BofAML: Small probability of a rate cut this week

PETALING JAYA: Bank Negara Malaysia (BNM) is likely to stay on hold at 3.25% at its policy meeting this Thursday, with a small probability of a surprise rate cut, said Bank of America Merrill Lynch (BofAML) Asean economist Chua Hak Bin.
"BNM has room to ease, given low inflation, but will probably only do so if there are visible signs of a fundamental economic slowdown. We maintain our view for a 25 basis point policy rate cut (to 3%) before the end of this year, as growth slows more significantly in the quarters ahead," he said in his Malaysia Economic Watch report last Friday.
Chua said lower energy prices, especially liquefied natural gas (LNG), and the 6% Goods and Services Tax (GST) are expected to hurt investments, exports and consumer spending.
"We see gross domestic product (GDP) growth slowing to 4.6% this year, the low end of the government's 4.5% to 5.5% range, and down from 6% in 2014," he added.
Chua said Malaysia's trade data in May was slightly better than markets expected with both exports and imports contracting at slower-than-expected pace.
However, trade surplus continues to narrow and BofAML continues to see external balances being pressured lower going forward, largely on a weak export outlook.
In May, exports contracted 6.7% year-on-year, improving from the 8.8% decline in April. Chua noted a more gradual decline in oil exports, with crude petroleum falling 20.4% year-on-year compared with a 44% decline in April while refined petroleum products fell 22% compared with 37% decline in May.
"But LNG exports are falling at a quicker pace, declining 48% year-on-year in May versus 40% decline in April, which commensurates with our thesis.
"We maintain our view that falling LNG prices will hurt Malaysia's export performance, reduce external balances and hurt economic growth. Manufacturing was a mixed bag, with electrical and electronic products (0.6% decline) and optical and scientific equipment (5.7% decline) contracting, but machinery and appliances (15% increase) expanding," he said.
Malaysia's exports to China improved, expanding 4.7% year-on-year in May (on 3mma basis) but exports to Singapore (largest destination) and Japan (third largest destination) continue to contract.
Exports to the US and Europe weakened in May, contracting 4.8% and 4% year-on-year respectively.
Meanwhile, imports fell 7.2% year-on-year in May compared with a 6.9% decline in April. The continued contractions in intermediate goods (8.4% decline) and capital goods (5% decline) imports suggest weaker investment activity in the second quarter but consumer goods spiked 27%, despite GST implementation since April 1.
"In May, the trade surplus narrowed to RM5.5 billion, from RM6.9 billion in April. We continue to see trade and current account balances being pressured lower going forward, on further LNG export contraction and weak external demand for manufactured goods. LNG prices follow global crude oil prices with a four to six month lag, suggesting the sharp contraction in LNG exports could last for several more months.
"We estimate that the second quarter current account surplus could come in at less than 3% of GDP, versus 3.6% of GDP in the first quarter of 2015 and 5.7% of GDP in the second quarter of 2014," said Chua.