OVERVIEW

• 1Q17 momentum to persist. With a surprisingly strong 1Q17, we expect improved growth momentum to persist, albeit at a slower pace of 5.4% and 5.2% for 2Q17 and 3Q17 respectively.

• Moderate but elevated growth. Nonetheless, we are cautious on the momentum to be sustained at 1Q17 levels and believe that growth will likely taper for the rest of the year. As such, we expect 2H17 growth to somewhat recede to 5.0% from an estimated 5.5% in 1H17.

• Manufacturing sector likely to taper; services resilient. Choppy IPI data and mixed signals on manufacturing surveys justify a more conservative outlook on both the manufacturing services. We expect the manufacturing sector and the services sector to taper somewhat to 4.3% and 5.6% for 3Q17 respectively (1Q17: 5.6% and 5.8% respectively).

• Supply glut, a barrier to oil price recovery. Despite OPEC’s initiatives, rising production from the US has kept oil prices relatively low. As such, despite robust demand and relatively high compliance by OPEC participants, we believe that our earlier price range of USD50-55/barrel is no longer sustainable; we are nudging our forecast downwards to USD47-52/barrel.

• Inflation likely peaked but remains elevated for 2017. Domestic inflation likely peaked in 1Q17 at 4.3% as cost-push factors have subsided with receding oil prices. However, recent indicators suggest a gradual uptick of demand-pull factors in play. Overall, we expect the inflation to be lower but remain elevated at 4.1% (2016: 2.1%)

• Little catalyst for a change in OPR. With cost-push pressure receding and only a mild demand-pull catalyst emerging, we believe that OPR will likely be maintained at 3.00%. In the absence of sharp shocks, we believe that BNM will likely await indications of multi-period growth before leaning on tightening policy bias.

• Fiscal consolidation likely to continue. Amid signs of the government juggling between revenue enhancements and safeguarding consumer sentiments, we believe that the 3.0% fiscal consolidation remains well within reach. The targets will be supported by improved GST collection and improving economic growth.

• Capital market flows to be buoyed by fundamentals. With a general improvement in economic fundamentals relative to 2016, we expect improved investor confidence to persist moving forward as exemplified by the continued net inflows of foreign capital in the equity and bond market since mid-1Q17.

• Precariously firmer ringgit. Despite a more sanguine outlook, we recognise lingering risks weighing against the ringgit, particularly from continued weaknesses in oil prices and ongoing 1MDB investigations weighing against sentiments. As such, it would likely see a soft resistance of USDMYR at 4.20 but likely to gravitate towards 4.15 by year end.

Source: Kenanga Research - 6 Jul 2017