Executive Summary

• We expect the world economy to grow a tad higher by 3.1% in 2017 (2016e: +3.0%), still below the long-term average growth of 3.9%.

• Prospects for the advanced economies continue to diverge, with the US expected to gain further growth momentum (+2.0%) while the Euro area and Japan continue maintain moderate expansion (+1.4% and +1.0% respectively).

• With US unemployment returning to pre-crisis level alongside firmer growth and inflation rate, we expect the Fed to raise the policy rate twice in 2017, slower than the pace projected by the FOMC.

• We expect outlook of emerging markets (EM) to stabilise as commodity prices reverse and shocks from US Presidential election taper. However, growth will be constrained by domestic structural issues and lacklustre global trade. With persistent risk of capital reversals, there is a tendency for some EM central banks to tighten policy or introduce capital flow management measures to manage FX volatility.

• China is expected to grow at steadier pace of 6.5% with continued policy fine-tuning and more focus on fiscal stimulus.

• Closer at home, we expect Malaysia to grow at faster pace of 4.5% in 2017 (2016e: +4.2%), driven by domestic demand and lesser drag from net exports.

• Private consumption growth to be sustained (+6.0%; 2016e: +6.0%) mainly on support measures from the government. Meanwhile, public sector expenditure is expected to expand at a faster pace on higher OE & DE spending.

• On the supply side, agriculture sector is expected to rebound as the impact of El Nino fades while mining output is forecasted to rise further, buoyed by commencement of new oil & gas field despite Petronas voluntary output cut by 20,000bpd.

• Current account surplus to stabilise at RM10-15bn (2016e: RM15bn) as higher prices of selected commodities (crude oil & CPO) offset downside risks from LNG pricing and capital imports.

• We are confident that fiscal deficit target of 3.0% of GDP is achievable supported by higher oil prices, streamlining of subsidies and stricter tax enforcement.

• We expect inflation to trend higher to 2.7% in 2017 (2016e: +2.1%), driven by transitory impact as oil prices rebound and removal of subsidies.

• We see BNM standing pat throughout 2017 given expectations of firmer growth and higher inflation amid volatile capital flows.

• Expect MYR to stabilise at RM4.30-4.55/US$ on BNM’s recent measures to reduce FX volatility and rebalance onshore FX dynamics as well as tapering of US$ strength.

Source: Hong Leong Investment Bank Research - 4 Jan 2017