Malaysia’s economy will keep its momentum next year

The economy is expected to settle at an overall growth rate of around 5.5% to 6%

By ALIFAH ZAINUDDIN / Pic By BLOOMBERG

Malaysia’s economy is expected to maintain its growth trajectory next year, helped by higher local consumption and export growth, although inflation pressures are building, said the International Monetary Fund (IMF).

The Washington-based IMF said the economy is expected to grow between 5% and 5.5% next year, due to sustained domestic demand and continued upswing in global trade.

According to the fund’s report based on its findings after a high-level IMF team visit to Malaysia, the country’s real gross domestic product (GDP) for the year has so far surprised on the upside, growing at 5.9% year-on-year in the first three quarters of 2017.

The economy is expected to settle at an overall growth rate of around 5.5% to6%.

The report said momentum in activity is expected to remain strong in the first half of 2018 (1H18), as domestic demand and global trade remain strong.

Nada Choueiri, who led the IMF team on a 10-day visit to Kuala Lumpur and Putrajaya, said headline inflation is projected to decline to 3% to 3.5% on lower impact from global oil prices.

“Risks to the near-term outlook are balanced. Strong global demand for electronics — which has benefitted Malaysia’s exports — could last longer than anticipated, while downside risks include policy uncertainty in advanced economies and tighter global financial conditions.

“Going forward, striking the right balance in policies will be key,” Choueiri said.

She said the current accommodative monetary policy is appropriate due to the stable core inflation, but warned that the authorities must act to ease overheating pressures.

“The authorities should stand ready to raise the policy rate, should leading indicators suggest the emergence of overheating pressures.

“Continued reliance on exchange rate flexibility and macroeconomic policy adjustments should be the first line of defence against capital flow shocks,” Choueiri said.

The government’s planned pace of fiscal consolidation for 2017 to 2018 is also deemed as appropriate and will help build buffers to maintain financial market confidence.

“In the medium term, fiscal policy should follow a gradual consolidation path. The composition of adjustment could be improved to make it more revenue-based, and to make room for the structural reforms and increased social spending for inclusive growth,” she said.

Meanwhile, Moody’s Investors Service Inc — in a report on Malaysia’s credit resilience and external vulnerability risks — said the strong growth trends are likely to be sustained.

“A highly diversified and competitive economic structure underpin stable and relatively robust growth trends that have proven to be resilient to external headwinds.

“The economy’s long-term potential growth should remain robust at around 5%, significantly stronger than other A-rated sovereigns,” said Moody’s.

The rating agency also does not expect the government guarantees to present material contingent liability risks.

Moody’s said as of the end of 2016, the total debt of non-financial public sector corporations stood at 16.6% of the GDP, two-thirds of which is guaranteed by the government.

But Moody’s said the higher foreign investor participation in both equity and debt markets exposes Malaysia to portfolio flow volatility and swings in foreign reserves.

“At present, reserves are insufficient to meet maturing external long- term debt repayments and short-term debt. However, a sizeable net asset position and deep domestic capital markets moderate external vulnerabilities,” said the rating agency.