Morgan Stanley: M’sia’s growth baton has passed to exporters

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KUALA LUMPUR: Morgan Stanley Research has raised its growth projection for Malaysia’s economy this year to 5.8%, 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 have on the contrary, surprised to the upside and outperformed global and regional exports,” Morgan Stanley said in a research report dated Sept 08.

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 stand 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 have 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 the 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, normalising from the spurt in the initial days of the Economic Transformation Programme,” 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 said 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.

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

This article first appeared in The Edge Financial Daily, on Sept 10, 2014.