Moody’s: Infrastructure spending spurs broad-based economic growth

Persisting solid external demand and ongoing govt infrastructure spending to support more investment by private businesses for Malaysia and Hong Kong


Strong public infrastructure spending in Malaysia and Hong Kong will ensure a more broad-based economic growth than other trade-dependent economies, according to Moody’s Investors Service.

In its latest sector in-depth report, Moody’s expects the persisting solid external demand and ongoing government infrastructure spending to support a further wave of investment by private businesses for both countries.

“That could mean that growth in that segment would slow down lesser in 2018 than we currently expect.”

In the case of Hong Kong, public infrastructure investment and rising housing supply were the main drivers.

For Malaysia, it said the acceleration in gross fixed capital formation reflects the ongoing implementation of large infrastructure projects, such as mass rapid transit lines as well as export-oriented projects in electronics manufacturing and petrochemicals.

“In both cases, stronger investment combines with accelerating exports, but the former is not a spillover effect of the latter,” it added.

The firm also believes that the strength of investment in Hong Kong and Malaysia in the first half of 2017 (1H17) represents a turnaround from the relative weakness of the preceding two years.

The report also highlighted that the strengthening in global demand since the end of last year has buoyed Asia Pacific’s trade-reliant economies.

“Since the start of this year, export growth in a number of Asia-Pacific economies, including Taiwan, Malaysia and Hong Kong, has outpaced the global average.

“Among the most trade-dependent economies, the pickup in export growth in the 1H17 follows two years of weaker shipments.

“In the case of Malaysia, the stabilisation in commodity prices has provided additional support,” it added.

The impact of stronger trade on gross domestic product (GDP) growth has been particularly visible in South- East Asia, with Malaysia and Thailand have recorded multiyear highs in growth.

For private consumption, Malaysia had its endogenous factors that played a greater role in supporting consumption growth.

“In the case of Malaysia, wage growth, partly due to civil servant salary increases and government transfers to low-income households have supported spending,” Moody’s said.

Still, in terms of growth forecast for Malaysia, Moody’s expects growth to slow to 4.7% in 2018 from 5.6% in 2017, as exports and private consumption cool on weaker demand for electronic exports and government expenditure rises at a more gradual pace.

“While a stronger rate of GDP expansion would be supportive, economic strength at ‘very high’ already represents the strongest pillar underpinning Malaysia’s credit profile, so the impact on its overall creditworthiness would be limited,” it said.

On the flip-side, some of those Asian economies that do not benefit from the pickup in global demand, such as Thailand, might end up depending on additional fiscal stimulus to support their economies.

It noted that trends in gross fixed capital formation have differed markedly among the region’s trade- dependent economies.

“Some businesses have started to invest in new or replacement equipment and facilities, while others are still using existing idle capacity to meet increased demand.”

On signs that global growth is likely to remain robust next year, Moody’s has raised its GDP forecasts for a number of Asia-Pacific economies.

“If solid external demand and robust domestic conditions combined to sustain business investment, that would further boost the medium-term growth outlook for the economies in question.

“The world’s biggest economies are recovering at the same time, giving a boost to trade,” the firm said.

Global export volumes in the 1H17 were 4% higher than the same period in 2016, according to data from CPB World Trade Monitor.

“For emerging Asia, the gain was an even more rapid 5.1%, consistent with our assessment of relatively high competitiveness and economic strength in the region,” Moody’s said.