RESEARCH houses are still cautious but optimistic on Malaysia’s gross domestic product (GDP) growth prospects this year in light of the rosier outlook by Bank Negara, following the release of its 2016 Annual Report on March 23.
While the central bank has raised its GDP outlook to between 4.3% and 4.8% this year, a check on several research reports reveal that many have maintained their projections at the lower end of the central bank’s range, citing prevailing concerns over the country’s economic fundamentals.
At a media briefing last Thursday, Bank Negara governor Datuk Muhammad Ibrahim (pic) pointed to the resilience of the Malaysian economy in 2016 despite a challenging macro backdrop and pressure on the ringgit.
In 2017, the expected improvement in consumption, exports and commodity prices will underpin the country’s economic growth for the year, he told reporters.
While analysts largely concur with the central bank’s assertion, there are significant differences in the projected numbers relating to the extent of the improvement.
One major point of contention is on the degree of private consumption growth, which is one of the key drivers of the economy. In its annual report, Bank Negara says that private consumption will remain supported by continued wage growth and the increase in disposable income due to measures imposed by the government, as well as improved commodity prices.
In a report, Affin Hwang Capital Research says that it projects a lower private consumption growth of 5.4% compared to Bank Negara’s expectation of a 6% growth. The firm forecasts GDP to grow by 4.4% this year.
“However, the central bank also cautioned that households are likely to make further expenditure adjustments in response to rising inflationary pressure. Nevertheless, with household debt levels continuing to moderate, which was partly attributable to Bank Negara’s pre-emptive macro and macro prudential measures, we believe that private consumption growth is unlikely to be impacted by household indebtedness,” it says.
On the other hand, PublicInvest Research, which expects GDP to grow by 4.6% this year, highlights the household debt situation as a significant factor.
While the growth in outstanding household debt moderated further to 5.4% last year from 7.3% in 2015, the firm says that inflationary pressures may have pushed up borrowing activity in the non-mortgage-related segment.
“While the bulk of the household debt formation continues to be mortgage-driven, signs of strain are starting to be seen on urban households as a result of cost pressures, with growth in personal financing and credit card balances inching up to 4.8% last year, and gross impaired loans in these two sub-segments also inching up higher,” it says.
Another consensus view between the central bank and the research houses is that private investment is expected to remain steady amid lower public spending, as the federal government strives for further fiscal consolidation.
However, the central bank expects a higher growth of 1.5% for public investment in 2017 compared to a 0.5% decline last year. This will mainly be driven by higher capital expenditures by both the Government and public corporations in key infrastructure projects.
While Bank Negara expects private-investment activity to moderate further to 4.1% this year compared to 4.4% in 2016 and 6.4% the year before, Muhammad reiterates that the quality of the investments and the positive spillover effects to the economy are more important than the absolute numbers.
“We opine that Bank Negara’s macro projections are broadly realistic. While the economy is expected to recover, the uptick is not broad-based. One significant point is that the central bank has projected a flat domestic demand growth, indicating its cautiousness against a full-fledged recovery,” says Hong Leong Investment Bank Research in a report. The research house expects the GDP to grow by 4.5% this year, driven by primary sectors and construction projects.
On the policy front, analysts largely agree that the central bank will continue to maintain its overnight policy rate at 3% in spite of inflationary pressures due to rising costs, as well as potential higher crude oil prices, going forward.
AmBank Research, which expects the GDP to grow by 4.5%, cautions that external uncertainties such as protectionism and monetary policy divergence could lead to a tighter financial market and renewed volatility in the foreign-exchange market, going forward.
“Hence, we reiterate our view that the monetary policy will continue to ensure that the economy does not suffer from tight liquidity in the financial system. Besides, we expect the policy to continue to be supportive while maintaining price stability,” it says.
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