August 16, 2019 / 4:19 AM / 2 months ago

Malaysia's GDP bucks regional slowdown, FX rules eased to boost liquidity

KUALA LUMPUR (Reuters) - Malaysia’s economy grew faster-than-expected in April-June and became the first Southeast Asian nation to report an acceleration in growth from the previous quarter, driven by stronger consumer spending and palm oil production.

FILE PHOTO - Malaysia's flag is seen at the landmark Petronas Twin Towers in Kuala Lumpur March 5, 2008. REUTERS/Beawiharta/File Photo

The region’s third-biggest economy also loosened currency hedging rules in a push to boost market liquidity and prevent its bonds being excluded from global index provider FTSE Russell’s benchmarks, which has loomed as a major concern for investors.

Central bank data on Friday showed second-quarter gross domestic product grew 4.9% year-on-year, beating the 4.8% forecast in a Reuters poll, and faster than the 4.5% pace in the first quarter.

Malaysia’s pickup in growth contrasts with other economies in its neighborhood, which have slowed this year as the U.S.-China trade war hits demand for exports. However, analysts and policymakers caution that increased global risks pose challenges for Malaysia’s outlook.

“Clear downside risks remain on the immediate horizon, stemming primarily from external factors,” Bank Negara Malaysia (BNM) Governor Nur Shamsiah Mohd Yunus said.

Malaysia’s full-year growth is still expected to come in within the central bank’s 4.3-4.8% target range, but Nur Shamsiah said an escalation in global trade tensions could knock 0.1 percentage point off GDP growth.

Indonesia, the Philippines and Singapore have all reported weaker growth in the second quarter than in the first. Thailand will report April-June data on Monday.

“We are forecasting a further slowdown in global growth over the coming quarters, which would weigh on demand for Malaysia’s exports,” Capital Economics Asia Economist Alex Holmes said in a note after the data. “The recent escalation in the U.S.-China trade war will be another headwind.”

Malaysia is one of the most vulnerable countries to the U.S.-China trade war, being a large exporter of intermediary goods to China.

The ringgit MYR= fell 1.5% against the U.S. dollar in the second quarter amid a weakening global growth outlook and escalating trade tensions.

The current account surplus narrowed to 14.3 billion ringgit ($3.42 billion) in the second quarter, from 16.4 billion ringgit in the first quarter, separate central bank data showed on Friday.

Headline inflation is expected to average higher in the second half of the year as the impact of tax policy changes lapsed, BNM said.

LIQUIDITY RELIEF

Separately on Friday, the central bank introduced new rules that allow foreigners to trade ringgit more freely and gives residents have more flexibility in managing their hedging of foreign currency risks.

Malaysia’s economic outlook has been clouded by investor concerns after FTSE Russell in April said it would review the country’s market accessibility in its World Government Bond Index due to concerns about liquidity.

BNM’s Nur Shamsiah said the measures would boost the onshore hedging market and help improve its case with FTSE Russell.

“The entire suite of FX measures that the BNM has introduced, a lot of that is to assuage concerns raised by overseas investors and FTSE Russell,” said Vishnu Varanthan, Mizuho’s head of economics and strategy.

“The new measures significantly enlarge the scope to hedge positions appropriately... there is palpable relief around the ringgit.”

Reporting by Joseph Sipalan; Editing by Krishna Das and Sam Holmes

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