Malaysia sees trade diversion cushioning impact of tariff wars

Kuala Lumpur

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 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 per cent to 4.8 per cent 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 materialise, 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.

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 per cent in the first quarter from a year ago, recent data showed.

The northern state of Penang, home to local facilities of Intel Corp and Dell Technologies, 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 per cent 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," Ms Shamsiah, 55, said at the Sasana Kijang centre, 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, Ms Shamsiah returned to the central bank in July last year following Prime Minister Mahathir Mohamad's surprise election victory.

She replaced 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 shifts away from rate hikes.

Ms 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 added. BLOOMBERG