Morgan Stanley raises Malaysia 2014 GDP growth forecast to 5.8%

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KUALA LUMPUR (Sept 9): Morgan Stanley Research has raised its growth projection for Malaysia’s economy this year to 5.8% year-on-year (y-o-y), up from 5.1% previously, on the back of the stronger-than-expected export performance.

“Although our global economics team revised downwards their 2014 and 2015 gross domestic product (GDP) growth forecasts slightly, Malaysia’s exports has to the contrary surprised to the upside and outperformed global and regional exports,” Morgan Stanley said in a research report dated Sept 8.

It has also revised upward its Malaysia’s GDP growth expectation for 2015, from 5.2% to 5.3%, at the same time rolling out its 2016 GDP growth forecast of 5.4%.

“Our numbers are above consensus, which stands at 5.3% for 2014 and 5% for 2015, but we expect consensus to similarly revise up thereafter,” said Morgan Stanley.

On the higher GDP growth forecast, Morgan Stanley explained that Malaysia’s exports has surprised on the upside, picking up the slack from moderating domestic demand.

Worth noting is that based on Morgan Stanley’s ranking of the ASEAN economies, Malaysia is the second strongest country from a cyclical economic standpoint, after Philippines.

Morgan Stanley also highlighted that Malaysia’s economic drivers have now passed the growth baton back to the exporters, from domestic demand previously.

“Specifically, non-commodity exports have improved in segments such as machinery and transport equipment and manufactured goods, but much of export strength, interestingly, is seen on the commodities front in the mineral fuels such as oil and gas,” it said.

Morgan Stanley went on to say that the healthy export momentum has buoyed overall headline GDP growth even as domestic demand momentum is moderating.

“We believe domestic demand momentum is likely to remain moderate with policymakers continuing on fiscal consolidation efforts as well as fixed capital expenditure (capex) momentum normalizing from the spurt in the initial days of the Economic Transformation Program,” it said.

The 2015 national budget is to be announced on Oct 10, and Morgan Stanley expects further narrowing in fiscal deficit from -3.5% of GDP in 2014 and -3% in 2015.

“On the investment front, we note that fixed capex growth has normalised to mid-to-high single digit growth levels from the double-digit growth momentum seen in 2013 and before,” it said.

Morgan Stanley opined that an accelerated pace of reforms to improve the quality of human capital would be required to see investment momentum pick up pace.

Whilst the cyclical growth momentum is likely to stay at a respectable pace, Morgan Stanley highlighted that more work needs to be done.

“Malaysia’s medium-term structural story is not as compelling as other ASEAN economies’ because it suffers from a Dutch Disease of sorts. Benign demographic trends have provided the labour inputs for growth.

Meanwhile, commodity-related revenue, making up 30% of government revenue, has provided the capital inputs for growth via fiscal pump-priming,” it commented.

Morgan Stanley warned that these factors had historically created a comfortable growth buffer, leading policymakers to neglect for some time what is needed on the competitiveness and productivity front.

On Malaysia’s inflation, Morgan Stanley expects the implementation of the goods and services tax (GST) at 6% in April 2015 is likely to keep headline inflation at 3.6%YoY in 2015, compared to 3.1%YoY in 2014.

The country’s inflation has accelerated from 1.5%YoY in the first quarter of 2013 to 3.2%YoY in July 2014, reflecting the inflation side effects from fiscal consolidation measures.

Bank Negara Malaysia has then hiked the overnight policy rate by 25bps to 3.25% in July this year to mitigate the risk of broader economic and financial imbalances.

“We do not think this would be an aggressive rate hike cycle and expect only another 25bps from here to 3.5%. This is because we believe that inflation pressures are policy-induced and not driven by demand-pull pressures and the fiscal consolidation measures that created the inflation side-effects would in any case have a restraining effect on growth,” Morgan Stanley concluded.