A more stable footing for the ringgit in 2017

KUALA LUMPUR: Malaysia’s gross domestic product growth (GDP) is set to pick up slightly to 4.5% in 2017 from 4.2% in 2016 driven mainly by a rise in exports, and the ringgit is expected to stabilise at around RM4.40 to the US dollar in 2017 and RM4.30 in 2018 driven by improved oil prices, said Euler Hermes-Allianz Research senior economist for Asia, Mahamoud Islam.
“It (ringgit) is not really strong, but it’s a stabilisation compared to what we’ve seen before, which was a depreciation,” he told a press conference on Malaysia’s economic outlook here yesterday.
The ringgit closed at RM4.33 against the US dollar yesterday.
Mahamoud said Malaysia’s economy is resilient and “the stars are now aligning” for the country’s export-oriented economy, with global trade value set to increase 3.6% in 2017.
He expects a modest improvement in Malaysia’s export volume with demand from major trading partners, such as China and the US, set to remain strong; while commodity prices are slowly improving. This is assuming that Brent crude oil prices average at US$57 per barrel in 2017 and US$59 in 2018.
Domestically, Mahamoud said, demand drivers are improving at a slow pace. For corporates, better revenues provide some leeway for increased capital expenditures. Business sentiment is rising, supported by increasing output and new orders. For households, both confidence and employment are improving. However, weak income growth and higher inflation point to limited momentum.
He said the central bank is unlikely to cut the overnight policy rate now because of higher inflation.
“The likelihood is to raise interest rates rather than cut, but that said, we don’t expect the central bank to hike interest rates, they should stay stable,” Mahamoud said.
He also said challenges to growth remain as Malaysia’s financial capacity to support growth is limited. Fiscal manoeuvring in Malaysia is constrained by a hefty public debt (above 50% of GDP) compared to regional peers. High household debt (88.4% of GDP) also keeps the central bank from easing monetary policy.
Competition from neighbouring countries is intensifying as regional manufacturing powerhouses aggressively expand their market share.
“The outlook of China is more supportive of Malaysia with stronger growth of import while the growth drivers for trade in the world and region is also growing. Looking at the trends, it’s more supportive to Malaysia with demand coming from China. The downside risks are protectionism and politics,” said Mahamoud.
He said four potential forces to aid growth for Malaysia are a more supportive business environment enabling Malaysia to become a capital magnet, investing further in innovation and infrastructure, digitisation & servitisation, as well as selective partnerships including deepening ties with Asean members and leveraging on China’s One Belt and One Road strategy.
To achieve Malaysia’s ambition to become a high income nation by 2020 requires boosting gross national income per capita to US$15,000 by then, from US$9,096 in 2016, Mahamoud said.
“When we compare (Malaysia) with high income markets, it’s not high value-oriented, but compared with Asean, it’s surely high value-oriented and is well advanced in terms of high value exports,” he added.