Highlights

• Real GDP growth continued to gain momentum to +4.5% yoy in 4Q16 (3Q16: +4.3% yoy). This was in line with our revised estimate but slightly higher than market consensus of +4.4% yoy. The pick-up was due to better performance in the primary and manufacturing sectors that offset slower pace of expansion in services and construction sectors. 2016 GDP came in at +4.2% yoy (2015: +5.0%), in line with our estimate.

• Current account (CA) surplus widened further to RM12.2bn in 4Q16 (3Q16: RM6.0bn) on account of larger goods account surplus (+RM31.4bn; 3Q16: +RM26.5bn) and improvement in income account deficit (-RM13.1bn; 3Q16: -RM15.5bn), which more than offset a bigger deficit in services (-RM6.0bn; 3Q16: -RM5.1bn). For full year 2016, CA surplus amounted to RM25.2bn (2015: RM34.7bn), higher than our estimate of RM15.0bn.

• On the expenditure side, domestic demand growth was slightly lower at +3.3% yoy (3Q: +4.6% yoy), on the back of slower private consumption growth and bigger contraction in public spending. On the external side, net export continued to contribute positively to growth (+0.5ppt; 3Q16: +0.5ppt).

- Private consumption growth moderated slightly to +6.2% yoy after reaching post-GST peak of +6.4% yoy in the previous quarter. Marginal propensity to consume also slowed to 0.70 from 0.80 in the previous quarter;

- Private investment grew at a slightly faster pace of 4.9% yoy (3Q16: +4.7% yoy) due to an increase in machinery & equipment (+2.9% yoy; 3Q16: +0.9% yoy) amid slower momentum in structure (+2.8% yoy; 3Q16: +5.0% yoy);

- Public consumption reversed to a decline of -4.2% yoy (3Q16: +2.2% yoy) amid spending rationalisation on supplies and services and a moderation in the growth of spending on emoluments;

- Decline in public investment moderated (-0.3% yoy; 3Q16: -3.8%) following higher spending by NFPEs.

• Sectoral wise, further improvement in the primary sector offset the moderation in services and construction sectors:

- Agriculture declined at a slower pace of -2.4% yoy (3Q16: -6.1% yoy) reflecting the diminishing impact of unfavourable weather on CPO output (-5.7% yoy; 3Q16: -14.1% yoy);

- Mining value added continued to trend upwards (+4.9% yoy; 3Q16: +3.0% yoy) due to the rebound in natural gas output (+10.1% yoy; 3Q16: -1.1% yoy);

- The manufacturing sector advanced further to 4.8% yoy (3Q: +4.2% yoy) driven by a continued recovery in export-oriented industries (+7.4% yoy; 3Q: +6.2% yoy). This reflects higher production of chemical-related products resulting from sustained regional demand as well as continued strength in the electronics segment in line with the recovery in global semiconductor sales

-The construction sector expanded at a slower rate of +5.1% yoy (3Q16: +7.9% yoy) following a broad-based moderation among all sub-sectors except non-residential buildings which rebounded by +2.5% yoy (3Q16: -1.4%) on the back of low base in the previous year;

-The moderation in services sector (+5.5% yoy; 3Q16:+6.1% yoy) was attributed to a sharp moderation in insurance sub-sector (+4.6% yoy; 3Q16: +14.4% yoy), lower growth in electricity and gas (+4.0% yoy; 3Q16: +4.5% yoy) as well as slower growth in government services (+4.1% yoy; 3Q16: +5.5% yoy) that offset the improvement in retail trade (+7.8% yoy; 3Q16: +7.5% yoy) and motor vehicles sub-sector (-2.2% yoy; 3Q16: -3.1% yoy);

• Given the firmer ending to 2016, we maintain our 2017 GDP growth forecast at +4.5% (Figure #5). While broad growth drivers and key assumptions remain unchanged, we introduce several tweaks to our forecasts:

-Growth projections for agriculture and mining are raised by 1.7ppts and 0.2ppt to 4.0% and 3.5% respectively following evidence of stronger recovery than our earlier estimate.

-Construction growth forecast is trimmed by 1.5ppts to 8.5% due to slower-than-expected pace in infra project implementation despite record high contract awards in 2016. Notwithstanding the revision, construction growth is envisaged to be higher than that of 2016 (+7.4%) as robust flow of contracts awarded would translate into construction activity in 2017.

-On the expenditure front, forecast for exports is raised by 0.3ppt to 1.3% due to stronger-than expected recovery in commodity-related exports.

-Public investment growth is lowered slightly, in line with expectation of slower pace of project implementation.

• We raise our 2017 headline CPI forecast to 3.4% (previously: 2.7%) primarily due to higher assumption of pump prices for petrol (RM2.30/litre; previously: RM2.00/litre). We understand that the recent spike in petrol retail price to RM2.30/litre in February was a result of several refineries shut down in the Middle East and Asia in January 2017 due to fires and other technical problems that led to a decline in supply that affected refined petrol prices. While the refinery shut down is expected to be temporary, we still expect inflation to trend higher in 1Q 2017 following lower base effect from oil prices in 1Q 2016 and current higher oil prices.

• Following the higher CA surplus on 4Q16, we upgrade our 2017 current account forecast to RM25bn (previously: RM15bn). Our projection of stable CA surplus takes into account higher commodity surplus stemming from increased export volume (CPO rebound, new gas and oil fields) as well as firmer commodity prices. However, surplus from manufactured segment is expected to moderate following weaker global trade activity amid rising protectionism policy and threat of adverse trade-related policies in the US.

• Given the expectations of resilient economic growth and higher inflation in 2017, we expect BNM to leave the OPR unchanged at 3.00% throughout 2017. We opine that risk to growth has somewhat receded given firmer commodity outlook and record high infra jobs acting as growth catalyst. As risk to inflation has recently escalated coupled with priority to stabilize ringgit, BNM may opt to stay pat longer despite uncertainty of US trade-related policies.

Source: Hong Leong Investment Bank Research - 17 Feb 2017