RAM expects growth to moderate in 4Q17

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KUCHING: RAM Ratings Bhd (RAM) expects growth of Malaysia’s gross domestic product (GDP) to moderate to 5.3 per cent in the last quarter of 2017 (4Q17) which is mostly attributable to the normalising high-base effects from external demand.

While RAM expects the momentum to continue in 2018 amid the resilient growth of both domestic and external demand, it envisaged some moderation in the pace following the robust growth last year.

“Under the circumstances, we expect GDP growth to come in at 5.2 per cent this year, after the strong 5.8 per cent clip in 2017,” it highlighted in a statement yesterday.

“What had begun as a hopeful rebound in export momentum had gradually built up into one of the main catalysts of the turnaround last year,” it added.

“Overall, nominal export growth clocked in at 18.9 per cent compared to the tepid 1.2 per cent of 2016.

“The vigorous momentum was mostly driven by healthier demand for investment goods and a robust global restocking cycle for electrical and electronic (E&E) items.”

As exports of machinery and transport equipment (encompassing both investment and E&E exports) account for over 40 per cent of Malaysia’s total exports, the country has benefited immensely from this amid the continued broad-based recovery in production and capacity-building activities by industrialised countries.

More importantly, this rebound in external demand has also managed to jump-start the domestic economy.

“As export-oriented industries have performed better and wages and recruitment have been ramped up, a positive spillover effect has flowed through to domestic demand, thereby providing a much-needed boost to consumption and investment,” observed Kristina Fong, RAM’s head of Research.

RAM said private consumption is expected to fully recover from the sluggish couple of years following the implementation of the GST and slack labour conditions, posting a seven per cent growth in 2017.

“Private investment is also anticipated to rebound a credible 8.8 per cent, after years of lingering business uncertainties stemming from external and domestic developments,” it added.

As indicated by the RAM Business Confidence Index (BCI), which provides an on-the-ground forward-look of the state of the economy 6 months down the line, export-oriented firms remain more bullish than their domestic counterparts.

Furthermore, recruitment and capacity-expanding activities are set to be maintained, at least in the first half of the year.

“Given this, we expect private consumption and private investment growth to come in at a respective 7.2 per cent and 8.0 per cent in 2018.

“Nonetheless, there could still be some headwinds as international developments remain much in focus, as key determinants of the strength of external demand. We believe that a more protectionist stance by some industrialised economies may affect this.

“However, the full extent of this impact may not be immediate, and will hinge on how firms throughout the global supply chain adjust to these new policies given their relative efficiencies and cost considerations.”

The momentum and trajectory of global monetary policy tightening are also on RAM’s risk radar.

Although the normalisation of monetary policy should be viewed as a medium-to-long-term objective, major central banks’ decisions on such policy in the interim could still cause some volatility in the capital markets during the adjustment period, it said.

RAM Ratings will also closely monitor monetary policy decisions and their impact on the real economy.

“On the local front, we do not expect any further increases in the Overnight Policy Rate (OPR) this year. The OPR is envisaged to wrap up 2018 at the existing 3.25 per cent.

“That said, future decisions on the OPR would be data-dependent, balancing the interplay of risks between growth and inflation. We expect inflation to moderate to 2.5 per cent in 2018, from last year’s 3.7 per cent.”