M’sia faces slowdown but still cushioned by domestic demand

Posted on April 9, 2012, Monday

GOING FORWARD: Domestic demand will uphold growth momentum given that consumer spending was benefiting directly from higher government operating spending.

KUCHING: Malaysia’s economic growth is expected to slow down to four per cent this year from 5.1 per cent last year.

Maybank Investment Bank Bhd (Maybank IB) said the slowdown reflected the drag from softer global economy and world trade on export and import growth.

Its domestic demand however, would uphold growth momentum given that consumer spending was benefiting directly from higher government operating spending following the disbursement of one-off cash handouts from the Budget 2012 ‘goodies’ announced back in october last year.

Among other factors that drove the domestic demand were the suspension of the Subsidy Rationalisation Programmes (SRP) to keep the prices fuel, stable essential food items and energy, and announcement of between seven per cent to 13 per cent increase in civil service salaries.

“Indeed, the government has also submitted a RM10.29 billion Supplementary Budget for Parliament’s approval in addition to the RM181.6 billion operating expenditure budgeted for 2012,” Maybank IB noted.

At the same time, gross fixed capital formation growth would come mainly from major infrastructure projects and socio-economic investments under the Economic Transformation Programme (ETP) and the Government Transformation Programme (GTP), especially from mid-2012 onwards.

These included construction of the Mass Rapid Transit (MRT), the rollout of oil and gas projects and investments, developments of several parcels of government lands and government expenditure to improve social infrastructure and public services.

For the record, out of the RM179.2 billion ETP investments announced thus far, RM12.9 billion worth of investments were realised in 2011. The remaining RM166.3 billion would be rolled out from 2012 onwards.

Inflation wise, Maybank IB expected a slower annual inflation rate this year of 2.7 per cent but a v-shaped monthly consumer price index that ease to 2.4 per cent year-on-year (y-o-y) in the first half of 2012 (1H12) to pick up to plus three per cent y-o-y in 2H12.

“The above-mentioned freeze on SRP came amid speculation of a snap general election, which could be as early as this quarter. On this assumption, we expect SRP to resume in 2H12,” it highlighted.

Taking into account, Bank negara Malaysia (BNM) has had two rounds of Monetary Policy Committee (MPC) meetings so far this year. On both occasions, the overnight policy rate (OPR) was left at three per cent.

“We reiterate our call of no change in OPR this year as BNM adopts ‘prudent bias’ amid the upside risk to inflation and the high level of household debt that have led to BNM introducing prudential measures on mortgages, credit cards as well as issuing more stringent bank lending guidelines on retail financing since late-2010,” the research firm stated.

Meanwhile, on the Strategic Reform Initiatives (SRIs), all eyes would be on the resolve to undertake the key reforms, namely the introduction of Goods and Services Tax (GST), which the Performance Management and Delivery Unit (Pemandu) had previously indicated might be implemented in 2014 or 2015.

“The current freeze on the SRP may push back the timeframe for the completion of this particular measure to 2015-2017, unless the government accelerates the SRP upon its resumption to catch up with the original schedule, which may intensify the upside risks to inflation,” Maybank IB highlighted.

“We will also be on the lookout for the economic and inflationary impact of the minimum wage, scheduled to be announced by Prime Minister on May 1, 2012,” it concluded.

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