• FT Confidential Research’s latest quarterly survey has found that most consumers in Malaysia, Asean’s third-largest economy, expected the economic and political climate to worsen in the next two quarters.
  • Loan growth is falling and we expect this to continue into 2017.
  • Najib Razak, the prime minister, has record disapproval ratings even though his future seems assured amid opposition disarray.

FT Confidential Research’s Economic Sentiment Index for Malaysia fell 6.1 points quarter-on-quarter to 29.6 in the third quarter of 2016, indicating that the majority of the 1,000 Malaysians surveyed expect the economy to worsen in the next two quarters (see chart). These results make Malaysia the most pessimistic of the five Asean countries — the others are Indonesia, the Philippines, Thailand and Vietnam — we surveyed.

The forward-looking index first fell in late 2014 as energy prices collapsed and Malaysia’s consumers braced for the imposition of a new consumption tax, and confidence has yet to return.

This is further reflected in weakening appetite for new loans. FTCR’s Consumer Borrowing Index, which tracks the change in respondents’ borrowing levels over the preceding 12 months, fell to 65.4 in the third quarter, from 68.1 in the second (see chart).

Central bank statistics tell the same story: loan growth has been decelerating over the past year. In July, annual growth in outstanding lending fell to 5.1 per cent from 5.6 per cent in June. This is well below the 9 per cent average loan growth recorded in 2015. We believe this slowdown will be sustained into early 2017. An FTCR index tracking borrowing intentions for the following two quarters slipped 0.1 points quarter-on-quarter to 65.6.

The indicators reflect and add to the gloom caused by the poor performance of the Malaysian economy. GDP growth decelerated to 4 per cent year-on-year in the second quarter, from 4.2 per cent in the first. FTCR expects GDP growth of between 3.9 and 4.2 per cent this year, down from 5 per cent last year. Looking to boost growth, the central bank lowered its policy interest rate by 25 basis points to 3 per cent in July. An additional 25bp cut is possible in November.

The government will present its 2017 budget on October 21. FTCR expects Mr Najib, who is also the finance minister, to increase social welfare spending as Malaysia enters an election cycle. But it is unclear how much fiscal stimulus is in store. Government revenues fell 10 per cent in annual terms in the first half and Mr Najib wants to balance the budget by 2020. The fiscal deficit stood at 3.2 per cent of GDP in 2015 and the government is struggling to meet its goal of lowering it this year. It may have to jettison its balanced budget goal as it looks to stimulate the economy.

A chaotic political situation is adding to the dismal economic mood. FTCR’s Political Sentiment Index slipped 1.8 points quarter-on-quarter to 29.1, against the backdrop of the promise of further instability. Bersih, a coalition of electoral reform groups, plans to hold protests in November in downtown Kuala Lumpur to demand action over the 1Malaysia Development Berhad corruption scandal.

There is also uncertainty about the date of the general election. While the contest must be held by August 2018, FTCR believes Mr Najib will seek to renew his mandate next year. FTCR data show he is unpopular among Malaysians (see chart), but the opposition is split into three groups that are too divided to challenge Mr Najib effectively at the ballot box.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.

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