Mier forecasts 2006 GDP growth at 5.5%

KUALA LUMPUR: The Malaysian Institute of Economic Research (Mier) estimates GDP growth for 2006 to edge up to 5.5% due to firmer commodity prices, a rebound in the electronics sector and a resilient domestic demand. 

This estimate is up from the 5.3% GDP growth forecast for 2005, said executive director Prof Mohamed Ariff.  

The improved figure is largely due to growth in the manufacturing and services sectors as well as resilient private consumption.  

Barring any unforeseen events, with a steadier global economy and stable domestic situation, the GDP growth rate can drift closer to 5.8% in 2007. 

“Improvements were recorded in the manufacturing sector, driven by growth in export-oriented industries. 

“The semiconductor industry is regaining its glitter, with growth recorded close to the global average. This means we are regaining competitive advantage,” he told a press conference yesterday.  

Foreign direct investment (FDI) approvals for the first nine months of 2005 were up 98% compared with the previous period.  

“Japan is coming back as a leading investor, followed by Singapore and the US. Most of the FDIs are going into the electronics sector,” he added.  

Although foreign reserves have declined to US$70.5bil as at end-December, they are expected to turn around if the stock market firms up and ringgit strengthens in the second half of 2006.  

Mier noted that the ringgit was still strongly influenced by the US dollar and would remain so until the dollar weakened.  

It believes the ringgit is undervalued by 6% to 7% against the dollar, whereas the dollar is overvalued by 30%.  

“Chances are the dollar will start to down cycle some time this year until 2008, during which time the ringgit will distance itself from the dollar and move more closely to other currencies,” he said.  

On interest rates, Mier estimates a minimal hike due to expectations that the US Federal fund rates will peak soon, which will lead to less pressure on other countries to raise their own interest rates.  

Mier believes that if the overnight policy rate was adjusted, it will be raised by not more than 50 basis points.  

Inflation is forecast at 3.5% this year due to rise in retail petroleum, oil and gas prices. 

Although global oil prices might not rise significantly, local prices may go up as the government is expected to reduce oil subsidies. 

The inflation rate is also affected by higher tariffs requested by utility companies. 

For MIER reports click here

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