Credit Suisse: Worst may be over for Malaysia

New Straits Times - - Business -

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

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