This article first appeared in The Edge Financial Daily on February 13, 2018

KUALA LUMPUR: High-base effects, particularly in external demand, are expected to moderate Malaysia’s gross domestic product (GDP) growth in the fourth quarter of 2017 to 5.3%, according to RAM Rating Services Bhd.

The same is also seen for Malaysia’s 2018 GDP growth, which it said should slow to 5.2% after the expected “robust growth” of 5.8% for the full-year 2017, said the local rating agency in a statement yesterday.

“What had begun as a hopeful rebound in export momentum had gradually built up into one of the main catalysts of the turnaround last year,” it said, pointing to 18.9% nominal export growth in 2017 against a mere 1.2% the year before, helped by demand for investment goods and restocking of electrical and electronic items in the period.

The rebound in external demand also helped “jump-start” the local economy, it added.

“As export-oriented industries have performed better and wages and recruitment have been ramped up, a positive spillover effect has flowed through to domestic demand, thereby providing a much needed boost to consumption and investment,” said RAM head of research Kristina Fong.

Private consumption is expected to have grown 7% year-on-year in 2017, signalling a full recovery from slacking labour conditions and the introduction of goods and services tax in 2015. Concurrently, it anticipates private investment to grow 8.8% in 2017.

And going by its Business Confidence Index, which provides a six-month forward looking outlook on Malaysia’s economic state, RAM said export heavy firms are still “more bullish” than their local counterparts.

Paired with expectations that recruitment and capacity expansions are to be maintained in the first half of 2018, the rating agency forecast private consumption and investment growth of 7.2% and 7% respectively, this year.

Notwithstanding the encouraging outlook, RAM warned of headwinds from international trade developments.

“We believe that a more protectionist stance by some industrialised economies [such as the recent tariff increase for solar panels and their imported components in the US] may affect the pace of exports,” it said.

“However, the full extent of this impact may not be immediate,” it added.

On monetary policy, RAM expects the local overnight policy rate (OPR) to stay at 3.25% in 2018, with inflation expected to moderate to 2.5% from 3.7% last year. “Future decisions on the OPR would be data-dependent, balancing the interplay of risks between growth and inflation,” it said.