Malaysia sees trade diversion cushioning impact of tariff wars

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KUALA LUMPUR (June 19): Malaysia’s central bank, which has already downgraded its economic growth outlook for this year amid an escalating trade war, sees a partial offset as companies shift operations from China to sidestep higher US tariffs.

In her first formal interview with the international media since she took office almost a year ago, Governor Datuk Nor Shamsiah Mohd Yunus said the trade diversion could add about 10 basis points to this year’s growth rate. That would be on top of Bank Negara Malaysia’s current forecast of 4.3% to 4.8% for 2019.

“There’s a lot of uncertainty as to when the increased investments, the higher productive capacity that the firms would be making in order to take full advantage of the trade diversion” will materialize, she said in Kuala Lumpur on Tuesday.

That was why the central bank included in its growth forecast only the anticipated losses from the trade war, including from the latest round of retaliatory measures between the world’s two largest economies, and not the benefits, she said.

Investment Boom

Like Vietnam, Malaysia is emerging as one of the key beneficiaries from the trade conflict given its manufacturing capability and open economy. Approved foreign direct investment into the manufacturing industry surged 127% in the first quarter from a year ago, recent data show.

The northern state of Penang, home to local facilities of Intel Corp and Dell Technologies Inc, was a particularly big recipient of the investment boom.

Overall, the trade war and a global slowdown remain a drag on Malaysia’s export-reliant economy, with analysts expecting growth to slow to 4.5% in 2019, which would be the weakest pace in three years.

“On a net-net basis the benefits from the trade diversion will not help fully offset the impact, the loss from the trade war,” Nor Shamsiah, 55, said at the Sasana Kijang center, a central bank facility named after the barking deer featured in its logo.

A former deputy governor who was involved in investigating the scandal-plagued 1MDB, Nor Shamsiah returned to the central bank in July last year following Prime Minister Tun Dr Mahathir Mohamad’s surprise election victory. She replaced Tan Sri Muhammad Ibrahim in the top job after he faced questions about the central bank’s role in a deal linked to 1MDB.

Bank Negara was the second central bank in Asia to lower interest rates this year as policy makers in the region seek to bolster their economies against global risks and the US Federal Reserve shifted away from rate hikes. Nor Shamsiah said the 25-basis-point reduction in the policy rate in May was in response to a tightening in financial conditions as a result of foreign outflows.

“This cut is supposed to restore the level of monetary accommodativeness that will support sustainable growth with stable inflation,” she said.

In her almost one year in office, the governor has steered the economy through an emerging market rout, worsening global growth, domestic fiscal risks and a short bout of deflation. She must deal with weaker investor sentiment now and financial market turmoil as Malaysia risks being excluded from a global bond index.

The benchmark stock index was one of Asia's worst-performing stock markets in the first quarter, while the ringgit is down more than 2% against the dollar in the past three months, underperforming Asian peers such as the Philippine peso and Thai baht.

The benchmark FTSE Bursa Malaysia Index extended its gains for a second day, rising 0.4% after a 0.9% surge on Tuesday that was the steepest jump since February.

For next year, Nor Shamsiah is upbeat on growth prospects as public spending on some projects is revived. The government needs to improve the efficiency of its expenditure, channel more funds to projects that have bigger spillover effects, and rationalize investment incentives to take advantage of the trade diversion benefits, she said.