Malaysia’s economy is expected to expand moderately in 2017 driven by domestic consumption, mega infrastructure projects and foreign direct investment. Julia Goh, Economist at The United Overseas Bank (Malaysia) Bhd (UOB Malaysia), explains the reasons behind the bank’s forecast and outlines the risks that will persist in the year ahead.
1. What is your growth forecast for Malaysia’s economy in 2017 and where will growth come from?
Malaysia’s Gross Domestic Product (GDP) is expected to expand moderately from 4.2 per cent in 2016 to 4.5 per cent in 2017 fuelled primarily by domestic consumer spending. In addition to domestic consumption growth, UOB Malaysia expects the economy to benefit from foreign direct investment (FDI) inflows resulting from the large pipeline of infrastructure projects over the next five years. Gross FDI inflows rose 3.2 per cent year-on-year to RM67.7 billion in first half of the year.
2. Why do you expect domestic consumption to be the key growth driver in 2017?
Both public and private sector consumption currently accounts for two-thirds of Malaysia’s GDP. This trend is expected to continue into 2017 supported by new government initiatives, tourism and stable unemployment rates.
The government’s financial aid and tax relief measures for the lower and middle income groups will help hold up private consumption. The higher cash aid allocated to low income households, lifestyle tax relief, and giveaways for civil servants will help alleviate the effects of higher living costs and reinforce private consumption growth.
3. How confident are you that domestic consumption levels will remain stable in the year ahead?
Stable unemployment rates and high labour participation are lending to Malaysia’s domestic consumption growth. Current labour force participation rate is high at 67.8 per cent and with companies still realising profits, the average nominal wage growth is expected to stay positive.
The advent of e-commerce and digital enablers has further lifted job opportunities along with the establishment of government initiatives under the Human Resources Development Fund to aid job placements and up-skill workers.
Our positive outlook for domestic consumption is further supported by Malaysia’s tourism growth. The number of tourist who visited Malaysia in the first eight months of this year grew by 3.8 per cent to reach 17.6 million. This was largely due to the higher number of visitors from China and neighbouring countries Singapore, Thailand and Indonesia.
4. What, if anything, will derail Malaysia’s growth prospects in 2017?
Mediocre global growth conditions and global geo-political events will continue to pose downside risks to Malaysia’s growth path.
The potential effects from the United States presidential transition, the United Kingdom’s referendum to exit the European Union, upcoming elections in the European Union, and the pace of US Federal Reserve (US Fed) interest rate normalisation policy, could weigh on Malaysia’s growth.
Closer to the region, the effects of China’s economic rebalancing, natural disasters and how Asia adjusts to lower growth prospects across advanced economies, could also impact the nation’s domestic growth negatively.
5. How can we manage and mitigate these global risk factors?
Global risk factors will continue to impact the strength of the currency and the pace at which Malaysia returns to a stronger growth environment. Against these global challenges, Malaysia will need to carefully manage the balance between monetary and fiscal measures to support growth, ensure stable inflation, manage financial risks and maintain fiscal prudence.
6. What is your outlook for the ringgit?
We expect the ringgit to trade at 4.15 against the US dollar by the end of 2016. The currency is expected to trade higher to about 4.08 by mid-2017 supported by stable oil prices, a return of confidence following the US presidential elections and the US Fed’s gradual approach to raising interest rates. In the interim, it remains susceptible to bouts of volatility owing to the global uncertainties.
Source : The Heat Malaysia Online