M’sia growth forecast upgrade draws mixed views
THE significant upgrade of Malaysia’s economic growth forecast by the Asian Development Bank (ADB) has drawn mixed views, with one saying that it may be premature.
“I believe the move by ADB is premature; there was some measure of seasonal effect at work that boosted our second quarter gross domestic product (GDP) growth figure,’’ said Inter Pacific Securities head of research Pong Teng Siew.
The Hari Raya festive season was shifted from July 2016, which was the third quarter, to June 2017, the second quarter.
“Hence, retail consumption spending and manufacturing associated with consumer products for festive consumption saw a strong boost.
“There will likely be a payback in the third quarter,’’ said Pong.
Malaysia and Hong Kong received the largest upgrades (5.4% from 4.7% and 3.6% from 2%) for this year among major economies in the ADB’s latest update, said Bloomberg, adding that the global trade recovery is helping to boost exports in these two countries.
In Malaysia, real output growth for the retail sector in the second quarter, year-on-year (yoy), was at 11.4%.
“This kind of growth was unheard of, even in the boom years of the 1990s.
“The retail sector will likely report a sharp slowdown in the third quarter, although it has shown some semblance of recovery. “Some of that recovery may have been due to nominal price effects rather than real growth,’’ said Pong.
A possible overestimation of the trend pickup in GDP growth, while not taking into account the local seasonal factor, will pose special risks especially when extrapolating computed yoy GDP growth, said Pong.
Factors that derail growth Gradual upgrades of GDP forecasts for Malaysia would be expected, said Fortress Capital CEO Thomas Yong.
“Back to the end of last year, growth forecasts were cautious due to uncertainty over monetary policies of central banks.
“However, for the first half, Malaysian economic growth turned out to be better than expected, indicating a stronger than expected world economy,’’ said Yong, cautioning that the economy is still highly dependent on external demand and commodity prices. “ADB’s upward revision of Malaysia’s GDP growth estimate to 5.4% this year is in line with our estimate of 5.5%,’’ said Socio Economic Research Centre executive director Lee Heng Guie.
“For 2018, we are forecasting a 5.1% growth against ADB’s 5.4%.’’
Global growth is projected to rise a little to 3.6% in 2018, from an estimated 3.5% in 2017. Higher interest rates in the US is expected to take some steam off global growth, said Lee.
“Factors that can derail Malaysia’s growth trajectory over the next 12 to 18 months include lingering uncertainty over fiscal and policy regulations in the US, faster than expected US rate hikes and unsustainable financial and debt risks in China.
“Financial volatility induced by these headwinds can dampen investors’ confidence and weigh on consumption and investment growth.
“With the Malaysian general elections at least six months away, investors’ sentiment may be held down by uncertainty over the economic and policy landscape, post elections,’’ said Lee.
S&P has lowered China’s sovereign credit grade by one step to A+ in its first such downgrade since 1999, citing risks from surging debts, said Bloomberg. This follows Moody’s cut in May, which China described as “absolutely groundless”. “Rating revisions on developing economies will impact foreign investment flow and borrowing rates.
“For Malaysia, I see less pressure on foreign borrowing rates, thus it will be easy to raise funds internationally.
“It will likely be the opposite for China, which may also discourage the outflow of money,’’ said Danny Wong, CEO, Areca Capital. “In the near term, this cut should have little impact on the region, as China still has high domestic savings and rela- tively tight capital controls.
“However, this can affect China’s aim of developing the bond market,’’ said Yong.
“The A+ grade is still an investment grade but it is important to contain financial risk and debt from imploding and destabilizing the financial system and economy,’’ said Lee.
Even the Chinese central bank concedes that mounting private debt levels are gradually posing serious systemic implications, noted Pong.
“The effects may show up in late 2018, but China is a very big economy and not all parts are hurtling down an unsustainable path. “Many hedge funds betting on a big devaluation of the yuan with large shorts (selling in anticipation of the yuan falling further so that they can buy it back) got wiped out.
“They say ‘do not fight the US Fed but they may have to add ‘do not fight the People’s Bank of China’ to their rules of thumb on how to operate macro trades,’’ said Pong.