KUCHING: The stronger real gross domestic product (RGDP) growth during the quarter was widely expected but mainly on the back of anticipation of better contributions from net exports while domestic demand was widely expected to cool off a bit.
MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) in a recent report noted, “We still expect domestic demand to ease off, perhaps quite markedly in the coming one to two quarters as the impact of the subsidy cuts take effect.
“We remain hopeful of a modest recovery in exports, however, the conundrum is that, for exports to pick up meaningfully, imports would have to pick up given the need for high import content for exports of manufactured goods.
“As such, to have the current account (CA) surplus at least be sustained at the four per cent of gross national income (GNI) ratio, exports would have to pick up much faster and that may be a challenge with the likely absence of boost from the commodity side.”
RGDP growth accelerated to five per cent on the back of an exceptionally strong personal consumption expenditure (PCE) and smaller than expected cutbacks in public spending private consumption expenditure rose by 8.2 per cent year-on-year (y-o-y); a one percentage point higher than growth in the previous quarter, marking it the fastest since second quarter of 2013 (2Q13).
The research house also highlighted that PCE contributed 4.3 percentage points to the five per cent growth during the
quarter.
Meanwhile, Gross Fixed Capital Formation (GFCF) growth rebounded to 8.6 per cent as private investment picked up while that of the public sector contracted by smaller margin than expected. Net exports turned around to post small positive growth after seven consecutive quarters of contraction.
On the supply side, this was reflected in the stronger growth in the services sector sub-component, wholesale and retail trade, communication, real estate and business services as well as government services which contributed higher and led the overall services sector to record a much faster growth of 5.9 per cent and contributed 3.2 percentage points to growth.
Other sectors also recorded faster growth except for mining, the research firm noted.
Meanwhile, the manufacturing sector contributed one percentage points while construction and agriculture contributed 0.4 percentage points and 0.2 percentage points respectively, to the real GDP growth, MIDF Research reported.
Going forward, “domestic demand is expected to cool off on higher prices and tighter monetary conditions but Net Exports may help to arrest the slip.We expect Bank Negara Malaysia (BNM) to hike up Overnight Policy Rates (OPR) by 50 basis points (bps) next year with the first 25bps in 2Q14, hence that would see PCE to continue to face downware pressure in the coming quarters.
“Nonetheless, we remain hopeful of a modest recovery in Exports which would help to arrest the slip in domestic demand. However, the conundrum is that, for Exports to pick up meaningfully, Imports would have to pick up given the need for high import content for exports of manufactured goods,” added MIDF Research.
To sustain CA surplus at current ratio can prove to be a challenge as surplus rose to RM9.8 billion in 3Q13 or 4.1 per cent of GNI.
To have the CA surplus at least be sustained at the four per cent of GNI ratio, exports would have to pick up much faster and that may be a challenge with the likely absence of boost from the commodity side.
The research firm pointed out that the government is also looking at nominal GNI to rise by about 7.5 per cent in 2014.
Aside from that, Foreign Exchange (FX) reserves were higher by RM11.8 billion but external debt rose faster by RM21.9 billion. FX reserves stood at RM444.6 billion at the end of 3Q13 and edged up slightly to RM446.2 billion at the end of October.
However, external debt rose to RM306.6 billion (US$93.2 billion) or 32.1 per cent of GNI (RM284.7 billion or 29.8 per cent of GNI) at the end of 2Q13.
The increase was due to the RM10.6 billion in medium to long-term debt by public sector while that of the private sector rose by RM5.5 billion. The striking development noted was the increase in short-term debt to RM120.3 billion during the quarter, MIDF Research explained.
“If we add on the amortisation and the principal repayment of long-term debt, our total external funding requirement ratio could be much higher, as CA surplus was smaller relative to last year,” it added.