KUALA LUMPUR (May 4): Moody’s Investors Service has raised its growth forecast for Malaysia’s gross domestic product (GDP) to 5.4% in 2018 — higher than the median of 3.5% for A-rated sovereigns — from its earlier forecast of 5.2% in February.
Growth should remain underpinned by a pipeline of large infrastructure projects that will stimulate both public and private investments, Moody’s said in a credit opinion dated April 30. The projection is slightly lower than Bank Negara Malaysia's projected growth of 5.5% to 6% for 2018.
"However, the recent uptrend in trade is unlikely to continue at a similar pace and government spending is unlikely to be as strong as it had been in the lead up to Parliamentary elections scheduled to be held on May 9," it said.
Moreover, it expects any escalation in trade conflict between China and US to impact Malaysia directly and indirectly, as US and China are the two biggest trading partners with Malaysia after Singapore. Both cumulatively accounted for almost a quarter of total Malaysia’s exports in 2017 (US:9.5%, China: 13.5%), which "suggests sizeable exposure".
It also noted that the imposition of higher import duties to the US would inflict secondary effects on Malaysia, because of its integrated supply chains "most notably through China", as well as through a shift in demand/supply and price dynamics of key inputs, including commodities.
"A significant share of Malaysia's exports consists of electronic components such as telecommunications equipment and electrical apparatus and parts, which are inputs for final products (these two product categories account for 21% of Malaysia's total exports)," it wrote.
Having said that, it noted that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership among the 11 remaining members of the original Trans-Pacific Partnership (TPP) minus the US, "will offer some new opportunities for Malaysia", like access into new markets that would benefit its palm oil, rubber and electronics exporters.
It also noted how strong export growth and a recovery of foreign ownership holdings in Malaysian government bonds have contributed to a gradual rise in foreign exchange reserves in the past 12 months, which crossed US$100 billion in April.
It forecasts that the current account (CA) surplus will remain around 2-2.5% of GDP over the next two years, slightly lower than the 3% of GDP in 2017. The CA surpluses and strong financial flows should see the reserves ending 2018 at about US$102 billion, it added.
Impact of election manifestos
On the election manifestos unveiled by both the incumbent Barisan Nasional and Opposition coalition Pakatan Harapan, Moody's noted some of the measures listed included raising minimum wages, greater cash handouts, and relief for Federal Land Development Authority (Felda) settlers.
"The impact of these programmes on the sovereign credit will depend on how they are funded and whether they have a negative effect by delaying government’s on-going efforts at fiscal consolidation.
"Economically, these programs are likely to boost consumption over the near-term, but against the backdrop of Malaysia’ export driven growth, the impact is not likely to be material and could be offset by inflation," it added.
Moody's rates Malaysia at A3, with a stable outlook.