UBS sees GDP at 6% in 2017, 5.5% in 2018

One-off cash handouts to civil servants ahead of the general election, in addition to infrastructure projects, should help maintain strong growth in 2018

By NG MIN SHEN / Pic By HUSSEIN SHARUDDIN

Malaysia’s economic growth has been forecast to moderate to 5.5% in 2018 from an expected 6% expansion in 2017, even though infrastructure projects and private consumption are expected to maintain solid growth next year.

The forecast, according to UBS Investment Bank senior Asean economist Edward Teather, is based on the current stability of inflationary pressures and higher oil price trends, although it remains unclear how long the upward trajectory will last.

For 2017, the main engines of the global growth pick-up were Chinese property, US shale and the wider community rebound, including Brazil and Russia emerging from recession.

Going forward, the Chinese property market looks to be weakening, while Brazil and Russia will continue to accelerate.

Teather said in a statement that the mix of growth is less supportive for Asian economies like Malaysia, which export less to countries like Brazil and Russia than they do China.

“As a result, we think trade will slow in real terms from around 10% year-on-year (YoY) in 2017 to 7% in 2018 for Malaysia.

“Exports comprise close to 80% of local gross domestic product (GDP), thus dominating the growth outlook next year. We estimate GDP growth to slow to 5.5% in 2018 from 6% this year,” UBS Investment Bank Asean economist Alice Fulwood said in the same statement yesterday.

One-off cash handouts to civil servants ahead of the general election next year, in addition to infrastructure projects, should help maintain strong growth in 2018.

Meanwhile, activities associated with the East Coast Rail Link (ECRL) and the Kuala Lumpur-Singapore highspeed rail (HSR) next year could also add between 0.3% and 0.5% to economic growth for each project.

However, strong economic growth may also be inflationary, especially as commodity prices appear to be rising, which is likely to be a cause for concern for the central bank.

“For every US$10 (RM40.84) the oil price rises, it is likely that 20 to 30 basis points (bps) are added to Malaysian inflation,” Fulwood said.

She said Bank Negara Malaysia stated that the output gap — a measure of capacity in the domestic economy — likely closed in 2016, while potential or trend growth is expected to range between 4.5% and 5%.

“This means that if the economy expands above this rate for extended periods of time as it is doing now, there is an increased risk of inflationary pressure building up. “While headline inflation should drop next year from 3.9% YoY to 2.4% YoY because of the base effect from rapid increases in fuel prices in early 2017, we think core inflation will accelerate,” she said.

The financial services firm predicts the central bank will raise the Overnight Policy Rate by 25bps twice in 2018 — once in January and once in the second half of the year.

Greater capital will likely flow into Malaysia in 2018, particularly from China. Over the last two years, Chinese foreign direct investments into Malaysia have grown from 0% of GDP in 2014 to almost 1% of GDP in 2017.

“We think this is likely to continue due to China’s One Belt, One Road (OBOR) initiative. China is likely to invest in the ECRL and the HSR, as well as several port and property projects. In our work on OBOR early this year, we found Malaysia was likely the biggest beneficiary of OBOR in Asean,” Fulwood said.

A survey done by UBS on 500 Chinese corporates showed that 15% to 25% of participants were looking to invest in Asean, with Malaysia as their most preferred destination, while 90% of large companies were looking into investing in Malaysia.

On the currency front, the ringgit is seen to reach RM4.10 against the US dollar by end-2017, and RM3.90 against the greenback by end-2018.

This is on expectations for inflation and credit cycle trends to remain benign while the current account balance remains stable, in addition to continued domestic growth potentially boosted by rising oil prices.