Malaysia's economy strengthens amid daunting factors

KUALA LUMPUR: The year has been kind to Malaysia as its economy strengthened amid a confluence of taunting domestic and external factors which include the low commodity prices and a weak currency.
Most economists have been very cautious over the evolving economic outlook at the outset of the year and this was especially true in the context of rising protectionist policies in the US and populism sentiment globally, which could potentially set the world's growth into a tailspin, had they materialised.
The ongoing Brexit negotiations and a series of elections in major European countries such as France and Germany threatened to further divide the European Union amid uncertainty in global oil prices as supply glut continues to shape the oil and gas industry.
However, as the year progresses, the US Federal Reserve has been forthcoming in its interest rate decision, resulting in three rate hikes this year.
And the Bank of England also raised its Bank Rate by 25 basis points during its November meeting, signalling that advanced countries have been gradually removing the monetary support as economic growth became more entrenched as evidenced by the decline in unemployment rate and increase in inflationary pressures.
Bank Islam Malaysia Bhd Chief Economist Dr Mohd Afzanizam Abdul Rashid said such dynamics have benefited Asian economies, including Malaysia as exports registered double-digit growth for most of 2017.
"Some industries such as the electrical and electronics, as well as rubber gloves have been upgrading their production facilities and (carrying out) further automation in their production processes.
"This has allowed them to cater for higher order volume from the customers as they gained economies of scale, while competitive exchange rate also helped improve the appeal of Malaysians products," he told Bernama in an email interview.
Overall, Malaysia's gross domestic product (GDP) growth picked up speed to reach a two-year high of 5.6% in the first quarter (Q1) after five consecutive quarters of slow growth since Q2 of 2015.
Boosted by strong domestic demand and private expenditure, GDP picked up momentum to record a 5.8% growth in Q2 of this year.
And it went on to achieve a 6.2% growth in Q3, the highest since Q2 of 2014, as activities in the services and manufacturing sectors picked up with even stronger public spending.
High economic growth achieved in Q3 has prompted the Netherland-base ABN AMRO Bank NV to project Malaysia's full-year economic growth of 5.5% and a moderate growth of 5.0% next year.
"We have raised these forecast a couple of times this year. The Malaysian economy clearly did better than expected this year.
"One year ago, we expected the economy to grow by 4.0% in 2017 and 2018," the bank's Senior Economist Arjen van Dijkhuizen told Bernama in an interview.
Back home, economists are predicting Bank Negara Malaysia would raise overnight policy rate by another 25 basis points next year as the country's economy progresses.
Bank Islam's Mohd Afzanizam said the country's economy was growing at a respectable pace and might continue to do so next year.
"Therefore, keeping OPR status quo would mean the conduct of monetary policy is less prudent as this would encourage money to flow into unproductive sectors in search for higher yield.
"In other words, it promotes speculative activities if rates are kept low during strong economic growth. Perhaps, the economy needs a slightly higher OPR in order to reward the savers," he pointed out.
He added that the move could also help drive the ringgit higher as other economies in this region appeared to be taking a different path in terms of monetary policy.
Bank Islam is projecting Malaysia's 2018 GDP at 5.5% from an estimated 5.8% growth in 2017, mainly driven by domestic spending, especially from consumers and private investment amid stability in global demand.
Meanwhile, the consumer price index (CPI) rose significantly in 2017, driven by an acceleration of economic activity and higher transport prices.
The CPI increased to an average of 4.0% in the January-October period, compared to a full-year average of 2.1% in 2015 and 2016.
"We have seen some moderation from the post-global-financial-crisis peak of 5.1% year-on-year in March, with CPI inflation at 3.7% year-on-year in October.
"We expect headline inflation to moderate further, to an average of 3.0% in 2018. We have pencilled in one policy rate hike by Bank Negara Malaysia in 2018 by 25 basis points, to 3.25%," said van Dijkhuizen.
There has been a dichotomy between the real economy and consumer sentiment following the persistent rise in the cost of living and expensive house prices, especially with the rising inflation rate in the first 10 months, while the central bank has been consistently highlighting the state of house prices which are generally beyond reach.
Direct cash transfers such as BR1M, the creation of Kedai Rakyat 1Malaysia and the provision of affordable houses through various agencies are among the key measures implemented by the government, while the creation of AKPK by BNM since 2006 is aimed at addressing the level of household indebtedness.
To date, the level of household indebtedness has eased to 84.6% of GDP as of Q3 2017 from as high as 89% in 2015.
The ringgit/US dollar is on an appreciating bias as BNM is anticipated to make its move next year in terms of interest rates.
Additionally, the recent communiqué from the US Federal Reserve (Fed) also suggests that the US interest rates rise is likely to be slow and steady as inflation risks remain at bay.
"So the gradualist approach by the Fed is deemed to be ringgit-positive. Not only it signifies the US economy is on stronger footing but also it allows sufficient time for the consumers and businesses to adjust to the new environment (i.e. higher rates).
"This is positive as demand from the advanced countries will not be so affected by higher interest rate environment and this should maintain the external demand momentum," said Bank Islam's Mohd Afzanizam.
The ringgit/US dollar is projected to move between RM4 to RM4.10 towards end-2018, he added.
On the trade front, Malaysia's total trade grew 21.5% to RM1.46 trillion in the first 10 months of 2017 from the same period last year, with exports surging 21.1% to RM772.66 billion, while imports climbing 21.9% to RM692.51 billion.
The main contributors to the growth was trade with Asean, China, the US, Hong Kong, Japan, the EU and Taiwan.
Trade surplus of RM80.15 billion was recorded, higher by 14.4% compared with the corresponding period a year ago.
In advancing protectionism, US President Donald Trump early this year placed Malaysia together with several other countries under the radar of trade cheat list for allegedly causing the world's superpower to have a trade deficit of nearly US$50 billion.
International Trade and Industry Minister Datuk Seri Mustapa Mohamed denied the accusation, citing the discrepancies were the result of differing classifications in how trade was measured, and that Malaysia did not consider transit destinations as the country of source.
Moving forward, ABN AMRO, in a research note, pointed that while China is an important trade partner for many Asian economies, including Malaysia, so are the advanced economies.
"While we do not expect a major trade war between China and the US, there is a risk that the US stance on trade will become more hawkish in 2018, affecting Asian exports," it said in a note on "Asia Watch – Still in the Lead in 2018". — Bernama