KUALA LUMPUR (June 14): Morgan Stanley has upgraded its gross domestic product (GDP) forecast for Malaysia to 5% for both 2017 and 2018, from an earlier projection of 4.5% and 4.6% for 2017 and 2018 respectively.

"Malaysia is one of the 'momentum' economies where we see an upswing in cyclical growth, supported by export recovery or currency depreciation and pre-election spending," it said in a report on Asean, South Korea and Taiwan Economic Mid-Year Outlook — The Export Recovery is for Real, released today.

Morgan Stanley said the revised growth forecast is due to better-than-expected export growth, which provides an offset to a bumpy domestic demand trajectory.

It noted Malaysia’s exports have seen a recovery, amid global trade recovery.

"Indeed, as at March 2017, export value and volume have risen by a cumulative 19.9% and 19.4% respectively since January 2016. The improvement in export momentum was driven by not only commodities (mainly rubber, oil,and CPO), but also non-commodities (mainly electronics), which accounted for 50% of the cumulative export
value recovery," Morgan Stanley said.

The global financial services firm has also revised its 2017/2018 headline Consumer Price Index forecast for Malaysia to 3.8%/2.2%, from 3%/3.1% respectively.

"Overall, we expect headline inflation to pick up in 2017 on higher global oil prices, before normalising in 2018," the report said.

Apart from the better external outlook, Morgan Stanley highlighted that currency depreciation has acted as an automatic stabiliser and helped to restore competitiveness in Malaysia’s non-commodity exports.

"In our view, the global synchronous recovery means that Malaysia’s non-commodities exports momentum will likely stay healthy for the rest of 2017 and 2018," the report added.

Nevertheless, Morgan Stanley is of view that Malaysia and Indonesia need to move away from commodities towards non-commodities, by improving the quality of its human capital in Malaysia’s case and ramping up on infrastructure or attracting more foreign direct investment in Indonesia’s case.

"For the latter, fiscal reforms to raise government revenue will be needed to raise infrastructure spending," the report added.

Morgan Stanley also noted policymakers who capitalise on export recovery to implement difficult structural reforms, will enable their economies to be on a better footing when the next cyclical downturn takes hold.

"Structural reforms rarely happen in a straight line. In Asean, we see structural reforms gradually under way in Indonesia and the Philippines, with measures undertaken to raise fiscal revenue and channel more resources towards infrastructure.

"However, structural policy reforms lag in Malaysia and Thailand," it said.

Nevertheless, Morgan Stanley believes potential pre-election spending or fiscal easing should help to lend momentum for Malaysia.

It expects Bank Negara Malaysia to maintain the overnight policy rate at 3% near-term. "Historically, GDP growth has gone higher into the 5+% territory, before BNM has started to ratchet up the policy rate from the 3% level."