KUALA LUMPUR (Jan 22): Malaysia is likely to post a growth rate of 4.7% in 2016, broadly in line with the estimated growth rate of 4.8% last year, assuming a number of factors going right for the country, but none of which are more important than crude oil prices, said OCBC Bank senior economist Selina Ling today.

Oil prices were averaging US$30.80 per barrel (/bbl) at the time of writing today, after falling to near US$26/bbl earlier in the week.

Ling, who noted that Malaysia has already announced a cut to its expenditure as it grapples with the slump, expects the spending cut to be minimal and believes Putrajaya will likely revise its fiscal deficit-to-GDP target from 3.1% to between 3.4% and 3.5% this year.

She was speaking at a media conference on the country's 2016 economic outlook, during which she noted that at this time last year, Malaysia had also had to reckon with unrealistic assumptions about oil price and was forced to cut expenditure and admit to higher deficit targets, to avoid a ratings cut.

Another direct victim of the plunge in crude oil prices has been the ringgit. In its latest USD/MYR forecast on Jan 4, OCBC forecast that the ringgit would weaken to 4.4433 by June this year and further depreciate to 4.59 by end-2016.

"While positive news flow suggesting the successful divestment of 1MDB (1Malaysia Development Bhd)'s power and real estate assets to China has helped to support the currency at the turn of the year, the effect has since been eclipsed by the latest negative oil price development.

"Given the global oil glut and the slowing global economic growth, oil price is likely to remain in the doldrums in the near term," Ling added today.

In her presentation, Ling said Malaysia's gross domestic product growth has slowed to 4.7% year-on-year in third quarter of last year (3Q15) — the slowest since mid-2013 — on slower private consumption and government spending. Current account surplus, on the other hand, also thinned from RM7.6 billion to RM5 billion in 3Q15, as repatriation of investment incomes by overseas investors picked up.

On a more positive note, export resilience has contributed to relatively stable growth and robust trade balance. Ling noted that the high proportion of electronics exports, which command 25% of total exports, has helped to buffer the ongoing slump in exports of commodities such as natural gas.

As such, she sees a good chance that things would at least stabilise in 2016, even if there is always the risk that the same factors which plagued the economy in 2015 may well rear their ugly heads again.

Meanwhile, besides oil, China's growth and its policy responses as well as the Federal Reserve's (Fed) rate path are going to be high on the watch list of investors who look at Malaysia, according to Ling.

"China is another important factor, given that China is the top end-destination for the country's exports. As China restructures its economy, we will continue to see policy risks and market volatility that is coupled with slower growth in China. Any depreciation move by China, however unlikely, would also impact Malaysia significantly," she said.

"Similarly, while the Fed's lift-off had taken place in Dec 2015, there is still the rest of the rate hike trajectory to go through. Given the high foreign ownership of Malaysia's sovereign bonds, any upsetting of global market sentiment is still going to affect the county adversely," she added.

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