KUALA LUMPUR: As Malaysians usher in 2017, they are set to grapple with a weak ringgit and higher food prices. Consumer spending will be reduced as imported goods become more expensive, pushing up inflation.

Indeed, economists have warned that Malaysia’s inflation level, measured by the consumer price index (CPI), could go up as much as 2.8% in 2017.

Recall that the October 2016 CPI increased 1.4% mainly on costlier liquor and tobacco, besides food and non-alcoholic drinks.

Nomura Research has said that it expects Malaysia’s inflation to rise by 2.8% in 2017 (from a 10-month average increase of 2.1% in 2016).

“This should be driven mainly by base effects from fuel prices,” the research firm said in a Dec 8 note.

UOB Malaysia economist Julia Goh said she expects inflation pressures to edge higher in 2017 with a forecast CPI growth of 2.5%.

“We foresee upside risks from currency weakness, higher food prices, [a] moderate pickup in oil prices, potential gas and electricity tariff adjustments and subsidy rationalisation.

“The expiry of the Price Control and Anti-Profiteering Act by year end may also lend to price adjustments next year albeit the government may announce new measures to prevent excessive price hikes,” she said in an email response to The Edge Financial Daily.

JF Apex Securities economist Norsyafina Mohamad Zubir also forecast a 2.5% inflation growth in 2017.

“The inflation rate is expected to pick up by 2.5% in 2017 partly due to continued higher prices of alcoholic and tobacco components as well as price hikes for food and beverage items amid the removal of cooking oil subsidy and increment in the wholesale price of refined sugar,” she told The Edge Financial Daily via email.

As for the ringgit, Goh projects that the local currency would trade at 4.50 against the greenback in 2017.

“However, [with the] ringgit being a high beta (high volatility) currency, [this] would mean periodic retesting of recent highs,” she said.

Goh opined that there are valid reasons to suggest that the ringgit has been oversold going on its estimated fair value of 3.9 against the US dollar, and the country’s stable fundamentals.

“The weaker currency buffers the current account position, and coupled with sustained inflows of foreign direct investment, income flows of local companies and repatriated funds by government-linked corporations, helps to offset some of the pressure from capital outflows on overall foreign reserves.

“One recourse for the ringgit is higher oil prices, though [this] is overshadowed by prospects of higher US 10-year yields and charging dollar bulls,” she said.

Dollar bulls are investors who are optimistic about the outlook for the US dollar against other currencies.

PublicInvest Research, in a Dec 16 strategy note, said that the ringgit could recover to average between 4.10 and 4.15 against the greenback for 2017.

“While we are longer-term positive on the ringgit, we must acknowledge the fact that foreign holding of domestic debt remains high.

“At [the] last count (November 2016), the number stood at RM181.8 billion in local government debt, RM23 billion in Malaysian Government Investment Issues (MGII) and RM17.1 billion in private-sector debt for a whopping RM221.9 billion,” the firm said.

As for monetary policy in 2017, Norsyafina opined that Bank Negara Malaysia (BNM) is likely to keep the overnight policy rate at 3%.

“We do not foresee any further rate cut for the whole year, unless the global economy continues to weaken,” she said.

Nomura, which forecasts a lower 2017 gross domestic product (GDP) growth of 3.7% compared to the Malaysian government’s official forecast of 4% to 5%, said that there is still room for a rate cut next year.

“As we believe BNM is biased towards supporting growth, we still think a 25-basis-point (bps) rate cut is likely in the first quarter of 2017. In particular, financial imbalance risks should ease as economic growth softens, which should open the door to a rate cut,” said the firm.

In a widely expected move, the US Federal Reserve raised interest rates on Dec 15, thus paving the way for further rate hikes in 2017.

“We now expect a faster trajectory of three hikes in 2017, with [a] magnitude of 25bps each time. Assuming that US President-elect Donald Trump is able to reflate the economy and US bond yields rise further next year, this is likely to pose more pressure on the ringgit.

“However, if the adoption of more expansionary US fiscal spending alongside [a] softer stance on anti-trade measures paves the way for [an] improved global growth outlook, this will bode well for the external economy and Malaysia,” she said.

Goh forecast a GDP growth of 4.5% in 2017 — a halfway mark on the government’s forecast of 4% to 5%, driven by favourable demographics and the country’s diversified export sector.

“There has [also] been a raft of domestic support measures, including big-ticket infrastructure spending to spur growth in the short and medium term.

“The RM29.7 billion of infrastructure job awards in the first half of the year have exceeded the full-year total for 2015, with another RM30 billion more in the pipeline.

“Government estimates indicate every RM1 spent in the construction sector will induce an additional 80 sen spent along the supply chain. As such, the positive spin-off effects could be as large as RM40 billion across the entire supply chain over the next few years,” she said.

Norsyafina also had a 4.5% target for Malaysia’s GDP in 2017.

“We expect domestic demand to continue to inch up in 2017 as the goods and services tax effect appears to be tapering off, while the government’s actions to raise households’ disposable income following the hike in the 1Malaysia People’s Aid and tax relief to households would stimulate consumer spending.

“However, downside risks remain as our trade performance is expected to remain moderate in 2017, consistent with evidence of a persistent deterioration in manufacturing activity by our main trading partners as well as [a] plunge in commodity prices,” she said.