in 2016, reflecting mainly the lower spending on supplies and services given the government's commitment to more prudent spending under the current uncertain environment. "However, public consumption will continue to contribute positively to overall growth, supported by the continued expansion in emoluments," said the central bank. Headline inflation is expected to range between 2.5 per cent and 3.5 per cent in 2016, driven mainly by upward adjustments in administered prices and the weak ringgit exchange rate, although this will be partly offset by the continued low global energy and commodity prices. The uncertainty around the path of the ringgit exchange rate and global energy prices, however, is a risk to the outlook for inflation. Nevertheless, Bank Negara said underlying inflation is expected to remain relatively stable given the more moderate domestic demand conditions. However, the impact of these cost factors on inflation will be mitigated by the low global energy and commodity prices, generally subdued global inflation, and more moderate domestic demand. In 2016, key economic sectors are projected to expand at a more moderate pace. The services and manufacturing sectors will remain the key drivers of overall growth, while growth in the construction sector is expected to be sustained, said BNM. Despite the lower oil and gas prices, growth in the mining sector will be supported by the introduction of new gas production capacity, it noted, adding the agriculture sector is expected to record a marginal contraction due to the lower yields caused by the El-Nino weather phenomenon. --BERNAMA