OVERVIEW

• Diverse growth alters monetary policy narrative. Global growth stayed on an uptrend at the start of 2018, beating expectations for a slowdown from the peak it reached at the end of 2017. However, growth across the advanced major economies (AME) remain diverged in 1Q18, leading to similar divergence in monetary policy.
• Trade tensions casts shadow on 2Q18 outlook. US-China’s tit-for-tat tariffs emerged as a new risk to the geopolitical space. We are concerned that further escalation of the trade tension could potentially undermine Southeast Asia’s growth potential. Nonetheless, we are hopeful that the recent change in US President Donald Trump’s rhetoric and trade talks between the US and Chinese government will lead to a gradual shift away from rising global protectionism.
• GDP growth expected to remain above-trend. While exports have begun to moderate on frail global trade flows, we expect Malaysia’s 2Q18 GDP growth to remain above-trend at 5.5% (1Q18E: 5.7%) on higher net exports contribution to GDP as weak domestic demand weighs on imports. We expect domestic demand to record a slower projected growth of 5.2% in 2Q18 (1Q18E: 5.5%) due to slower investment from both the public and private sector. While we retain our projection of a 5.5% economic growth for 2018, we are watchful of downside risks from global exogenous factors and the outcome of the 14th General Election (GE14).
• Growth by sectors sees gradual moderation. We expect the manufacturing and services sectors to continue its downtrend in line with lower projected exports growth. Similarly, we expect agriculture sector growth to continue its downtrend on lower demand for palm and rubber produce. The exceptions are the mining and construction sectors as the former is due to higher production in line with improving global crude oil prices while construction is driven by ongoing major infrastructure projects.
• 2Q18 onwards - a period of uncertainty. While our base case view is for the incumbent Barisan Nasional (BN) to win the GE14 with a simple majority and stay in power, we are not discounting the possibility of an element of surprise given the growing support for Pakatan. Either way, we see the government’s low opex spending as well as Pakatan’s manifesto to remove GST as potential uncertainties for the government’s balance sheet.
• OPR likely to stay put. We see limited room for BNM to further tighten policy rate for the year in view of moderating growth trend, weaker inflationary pressure and a relatively stronger ringgit. With BNM monetary policy likely to focus on ensuring sustainable growth trend, we expect BNM to maintain overnight policy rate at 3.25% for the rest of the year.
• Receding inflationary pressure. While headline inflation is projected to average higher in 2Q18, we see little upside to inflationary pressure on expectations oil prices will somewhat peak at around USD70/barrel. We thus maintain our full year CPI forecast at 2.8% (2017: 3.7%).
• A narrower current account surplus. In line with our narrative of moderating exports and rising external uncertainties, we maintain our projection of a lower current account surplus for the year at 2.0-2.5% of GDP (2017: 3.0%).
• Ringgit bias on weakness. We expect strong economic fundamentals and stable monetary conditions to underpin the ringgit’s strength . We project USDMYR to be range bound between 3.85-4.10 before ending the year at 3.90.

Source: Kenanga Research - 7 May 2018