KUCHING: Signs that Malaysia’s export growth has moderated again in the second quarter (Q2) have led to some concerns regarding Malaysia’s growth momentum going forward, despite private consumption growth having accelerated in Q1.
In making the call, OCBC Bank Bhd (OCBC) economist Gundy Cahyadi pointed out that the moderation in export growth should be hardly surprising given that the global economy was in a soft patch for the best part of Q2.
Upon a closer look though, it should be noted that while export of electronics and electrical products had recovered back near the pre-crisis level, Malaysia had largely benefitted from the surge in global commodity prices in the early part of this year.
Cahyadi stated, “We remain of the view that Malaysia is likely to chalk a 5.7 per cent year-on-year (y-o-y) expansion for the year but meeting the six per cent target under the Economic Transformation Programme (ETP) maybe a bit of a stretch.”
“Certainly, there is little doubt that export growth has continued to shoulder the economy in the first half (H1) and as we have mentioned previously, the nominal values of Malaysia’s main export components (namely electronics and electrical, oil and gas and palm oil) have rebounded back to the pre-crisis level.”
Yet, volumes of both palm oil and oil and gas exports had remained relatively flat since late 2008, indicating that the robust growth especially seen in Q1 had been almost solely driven by higher prices alone.
He continued, “On this front, the recent downtrend in global commodity prices is disheartening. Concerns over the state of the global economy, risks of excessive supply in some base metals, and recent actions by the Saudi government and the International Energy Agency (IEA) to increase crude oil supply have all led to a sharp unwinding of net long positions of global commodities.”
“Should there be further sell off in global commodities, we see risks of Malaysia’s overall growth slipping to the low 5 per cent levels in H2, down from our current estimate for Q2 gross domestic product (GDP) growth at 5.6 per cent y-o-y.”
Recent import data still showed an upward trend in consumption goods purchase and this typically indicated that private consumption growth would remain supported going forward.
Other encouraging signs included manufacturing sales growth and payroll in the manufacturing sector, both of which had inched up rather steadily in recent months.
On the investment front, progress on the ETP was worthy to monitor and definitely put a positive twist on Malaysia’s longer-term growth outlook.
Noted bigger projects included Petronas’ feasibility study stage of the Refinery and Petrochemical Integrated Development (RAPID) project estimated at RM60 billion and Exxon Mobil’s plan to invest up RM10 billion to rejuvenate mature facilities and undertake enhanced oil recovery activities.
Most of these projects tended to be still in the planning stage and that the amount of investment in the near-term was still likely to be limited.
As such, he remained less bullish in the near-term perspective, especially noting that imports of capital goods had somewhat stalled at around the six to nine per cent range y-o-y in H1.
This was unlikely to lead private investment growth returning to the double-digit territory, which was essential for the government’s medium-term growth target.
Additionally, growth of loans for working capital had also continued to be lacklustre, presumably suggesting that most businesses still preferred to be on the cautious side.
Private investment growth was noted as the key for Malaysia to build its momentum for the next five years or so, and without a stronger rebound in H2, the country would be unlikely to see GDP growth soaring above six per cent y-o-y for 2011.
From the policy perspective, recent attempt to reduce fuel subsidies had so far failed to materialise, and thus, it was unlikely that the government would reduce its budgeted spending at this juncture.
With softening commodity prices including food, he did not expect a steep acceleration in inflation for the best part of Q3, with a good chance of some easing towards the year-end.
OCBC maintained its 2011 average inflation forecast at 3.3 per cent and expected Bank Negara Malaysia to leave the Overnight Policy Rate at 3.25 per cent by the year-end.
Development in the global economy would continue to affect the recovery in Malaysia, given that external demand had remained as an important component in Malaysia’s current growth momentum.
Support from private consumption growth, however, was likely to continue shouldering the economy in 2011, with a modest 5.7 per cent y-o-y expansion still in the offing.