Highlights

• BNM’s macro projections for 2018 is 5.5-6.0% (point forecast: 5.7%), higher than MOF’s projection that was published on 22 Oct 2017. On the demand side, net exports will contribute positively to growth (+0.4ppt; 2017: -0.1ppt) while domestic demand growth is envisaged to be slightly lower (+5.3%; 2017: +6.0%). On the supply front, growth is anticipated to be driven by manufacturing and services sectors.

• Following the improvement in exports and firm domestic demand, current account (CA) is expected to remain stable (2.0-3.0% of GNI; 2017: 3.0% 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 a lower forecast at 2.0-3.0% (MOF projection: 2.5-3.5%), reflecting smaller contribution from global cost factors and ringgit appreciation. According to BNM, the continued expansion in domestic demand is expected to leave a slight positive output gap in 2018 (+0.2%). Nevertheless, core inflation is anticipated to be contained by improving labour productivity and capacity expansion.

• On MYR, BNM explained that the strength of the ringgit was a reflection of robust domestic economic performance and positive sentiment. However, in the near term, MYR remains susceptible to volatile conditions in the global financial market.

• BNM notes that the risk confronting the economic outlook is broadly balanced. Hence, the MPC will continue to monitor the evolving economic outlook closely and ensure domestic liquidity conditions remain sufficient.

• On financial stability front, BNM assessed that risks to financial stability continued to be contained. Nevertheless, authorities opined that domestic debt levels remain elevated and see heightened risks in the property market.

Comment

• We opine that BNM’s macro projections are broadly realistic. BNM’s GDP projection of 5.5-6.0% in 2018 is envisaged on stronger global growth prospects and positive spillover to the domestic economy through increased wages and higher investment activity. Our projection of 5.3% in premised on the assumption that global growth will be more moderate as base effect eventually comes to an end. While we acknowledge our growth forecast may be conservative, we also feel that the upside risk of higher-than-expected global growth is partly offset by downside risk of increased financial market volatility emanating from policy uncertainties.

• Despite the more favourable growth projection, BNM noted that the demand-led inflationary pressure is unlikely to be excessive due to improving labour productivity and capacity expansions which will increase potential output. Hence, we take this as a signal that BNM will maintain the OPR at 3.25% for the rest of 2018 unless core inflation accelerates.

Source: Hong Leong Investment Bank Research - 29 March 2018