Growth tapers in 2H14 – Facing a higher base effect, it will be hard for the 2H14 to keep the same pace. GDP growth is projected to moderate to 5.7% from 6.3% in 1H14 mainly due to slower value-added exports (5.8% in 2H14 vs. 8.3% in 1H14). Strong exports and steadier aggregate demand growth are prime contributors to overall GDP growth in 2014 which is projected to reach 6.0% (2013: 4.7%).
Consumption recovery – Price normalization and seasonal factors to improve consumption. However, this may be dampened by higher interest rates and another subsidy rationalisation.
Fiscal consolidation – Both public and private sectors are keeping their belt tight and patiently wading through inflationary pressures as a result of fiscal consolidation. There may be another subsidy cut in the works if the government commits to achieve its fiscal deficit target of 3.5%. However, we project it would narrow to 3.7% of GDP (2013: -3.9% of GDP) on higher opex (Emoluments, subsidies, BR1M, etc)
Expansionary Budget – To prepare the country for the GST and help dampen negative effects from rising costs of living, the proposed fiscal Budget for 2015 would remain expansionary.
Inflation to normalise – Inflation has normalised and expected to hit closer to the long-term average of 3.0% in the 4Q14.
Tightening mode – There’s a probability of another 25 bps hike (to 3.50%) in November, the last chance for BNM to raise the rates this year to deal with the growing financial imbalance. We feel it should be done sooner to leave some breathing space before GST.
Ringgit to remain volatile – With Fed’s QE ending soon, along with ECB recent rate cuts and stimulus, the ringgit is expected to remain volatile with a weakening bias vis-à-vis USD over the next 6 to 12 months.
Beyond 2014 – The higher possibility that the Fed would hike interest rates and the impact of the implementation of GST next year would generate an interesting macro environment with a possible downside bias to the economy. On the expectation of further improvement in the global economy and steadier domestic growth traction in the 2H15, we expect the GDP to post above 5.0% growth next year.
Source: Kenanga