Highlights

We raise our 4Q17 GDP growth estimate slightly to +5.9% yoy from +5.8% yoy, but still a moderation from 3Q GDP +6.2% yoy following the release of various indicators, some of which were better than anticipated. 4Q17 GDP will be released on 14 th February 2018.

• Consequently, we also raise our 2017 full year GDP growth forecast slightly to +5.9% yoy (previous: +5.8% yoy). We maintain our forecast trajectory for a more moderate 2018 (+5.3% yoy) as the base effect and exuberance wear off.

• 4Q GDP : Growth is expected to be more moderate, following deceleration in manufacturing and construction activities and decline in the mining sector. Mining sector declined as the increased output from new facilities that started production towards the end of 2016 normalises. Manufacturing sector saw a moderation, in line with the slower growth recorded in global semiconductor sales (+21.9% yoy; 3Q: +23.4% yoy) and export of Malaysia’s E&E products (+14.8% yoy; 3Q: +22.1% yoy). Meanwhile, agriculture sector accelerated due to double-digit expansion in palm oil production (+22.5% yoy; 3Q +8.5% yoy) following low base effect from the El Nino impact. Services sector remain steady in 4Q as acceleration in accommodation and finance was offset by slower wholesale and retail trade as well as transportation and storage. On expenditure front, contribution from net exports is anticipated to moderate following steady trade surplus (RM9.3bn; 4Q16: RM9.2bn). Private consumption is anticipated to moderate, but remain supported by strong wage growth (+13.2% yoy; 3Q: +9.5% yoy) and improved consumer sentiment.

• 2018 GDP: We maintain our forecast trajectory for a more moderate GDP growth in 2018 (+5.3% yoy) as base effect wears off. In particular, agriculture growth is expected to ease further as the incremental recovery from El Nino wears off while mining activity will continue to be constrained by output cut commitment. Manufacturing growth acceleration is expected to taper on as global restocking and base effect fade off.

• After BNM raised the OPR by 25bps in January 2018, we reiterate our expectations for BNM to retain the OPR at 3.25% in the remainder of 2018: - Growth: While GDP growth has accelerated in 2017, it has come off from a low base after two years of moderation. In 2018, we maintain our forecasts for GDP to grow at a more moderate pace as base effect wanes. - Inflation: CPI pressures are also anticipated to ease in 2018, growing within government range of 2.5-3.5%. Domestic price pressures are also expected to be modest with stable core inflation. - Financial stability: Loan growth remains moderate at 4.1% (peak in May ‘11: +13.8% yoy). Excess liquidity in the system has also been wound down while financial stability concerns remain in check (e.g. house price: 3Q17: 5.1% yoy; peak in 4Q12: +14.3% yoy).

Source: Hong Leong Investment Bank Research - 12 Feb 2018