KUALA LUMPUR (Jan 27): Emerging markets are likely to be more vulnerable to U.S. President Donald Trump’s protectionist policies than what most people think, particularly Malaysia, says Nomura’s Global Markets Research.
In a report released on the eve of Chinese New Year, Nomura said Malaysia’s economy is turning from resilient to vulnerable, given that the country has in the past, derived much of its recent economic resilience from U.S. demand for its manufactured exports.
“The prospect of protectionist U.S. policies could threaten U.S. demand of Malaysian manufactured exports, in effect turning a source of resilience into one of vulnerability. The U.S. accounts for about 10.3% of Malaysia’s merchandise exports and 10.5% of foreign direct investment inflows,” said the report written by economists Euben Paracuelles, Brian Tan and Lavanya Venkateswaran.
“Protectionism could also indirectly hurt Malaysia’s exports of intermediate goods to China. Higher U.S. rates and a further weakening of the ringgit could also spur greater capital outflows, especially as foreign investors still hold a substantial 47.1% of Malaysian government securities,” the trio said in the report.
The result of Trump’s aggressive protectionist policies may drag the country’s economy, with the gross domestic products — in Nomura’s risk-scenario assessment — expected to fall by another 0.4 percentage point to 3.3%, from its our base line expectation of 3.7%, which is already below the government’s official estimate of 4% to 5% economic growth’s forecast range.
The three economists agreed Malaysia’s fiscal policy will likely continue to consolidate, with the government targeting a further reduction in its fiscal deficit to 3% of the gross domestic products in 2017, from 3.1% in 2016, implying little support for the economy.
“Partly for this reason, we believe Bank Negara is biased to ease monetary policy further, although the extent of rate cuts will be limited by financial stability concerns and foreign exchange pressures, given external debt levels at a fairly elevated 71.8% of GDP in the third quarter of 2016,” they added.
Nomura also believes with inflation likely to remain low at 2.3% rather than rising to 2.8% under our base-case assessment, Bank Negara may cut its policy rate by another 50 basis points to support growth.
“Additional rate cuts may be difficult in the face of a likely spike in forex volatility,” the research house noted, adding the ringgit may even extend its loss to end-2017 at RM4.86 against the greenback. – The Edge