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Saturday, January 5, 2013

MARC: Expect resilient growth

Publication: NST
Date of publication: Jan 4, 2013
Section heading: Business Times
Page number: 003
Byline / Author: By Rupa Damodaran

KUALA LUMPUR: Malaysia can expect another resilient growth performance in 2013 as domestic forces may offset weaknesses in the external sector, says Malaysian Rating Corporation Bhd (MARC).

In its latest outlook, the rating agency expects economic growth this year to track a 5.3 per cent pace, and will largely hinge on global economic momentum, which is clouded by the prospects of recovery in the Euro region.

Malaysian exports will post a mediocre growth of 4.0 per cent in 2013.

"The bottoming of Malaysia's exports will likely lead to a mild rebound in external trade performance as exports to Asian economies stabilise," its economics team said, adding that an upturn in new US orders signals a recovery in Malaysia's future export performance.

It said the wobbly demand for semiconductors, as evidenced by the declining B-T-B (book to bill) ratio, and the softening crude oil and crude palm oil (CPO) prices will cap Malaysia's external trade performance in 2013.

Semiconductor sales are expected to rebound by only 4.5 per cent (according to the estimates by World Semiconductor Trade Statistics) and palm oil prices are expected to move within the RM2,200 to RM2,600 per tonne range next year.

In Asia, the bottoming of China's economy will also help Asia's export performance and contribute to Malaysia's net trade in 2013.

"On the domestic side, demand will likely stay resilient amid rising contributions from private investment and private consumption."

Private investment will continue to remain upbeat in view of the ongoing infrastructure as well as other mega projects to be undertaken by the government in the next few years, while private consumption will remain resilient.

The mega projects include the MRT project, Menara Warisan, the Rapid project and the Second Penang Bridge.

"It is worth noting that contribution by total investments to the headline growth has climbed to an average of five percentage points in the first nine months of 2012, compared with the average contribution of 1.3 percentage points in the last six years."

On the monetary policy front, MARC expects the Overnight Policy Rate to remain unchanged in 2013 as inflation remains benign.

"However, there is a possible upward bias towards the end of the year if the US economy continues to cruise steadily."

The ringgit is expected to benefit from capital inflows, especially with QE3 underway in the US, and should have a bias towards appreciation.

(QE3 refers to the third round of quantitative easing in the US, which was announced in September 2012. The Federal Reserve had launched a new US$40 billion (RM121.2 billion) a month, open-ended, bond purchasing programme of agency mortgage-backed securities and continued with extremely low rates policy until at least mid-2015.)

On the fiscal side, the government's deficit target of 4.0 per cent should not be difficult to achieve, said MARC, adding that revenue growth is likely to surprise on the upside.

It, however, highlighted several major imbalances that were of concern in the economy and which included domestic asset prices.

Housing costs in select areas are increasing faster than incomes despite efforts by the government to increase housing supply and the central bank's efforts to rein in property speculation.

Household balance sheets also remain strained at over 70 per cent of the GDP, with the lower income group most at risk, while the structural decline in the current account surplus may put some future pressure on the ringgit.

The inflation rate, as measured by the Consumer Price Index, will not likely surpass the critical threshold that may cause a dramatic decline in private consumption, it said, projecting a 2.5 per cent growth in 2013.

"Possible supply shocks such as higher global food and energy prices are the wild cards for 2013."

It is also factoring in some development that may take place in 2013 - implementation of the minimum wage policy, further rationalisation of subsidies and the reaction to the impending implementation of the GST(goods and services tax) - that will likely put a mild upside pressure on consumer prices.