Growth Prospects Will be Enhanced From Global Economic Conditions

There are no major surprises in the latest Annual Report, where Bank Negara Malaysia (BNM) revised higher the country’s real GDP growth target to be in the range of 5.5% to 6.0% for 2018, higher than the government's earlier projection of 5.0% to 5.5%. BNM’s GDP growth projection for 2018 is based on a set of reasonable assumptions such as price for Brent crude oil of US$63 per barrel, crude palm oil (CPO) price of RM2,700 per tonne, on the back of global GDP growth forecast at 3.9% for this year, with stable inflation of between 2-3% as well as a steady Ringgit of around RM3.90/US$.

Domestic Demand to Lead Economic Growth

BNM expects the country’s underlying real GDP to grow steadily at 5.7% projected for 2018 (calculated based on GDP at constant prices), as compared to Affin Hwang’s own GDP growth forecast of 5.3%, where the main difference lies in higher growth forecast on real exports by BNM, which is projected to expand by 8.8% in 2018 (9.6% in 2017), against Affin Hwang’s 5.4%.

Private Consumption Will be Supportive of Economic Growth

Consistent with the view taken by BNM, growth in private consumption will remain the key driver of GDP growth, projected to grow by 7.2% in 2018 (7% in 2017), underpinned mainly by continued growth in wages and employment and improving sentiments. BNM also expects growth in private investment to continue to be driven by ongoing and new capital spending by manufacturing and services sectors in 2018. The investment in manufacturing sector will benefit from the expansion in global growth, especially in the export-oriented industries.

Current Account Surplus to Remain Firm in 2018

On the current account balance, BNM expects the surplus position to narrow to RM38.9bn or 2-3% of gross national income (GNI) compared to RM40.3bn or 3.1% of GNI in 2017. However, the expected wider deficits in the services, primary income and secondary income accounts will weigh on the current account surplus.

Headline Inflation Is Expected to Moderate in 2018

BNM revised lower the inflation target to 2.0-3.0% in 2018, as compared to earlier government’s forecast of 2.5-3.5% (3.7% in 2017), which may be attributed to the prospect of stable global commodity and energy prices, and the impact of the appreciation of the ringgit exchange rate on imported inflation. However, potential output was estimated at about 5.4% in 2017 by BNM, higher than the 5.0% average during 2010-2015 period. With the positive output gap (the difference between actual GDP and potential GDP) of 0.5% in 2017 and likely around 0.4% estimated for 2018, the country’s inflationary pressure may increase slightly.

Monetary Policy Will Remain Focus on Sustainable Growth

The stance of the country’s monetary policy to be accommodative and supportive of domestic demand. We believe BNM will likely maintain its policy rate at 3.25% in 1H18 and wait until 2H18 to gauge the state of the Malaysian economy, before deciding on whether to raise OPR by another 25bps to 3.5% by end-2018. We expect Ringgit to trade between RM3.85- 3.90/US$ throughout most of 1H18, where Ringgit may appreciate to RM3.80/US$ by end 2018, supported by steady sustained economic growth, as well as expectations of higher commodity prices and possible monetary policy normalisation in 2H18.

Source: Affin Hwang Research - 29 Mar 2018