Highlights

• BNM’s macro projections for 2017 are higher at 4.3-4.8% (point forecast: 4.6%), with the lower bound higher than 2016 GDP of 4.2%. On the demand side, net exports will contribute positively to growth (+0.4ppt; 2016: -0.2ppt) while domestic demand growth is envisaged to be steady (+4.4%; 2016: +4.4%). On the supply front, all sectors are expected to register positive expansion.

• Following the gradual improvement in exports and firm domestic demand, current account (CA) is expected to narrow but remain in surplus (1.0-2.0% of GNI; 2016: 2.1% of GNI). The state of CA will be dependent on strength of global and domestic demand as well as commodity prices. On inflation, BNM introduced higher forecast at 3.0-4.0% (Budget 2017: 2.0-3.0%), reflecting cost-push pressures. However, core inflation is only expected to increase moderately.

• On the exchange rate, BNM explained that MYR has been subjected to greater volatility due to the imbalance in the domestic FX market. The one-sided demand for USD necessitated policy intervention to rectify the imbalances, especially in the face of extreme outflows. For 2017, BNM is using an assumption of RM4.30-4.40/US$. BNM said that recent FX measures have led to lower MYR volatility and increased export conversion.

• While growth and inflation are both projected to be higher, BNM noted that the economy is confronted with multiple downside and upside risks. Hence, BNM will continue to monitor the balance of risks to ensure monetary policy is consistent with steady growth and price stability. BNM noted that financial imbalances are largely contained.

• On financial stability front, household debt sustained its moderating growth path for the 6th consecutive year leaving household debt level at 88.4% of GDP (2015: 89.1%). On liquidity, despite the massive capital outflows, surplus liquidity in the domestic market remained supportive of growth.

Comment

• We opine that BNM’s macro projections are broadly realistic. While the economy is expected to recover, the uptick is not broad-based. Of significance, BNM projected a flat domestic demand growth, indicating its cautiousness against a full fledged recovery. We maintain our GDP growth forecast of 4.5%, driven by primary sectors and construction projects.

• BNM projected a higher headline inflation due to higher crude oil price assumption of US$50-55/bbl. While BNM noted the possibility of CPI overshooting 4% for 2017, it remains highly uncertain given the volatile global oil market. We maintain our CPI forecast at 3.4% in 2017 with the expectation of CPI exceeding 4% in most of 1H17 before moderating thereafter.

• Given the potential output growth of 4.5-5.0%, we opine that GDP growth is unlikely to surpass this range in 2017 to cause overheating. Consequently, we do not expect BNM to alter OPR this year due to modest growth trajectory.

Source: Hong Leong Investment Bank Research - 24 Mar 2017