Credit Suisse: Worst may be over for Malaysia

KUALA LUMPUR: The drag from the lower commodity prices and government spending are both behind now, which means the Malaysian economy can improve this year, says Credit Suisse.

With revenues rising, it sees less fiscal drag for the rest of this year and expects the gross domestic product (GDP) to record a 4.5 per cent growth, compared with 4.2 per cent last year.

“The biggest drag from lower commodity prices is likely behind us, given the rise in palm oil, rubber and crude prices. This should help support rural incomes, while also boosting commodity-related investments and producers over time,” said economist Michael Wan.

Last year, there was a significant drag on growth, with a decline in spending, especially in the second half, and this was seen from the 12 per cent (year-onyear) decline in overall government spending.

Wan expects the rise in oil prices to help the central government’s revenues, resulting in less fiscal drag for the rest of this year.

Driving the forecast is the expectation that broader public infrastructure projects such as Mass Rapid Transit 2 (RM27 billion), Light Rail Transit 3 (RM9 billion) and the Pan-Borneo Highway (RM29 billion) will pick up over the course of the year.

The Singaporebased research house has also raised its current account surplus forecast slightly to 2.5 per cent of GDP from 2.3 per cent earlier, based on the improved global growth outlook and higher commodity prices.

The ringgit is forecast to trade at 4.35 versus the US dollar in three months and 4.50 in 12 months, from 4.45 and 4.55 previously.

“Foreign reserve inflows from trade have increased and Bank Negara Malaysia’s new export conversion rules seem to have helped to improve foreign exchange liquidity in recent months.”

The effects of the export conversion rules are likely to rise further in the coming months as the full effect of the policy kicks in.

Inflationary pressures will continue into this year due to the rise in fuel prices, and higher pass-through to food prices from the removal of cooking oil subsidies last year.

Credit Suisse expects the consumer price index to grow by 3.8 per cent, up from 2.1 per cent last year.

On the outlook of the central bank’s monetary policy this year, Wan said the risk had now shifted towards rate hikes rather than cuts this year, given the stronger outlook for both growth and inflation.

The central bank, he noted, had nonetheless stated a preference to focus on core rather than headline inflation in its recent statements.

On investment outlook, he expects the flow of China-related investments to continue over the rest of the year, adding that rising FDI could help fund some of the bigger infrastructure projects.

China-related investments jumped to a multi-year high of US$4.6 billion last year, a significant increase from around the US$1 billion average over the past five years, partly due to digital promotion tie-ups. Rupa Damodaran

The biggest drag from lower commodity prices is likely behind us, given the rise in palm oil, rubber and crude prices. This should help support rural incomes.

MICHAEL WAN

Credit Suisse economist