M’sia still favourable with strong growth, incoming investments
by Ronnie Teo, ronnieteo@theborneopost.com. Posted on August 18, 2012, Saturday
CRITICAL PLANS: OCBC Bank’s Cahyadi affirms that the upcoming 2013 Budget plan will be critical especially considering that Malaysia’s budget deficit for this year is likely to have exceeded the initial 4.7 per cent of GDP target.
Gundy Cahyadi
KUCHING: With Malaysia reporting a strong gross domestic product (GDP) of 5.4 per cent year-on-year (y-o-y) for the second quarter of 2012 (2Q12), economists believe that Malaysia will sustain its attractiveness on foreign investors and to continue reaping the benefits from its ongoing investment growth.
According to OCBC Bank (Malaysia) Bhd (OCBC Bank) economist Gundy Cahyadi in an email to The Borneo Post yesterday, this robustness prompted the bank to revise its 2012 GDP growth forecast upwards to 4.8 per cent y-o-y from 4.2 per cent previously.
“This is the second consecutive quarter that growth has outperformed our expectations, and not surprisingly, the key driver has once again been investment growth, which is at a record-high,” affirmed Cahyadi in his email.
“The strong expansion in imports of capital goods during the period had been a clear signal that a robust investment growth has sustained in the economy, but the extent of this expansion has taken us by surprise, especially given the fact that there would have been some drag from the negative income effect from the weaker ringgit and lingering uncertainties in the global economy during 2Q12,” he added.
Cahyadi noted that the contribution from investment to the overall GDP currently stood at roughly an equal level with that of private consumption, which also maintained its strong performance during the quarter.
Additionally, the OCBC Bank economist attributed public sector initiatives being the underlying support to this robust expansion in the domestic economy, especially in the oil and gas sector, which has benefitted greatly from the increase in output in the period.
“Note that public consumption growth has also ticked up to 9.4 per cent y-o-y in 2Q12 from 7.3 per cent previously, reflecting a step-up in fiscal expenditure that has included frontloading of welfare spending such as cash assistance to the rural poor,” he revealed.
“Presumably, this is where the challenge will be going forward, especially since we remain of the view that Malaysia’s fiscal space is limited, and it remains to be seen how significance would the impact be on the private sector once the government starts to consolidate its spending.”
On this front, Cahyadi noted that Malaysia’s business condition index eased slightly lower in the period, even if both consumer sentiment and employment indices remained fairly supported.
The upcoming 2013 Budget plan would also be critical, he added, especially considering that Malaysia’s budget deficit for this year was likely to have exceeded the initial 4.7 per cent of GDP target.
“Going by the recent announcement of the multi-billion dollar Tun Razak Exchange (TRX) though, we expect the government to remain aggressive in actively playing a role to boost domestic investment growth, particularly in light of its ambitious target in the financial sector,” he highlighted.
“The other crucial reason as to why we think that things are favourable for Malaysia right now is the fact that inflation has continued to ease, and at 1.4 per cent y-o-y as of July, inflation is currently in its lowest level in almost two years.”
While the recent threat of a surge in food prices was a risk to reckon with, Cahyadi said inflation was still likely to average very closely to two per cent for the year, well within Bank Negara Malaysia’s comfortable range.
This, he said, would provide room for the central bank to inject further monetary stimulus if necessary, which essentially meant that the risk of a sharp plunge in growth was minimal at this juncture, considering the limited fiscal space in the economy.
“The other positive data that accompanied the 2Q12 GDP data release was the 2Q balance of payments (BOP) breakdown, which indicated that while current account surplus has slipped quite significantly to RM9.6 billion in the second quarter,” he affirmed.
“The overall BOP has returned to the surplus territory on the back of positive net foreign direct investment (FDI) flows in the period.
“The rise in both equity capital flows and inter-company loans that has led supported net FDI flows is partly a reflection of its robust domestic economy and would be a key support to external liquidity going forward especially at times of uncertainties regarding portfolio flows.”
Fiscal expenditure growth was likely to remain supportive of growth in the coming periods, he affirmed, with the role of the private sector to stay crucial going forward.
“On this front, we have been encouraged by the fact that FDI flows have held up decently in 2Q12,” he noted. “In any case, easing inflation in the economy also means the room for monetary stimulus is wide open should the global economic conditions continue to worsen going forward.”
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