BNM Report 2014: Malaysia to see volatile capital flows

KUALA LUMPUR: Bank Negara Malaysia (BNM) expects the uncertain global economic outlook and the potential divergence in the monetary policies of the major economies, large shifts in capital flows can be expected to continue in 2015. 

“Together with other emerging economies, Malaysia is also expected to experience volatile capital flows,” it said on Wednesday. 

The central bank emphasised that the availability of a wide range of policy instruments, policy flexibility and sufficient buffers have improved Malaysia’s ability to manage these volatile capital flows.

“In addition, a strong banking system and well-developed financial markets will be able to absorb and intermediate swings in capital flows without disruptions to financial intermediation or dislocations to underlying economic activities. 

“Most importantly, monetary and financial conditions are expected to remain accommodative and supportive of real economic activity,” it said.

BNM said monetary policy in 2015 will focus on ensuring steady growth of the Malaysian economy amid contained risks to inflation. 

It elaborated that the operating environment for monetary policy will be shaped by a number of factors including external developments that would affect the overall outlook for the domestic economy. 

Among the factors are the considerable downside risks to the global growth prospects, the implications of a changed outlook for commodity prices, and the potential divergence in the monetary policies of the major economies. 

Notwithstanding these external developments, the Malaysian economy is expected to remain on a steady growth path of 4.5%-5.5%, supported by a sustained expansion of domestic demand and a resilient export sector. 

Headline inflation will be lower during the year given the significant decline in commodity prices. In addition to these developments, monetary policy will also consider the potential risk of financial imbalances that may have medium-term implications for the Malaysian economy.

Monetary policy in 2015 will focus on ensuring steady growth of the Malaysian economy amid contained risks to inflation.

Global growth is expected to improve moderately in 2015 but will remain uneven, with considerable downside risks. Although growth in the US is expected to improve and growth in many Asian economies will be sustained, the growth momentum in a number of key major economies is weaker than earlier expected. 

While overall supportive of global growth, the decline in commodity prices has also raised concerns over the growth prospects for net commodity exporters. The magnitude and timing of monetary policy shifts in the major economies are also uncertain. Against this backdrop, international financial markets are expected to continue to be volatile during the year. 

The Malaysian economy is expected to grow by 4.5 - 5.5% in 2015. Domestic demand will continue to anchor growth. Private consumption will be supported by higher disposable income from lower fuel prices and favourable labour market conditions. 

BNM said after three years of double-digit growth, growth in private investment is expected to moderate due mainly to lower investment in the mining sector as a result of the weak global crude oil prices. 

Nevertheless, private investment growth will be supported by on-going and new investment plans in the manufacturing and services sectors as firms benefit from the continued global recovery and lower cost of inputs. 

The export sector is expected to remain resilient, with the continued growth in manufactured exports, mitigating the impact of lower commodity prices on commodity exports. 

Against a backdrop of continued uncertainty in the global economic and financial landscape, the key risks to the growth outlook for the Malaysian economy will therefore emanate mainly from the external environment.

The risks to the inflation outlook are assessed to be relatively contained going forward. Headline inflation is projected to be lower at 2%- 3% in 2015, largely reflecting the impact of lower global oil prices on domestic fuel prices and the lower imported inflation, which are expected to partly offset some of the impact of the GST on inflation. 

“Going forward, the inflation rate could be subject to the volatility in global oil prices. Nevertheless, underlying inflation is expected to remain contained amid the stable domestic demand conditions,” it said.