KUCHING: In the near term, Malaysia’s growth trajectory will hinge on two major factors – namely the global economic development and the strength of private consumption in supporting domestic demand.
STRONG BEARING: On the external front, the US’ economic strength will have a strong bearing on Malaysia’s economic performance through direct and indirect trades. – Photo from mir.com.my
According to Malaysian Rating Corporation Bhd (MARC), Malaysia’s gross domestic product (GDP) growth in 2011 is anticipated to normalise but remain higher than its long term trend of 4.5 per cent to five per cent.
“The moderation in growth in the next one to two quarters is expected to continue, judging by high frequency statistics and leading indicators such as equity market movements and the Organisation for Economic Co-operation and Development (OECD) composite leading indicators (CLI) which are currently moving downward,” said the economics team in MARC.
In its report, MARC further pointed out that the benchmark equity market, the FBM KLCI which leads the economy by approximately four months had now turned downward, portended slower growth over the next few quarters.
Similarly, the sharp decline in the OECD CLI and a more moderate outlook for the manufacturing sector suggested a softer growth in the near term.
On the external front, the US’ economic strength would have a strong bearing on Malaysia’s economic performance through direct and indirect trades. Although the proportion of Malaysian exports to the US shrank to 9.7 per cent in the first 10 months of 2010, US still remained as an important final destination for a major chunk of Asean exports.
Therefore, it was not surprising that the overall correlation between Malaysia’s and the US’ economies remained high over the years, said the economics team. With the US economy expected to continue being saddled with high unemployment, growth would be slightly lower than its long term trend.
However, the lag effect of huge liquidity injections would likely provide some support to the economy that would otherwise grow at a minuscule rate.
“Going forward, we opine that the external sector will exert downward pressure on the domestic economy, especially in the first half of 2011, as demand for major products such as electrical and electronic (E&E) manufactures by advanced economies soften.
“The offsetting effect, however, will come from the commodities side, where prices of crude palm oil (CPO) and crude oil are expected to remain relatively firm,” it revealed.
On the domestic front, the demand would largely be supported by private consumption which had primarily been responsible for the country’s growth since the Asian Financial Crisis (AFC). Major factors that supported private consumption remained favourable, suggesting that consumers would likely be driving domestic demand.
The unemployment rate had declined to 3.1 per cent in the third quarter of 2010 (3Q2010), below its long term average of 3.4 per cent, providing an important catalyst for private consumption. Similarly, consumer sentiment which is another indicator of private consumption had also remained upbeat, suggesting a sustainable growth in private consumption throughout 2011.
Based on the given factors, the rating agency foresaw Malaysia’s GDP growth to moderate to 5.3 per cent in 2011, from the estimated growth of 7.2 per cent in 2010.
MARC economic report also showed that inflation was expected to creep up in 2011, but it would stay below the three per cent mark. That was due to the lack of demand driven factors that offset the rising food and fuel prices arising from the government’s subsidy rationalisation efforts to reduce the burden on its coffers.
As for food prices, it foresaw continuous upward pressure following the sustainably strong commodity
prices attributed to the uncertainty in weather conditions. In this light, Malaysia, being a net food importer, was expected to bear the brunt of strong commodity prices due to low self-sufficiency in food production.
As for fuel, it anticipated further adjustments in petrol prices by 10-20 sen in view of steady and strong prices of crude oil. Sustainable economic growth above its long term potential means that Malaysia would likely take the opportunity to reduce the burden on the government’s financial position.
On the other hand, on the demand side, the small output gap for 2011 of minus 0.6 per cent suggested that demand driven factors that were normally responsible for higher inflation were less visible.
“Against such a backdrop, we project the consumer price index (CPI) to post a moderate increase of 2.6 per cent in 2011, up from an estimated 1.9 per cent in 2010, with core inflation edging up to 2.1 per cent,” said MARC economic team.
In terms of implicit deflators, the divergence between the private consumption and GDP deflators was worth noting. While the implicit deflator for private consumption was in line with the CPI, the implicit deflator for GDP was suggesting stronger price pressures, having grown by 4.1 per cent in 3Q2010 after peaking at 6.1 per cent in 1Q2010.
However, the moderation in its growth suggested that inflation might not be a pressing issue in the nearterm.
In terms of debt sustainability, the Malaysian government’s ability to meet its obligations had been demonstrated by the decline in its debt-service charge ratio to 10.2 per cent in the first nine months of 2010 alone, with the ratio now well below the historical average of 15.6 per cent.
In terms of debt sustainability, the Malaysian government’s ability to meet its obligations had been demonstrated by the decline in its debt-service charge ratio to 10.2 per cent in the first nine months of 2010 alone, with the ratio now well below the historical average of 15.6 per cent.
Additionally, analysis of the debt maturity profile revealed that the bulk of the government’s debt would mature after three years, suggesting that the risk of an asset-liability mismatch was fairly low for the Malaysian government.
On interest rates, MARC believed that demand-led inflation, if it happened, would not be a major trigger for future rate increases, as Bank Negara Malaysia (BNM) would likely resort to administrative measures instead. Furthermore, the need to sustain the growth momentum could mean that the policy rate would remained status quo in 1H2011.
In the medium term, however, Malaysia’s stable economic growth above its long term trend, coupled with the need to address financial imbalances, could lead to further normalisation, which was expected to happen in 2H2011.
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