There is a strong possibility that Bank Negara Malaysia might employ a rate cut to boost the economy, as companies exposed to the European Union face a downside risk, according to a report in the Nikkei Asian Review.
Nomura forecast that Malaysia’s GDP could drop to 3.9% from 4.3% this year due to Brexit (British voters voting to leave the European Union).
“Tentatively, our economists are looking at a 0.3 percentage point downgrade to the Asia, excluding Japan, region’s GDP growth for 2016. Specifically, for Malaysia, we’re looking at a 0.4 percentage point downgrade,” its Vice-President of Asean equity strategy Shubhankar Das was quoted as saying at a media briefing on Tuesday.
He added that Malaysia was largely exposed to the UK market through its exporters.
OCBC Bank economist Wellian Wiranto was quoted by Nikkei Asian Review as saying that if the European economies were affected by the UK’s absence, then Malaysia, which exported as much as 6% to 8% of its GDP to Europe, would find it harder to ride out the “potential secondary effect.”
Nomura also predicted the possibility of an overnight policy rate cut of 25 basis points before year-end.
“With Brexit, our economists are looking at one rate cut for Malaysia but this is not the start of a cutting cycle. It’s probably a one-off rate cut just to reassure the market that [Bank Negara] is constantly monitoring external conditions,” Das said.
The report said that the possibility of a rate cut in Malaysia in the coming months was also echoed by Standard Chartered.
“Brexit reinforces our view that Bank Negara Malaysia may have to cut policy rates in the second half of the year to support slowing growth,” it said in a note addressing the outcome of the Brexit referendum.
In general, the decline in the Malaysian equities market post-Brexit was modest, according to Nomura which had upgraded the country to “overweight” this week. Das, in particular, said that Asian equities may look more attractive due to heightened uncertainty and weaker growth elsewhere.
According to the report companies with exposure to the UK and European countries, such as YTL Power International, Sime Darby, Genting, Malaysia Airports Holdings and IHH Healthcare are expected to see negative impacts in earnings and increased exchange rate risks as well as weaker consumption demand.