Private sector spending and exports fuel economic growth
KUALA LUMPUR: THE Malaysian economy grew at the fastest pace since the first quarter of 2015 with gross domestic product (GDP) expanding 5.8% for the second quarter ended June 30 compared with the same quarter a year ago on private sector-led spending and exports, exceeding economists’ forecast of a 5.4% rise.
Bank Negara governor Datuk Seri Muhammad Ibrahim says the growth outlook will be revised higher given that GDP for the first-half of the year has exceeded the central bank’s forecast of 4.3% to 4.8%. “The data looks good,” he says at a media briefing on the economy’s second quarter performance.
Nomura Singapore Ltd senior economist for South-East Asia Euben Paracuelles says in a report that the data is supporting the view of strong exports spilling over into domestic demand, particularly private consumption. “With first-half GDP growth coming in at a robust 5.7%, we raise our full-year 2017 forecast to 5.5% from 5.3%, further above the consensus estimate of 5%,” he says.
Citigroup Inc economist Kit Wei Zheng, who has also raised his GDP forecast to 5.5% from 5.2%, says the probability of a rate hike is now higher. Bank Negara last adjusted the overnight policy rate in July when it cut the benchmark rate by 25 basis points to 3%.
Meanwhile, Muhammad says growth will certainly be above 4.8% with the new forecast to be released at the tabling of Budget 2018 in late October. He adds that private consumption and exports are expected to improve in the second-half but says that external risks must be taken into consideration.
“The risks have not changed,” Muhammad says, citing monetary policy of developed economies, geopolitical uncertainties and rising talk of trade protectionism as the top three risks to Malaysia and the trade-dependent East Asian economies.
He says Malaysia and the rest of the region have done very well because of an open trade policy. “Because of that we’re very agile and very competitive,” Muhammad says.
He points out that companies reliant on exports to drive sales should not depend on a weak ringgit as the volume of sales was not driven by a weak currency but by demand. Muhammad says this finding came from a survey that showed a weak ringgit had limited impact on export volume.
“Global demand remains the key factor and not the exchange rate, and relying on a weak ringgit is an unsafe strategy,” he says, adding that companies should be more competitive in order to maintain an edge in the global economy.
Muhammad says the central bank will continue to rely on data to make decisions on monetary policy, noting that entrenched economic growth and eventual benign inflation will give the central bank more flexibility on policy. Bank Negara has a 3% to 4% forecast for headline inflation this year.
On another note, he says Bank Negara’s warning on the trading of ringgit futures introduced by the Singapore Stock Exchange (SGX) and the Intercontinental Exchange (ICE) over a week ago for their respective bourses in Singapore
was for Malaysians.
He explained that the central bank’s statement issued soon after the announcement by the SGX and ICE was meant for those market players in Malaysia as the central bank has no jurisdiction outside the country.
“For those who engage in such transactions within Malaysia, that will be against the rules and if they’re found engaging in these illegal activities, then action will be taken,” Muhammad says.
He adds that foreign banks licensed in Malaysia who facilitate such trading for Malaysians will also be taken to task. “The law basically says that if it is a resident engaging in any illegal activity in contravention of the Financial Services Act we’ll take action,” Muhammad says.
To a question on whether the use of cryptocurrencies will be regulated, he says that if the need arises, the central bank will look at it in greater detail and come up with a framework so that transactions can be done in a transparent manner.
Muhammad says the central bank has studied the use of cryptocurrencies and in particular their use in payment arrangements. “We’ll come up with the framework when it becomes more important and relevant,” he says.