By ANNA CHIDAMBAR
RAM Rating Services Bhd (RAM Ratings) is revising its economic growth projection up to 5.2% for 2017 from its original expectation of 4.5%.
“After a better than expected growth performance of 5.6% in the first-quarter of the year (1Q17), the economic recovery momentum is beginning to show signs of sustainability,” the credit rating agency said in a statement yesterday.
Most of the upside, RAM Ratings said, stemmed from a positive turnaround in business sentiment, which had brought about more productive capacity building in the form of machinery and equipment investments.
A significant rebound in external demand had also supported this robust growth and had been a key driver of higher business confidence exhibited by export-oriented firms, in line with RAM’s Business Confidence Index findings.
With the upward revision of gross domestic product (GDP), RAM Ratings also increased its inflation expectations for 2017 to 3.8% from 3% on the back of a stronger than expected oil price recovery momentum in the 1Q and upward stickiness of food prices, especially food away from home.
“Although the current upward price momentum is still primarily cost-push driven, the acceleration in growth momentum indicates a stronger potential for a higher prevalence of demand-pull inflation going ahead,” it added.
RAM Ratings did not exclude a higher possibility of a 25-basis-point (bp) hike in the Overnight Policy Rate (OPR) towards the end of the year.
AmBank (M) Bhd’s research arm AmBank Research concurred in a report yesterday that the probability for a rate hike by Bank Negara Malaysia (BNM) by 25bps had gone up to a 45% chance from 30% previously.
The research firm said headline inflation in May rose at a slower pace by 3.9% year-on-year (YoY) after growing above the 4% level since February 2017. Despite registering a slightly slower gain, inflation for the first five months grew 4.2%, which remained above the full-year average of 4%.
“Although the inflation data may have eased slightly in May, we still expect the overall inflationary pressure to stay in the coming months. Cost pressure will remain as the key culprit in preventing inflation from sliding apart from the base comparison,” it said.
AmBank Research said demand-pull inflation should kick in, especially with the improving economic activity reflected by the strong 1Q17 GDP of 5.6% YoY, healthy corporate earnings and firm labour market.
“There were no major surprises on the inflation numbers as the pressure is still from the cost side. We saw firm gains from producer prices which rose 9.4% YoY for the first four months of 2017, driven by higher prices of intermediate materials, up 7.3% YoY. This should result in further levels of transfer pricing on consumer items,” it said.
The research firm said inflation would be driven by the transport segment. Transport prices jumped 13.1% YoY in May from 16.7% YoY in April due to more expensive fuel prices.
“We found the average price of one litre of RON95 petrol was RM2.09 in May 2017 versus RM1.70 in May 2016,
while RON97’s average price was RM2.37 in May 2017, compared to RM2.05 in May 2016. Fuels and lubricants for personal transport equipment account for 7.8% of the Consumer Price Index (CPI) weight,” it added.
Meanwhile, AllianceDBS Research Sdn Bhd expects BNM to keep the OPR steady at 3% throughout 2017 as inflation is mainly cost-driven.
“Currently, the overall inflationary trend still remains high, as the three- month moving average in May recorded 4.5%. For now, we reckon inflation will remain in this range in the near term,” it said in a research report on Wednesday.
“The direction of CPI is uncertain given the recent volatility in global crude oil prices. We maintain our inflation forecast of 3.5% in 2017 against 2.1% in 2016,” it added.
Due to strong exports and manufacturing performance, AllianceDBS expects 2Q17 to be robust at around 4.8% to 5%. It forecasts the GDP at 4.8% for 2017.
JF Apex Securities Bhd maintains its headline inflation of 3.6% YoY throughout 2017 and expects inflation to taper off amid the softening commodity prices and strengthening ringgit.
“We expect BNM to keep OPR unchanged at 3% for 2017 given the relatively stable domestic financial and economic conditions,” it added.