Healthy economic fundamentals to support Malaysia’s growth

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Analysts are generally cautiously optimistic about Malaysia’s economic performance in 2017.

Recovery underway amidst domestic and external headwinds

KUCHING: Analysts are generally cautiously optimistic about Malaysia’s economic performance in 2017.

In a recent report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) pointed out that the recently released 2016 Bank Negara Malaysia (BNM) annual report kicked off with a relatively more optimistic outlook to the previous year.

However, it noted that the report retained a cautious tone, warning of downside risks arising from global events, particularly among the major economies.

Furthermore, lingering domestic risks (higher cost of living, weak sentiments, among others) might also weigh against Malaysia’s recovery, it added.

Nevertheless, the research team opined, “The prospect of Malaysia’s economic growth, barring unforeseen shocks, appears to have improved.

“This may compel us to believe that it could be a start of a gradual shift of monetary policy bias to slightly tightening from the current neutral standing.”

That shift, however, might only happen provided the perception of political risk subsides along with the reversion of the ringgit towards its fair value, it cautioned.

“For now, we reiterate our viewpoint that BNM would retain the overnight policy rate (OPR) at three per cent at least in the the first half of 2017 (1H17) in the absence of any deterioration to growth amid cost-push inflationary uptrend.

“The possibility of a highly-anticipated General Election in the second half of the year would also add to the likelihood that rates would remain unchanged. That being said, we believe the OPR is both accommodative of growth while sufficient in keeping inflation in check,” it commented.

Meanwhile, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang) believed that Malaysia’s economic fundamentals, barring any unforeseen external circumstances, would continue to remain sound, supported by improving economic outlook, sustainable current account surpluses and healthy foreign exchange reserves.

However, it pointed out that there is some upside risk to inflation.

It noted, “BNM raised its inflation target to three to four per cent in 2017, higher than our forecast of 2.7 per cent (2.1 per cent in 2016). BNM attributed higher inflationary pressure to the prospect of higher global commodity and energy prices, and the impact of the depreciation of the ringgit exchange rate.”

Aside from that, Affin Hwang said, BNM’s monetary policy would continue to remain supportive of economic growth.

“According to BNM, monetary policy in 2017 will continue to ensure that its stance is consistent with sustaining a steady growth path amid price stability.

“We concur that the policy environment is expected to remain challenging, due to higher inflation, volatile capital flows and lingering uncertainties in the global economic and financial environment,” it commented.

On the external front, the research team believed that the recovering global trade could drive Malaysia’s growth.

“In the latest publication, the International Monetary Fund (IMF) projected that the world trade volume will grow by 3.8 per cent in 2017, against 1.9 per cent last year.

“BNM is projecting a strong growth of net exports by 5.3 per cent in 2017 as against a contraction of 1.8 per cent in 2016, with strong exports growth of 2.2 per cent in 2017, while imports are projected to expand by 1.8 per cent,” it added.

Aside from that, it pointed out that Malaysia has a healthy balance of payments surplus in current account.

On the local front, AllianceDBS Research Sdn Bhd (AllianceDBS Research) pegged a cautious view on the sustainability of domestic demand, given that expectations of its growth momentum seem to be upheld by one-off measures (EPF contribution rate cut, BR1M).

“Additionally, leading indicators such as MIER Consumer Sentiments Index have been pointing downwards (4Q16 at 69.8 compared with 3Q16 at 73.6).

“In addition to higher inflation, BNM guides for a soft labour market, with unemployment rates averaging 3.6 to 3.8 per cent during 2017 (3.5 per cent in 2016),” it explained.

It further pointed out that in the absence of a turnaround in labour market condition and sustainable household income growth trend by year end, overall growth prospects could remain subdued going into 2018.

Aside from that, it highlighted that as guided by Malaysian Investment Development Authority, approved investments growth is expected to be lower than the 7.7 per cent recorded in 2016.

“Economic uncertainties and increasing protectionist views are cited as key risks to FDI inflow,” it added.

Overall, AllianceDBS Research maintained its gross domestic product (GDP) forecast for 2017 at 4.4 per cent.

It explained, “Public consumption and investment will continue to grow below trend as the government remains committed to reduce the fiscal deficit further to three per cent of GDP this year.”