IT would seem that Malaysia’s surprisingly strong gross domestic product (GDP) growth of 5.8% for the fourth quarter ended Dec 31, 2014 (4Q2014), which brought full-year growth to a stellar 6%, is winning the country some favour.

“Today’s data suggests that the much feared drag of lower oil prices on growth or the current account surplus has yet to materialise,” Citi Research economist Kit Wei Zheng says in a note following the release of the 4Q2014 GDP results last Thursday.

Bank Negara Malaysia governor Tan Sri Zeti Akhtar Aziz seized the opportunity accorded by the unexpectedly strong growth numbers by calling a press conference to dispel what she called misunderstandings on the state of the country’s economy.

“Of course we are affected [by the unexpected plummeting of oil prices] but it does not mean we are not in a position to manage these kinds of conditions. Our resilience is through actions that we have taken much earlier,” she said.

“Because we took steps to diversify our economy, to diversify our exports, to diversify our revenue base, all these efforts had paid off and domestic demand is now the anchor and driver of growth.”

Zeti highlighted that private investment and private consumption were behind the strong 4Q2014 growth. Domestic demand rose 5.9% year on year in 4Q2014 after rising 4.9% in 3Q2014 when GDP grew 5.6% for the quarter. Malaysia’s GDP grew 4.7% in 2013, 5.6% in 2012 and 5.2% in 2011.

Sceptics, however, reckon the central banker is trying to bolster confidence by “talking up” the economy and want more proof of the country’s resilience.

“It is a tough job being the central banker, and Malaysia is lucky to have her (Zeti) but her life would be much simpler if debt levels are not so high,” says a local economist.

Whether or not fears of Malaysia’s woes are indeed overblown, economists are adopting a wait-and-see stance for now, with most of them retaining their respective 2015 GDP growth forecast of falling some 0.5% to 2% y-o-y.

Citi’s Kit, for instance, maintains his forecast of 5% — the mid-point of Malaysia’s revised official GDP forecast of between 4.5% and 5.5% — and sees lower oil and gas capital expenditure as the main risk to growth in 2015.

Bank of America Merrill Lynch (BAML) Asean economist Chua Hak Bin also retains his stance.

“We are unperturbed by a strong GDP print in 4Q2014 and maintain our growth forecast of +4.6% for 2015. The oil and LNG (liquefied natural gas) price collapse will deliver a severe negative shock to fiscal finances, investment and the current account,” Chua writes in a Feb 12 note.

He says Malaysia’s current account balance will “likely face increasing pressure from falling LNG prices”, which, according to him, are projected to halve by mid-2015. Malaysia’s LNG trade surplus was RM60.4 billion or 5.6% of GDP in 2014.

“Furthermore, global growth will improve modestly at best, limiting an upswing for manufacturing exports,” Chua adds, pointing out that Bank Negara itself had said overall exports growth will remain modest. He also sees falling LNG prices as the main risk and pressure point on the current account balance.

“A 50% decline in LNG prices could shave the current account surplus by about 2.5% to 3% of GDP, putting the risk of a current account deficit within striking distance.”

According to Chua, Malaysia’s current account surplus narrowed to RM6.1 billion or 2.2% of GDP in 4Q2014 from RM7.6 billion or 2.8% of GDP in 3Q2014.

It didn’t help that Bank Negara’s latest foreign reserves as at Jan 30 was down US$5.4 billion m-o-m and US$22.53 billion y-o-y to US$110.6 billion — its lowest since February 2011. Collectively, the central bank’s reserves are down US$21.44 billion over five months (since end-August 2014).

Chua says Malaysia’s reserves, which are now below that of Indonesia’s, raise concerns over reserve adequacy, noting that Malaysia’s net portfolio investment outflows nearly doubled to RM20.4 billion in 4Q2014 from RM11 billion in 3Q2014.

At the media briefing, Zeti maintained that Malaysia’s current account balance could moderate going forward but is expected to remain in surplus. She also said Malaysia had seen much larger swings of portfolio outflows during the global financial crisis (March 2008 to March 2009) of some US$39.3 billion, where Bank Negara’s reserves fell by US$28.5 billion.

“And there was no disruption and dislocation in economic activity… it is not something that we’ve not seen… I would like to highlight that even during the Asian financial crisis, we had very significant outflows. I do believe these (recent) outflows were larger even than that but I would like to highlight that during the (1997/98) Asian financial crisis, despite the massive outflows that we did experience, our reserves remained intact and they didn’t fall below US$20 billion, and that was important for Malaysia at that time because it allowed us not to go under the International Monetary Fund programme. But more importantly, we didn’t go under the IMF programme because Malaysian businesses, which had external debts, could meet their obligations,” Zeti said.

In addition, Bank Negara’s stress tests show that the banking system is expected to remain resilient amid the adverse and challenging economic and financial market conditions.

“Any data you can think of, the chances are we’ve used them,” she said, in a reply to questions on the extent of Bank Negara’s examination, which concluded that Malaysia’s banking system can withstand extreme scenarios such as a 200% increase in default instances and 40% fall in house prices. Although debt levels are high, the quality of debt in the banking system is good, with impaired loans among households at only 1.5% and businesses at 2.5%, she said.

Zeti is expected to present more proof of Malaysia’s resilience when Bank Negara releases its 2014 annual report and 2015 GDP forecast on March 11. For now, some observers see hope of better days ahead with global oil prices and the ringgit retracing some lost grounds.

“Be prepared for the worse, but don’t close your eyes to who will benefit should things turn out to be stronger than expected,” a seasoned investor says.

This article first appeared in The Edge Malaysia Weekly, on February 16 - 22, 2015.

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