10/02/2012 (The Star) - Credit Suisse expects Malaysia's gross domestic product (GDP) growth to outperform regional small open economies, attributable to strong domestic demand, high palm oil and crude oil prices and a governmental fiscal boost.

In its economic research report on emerging markets, it said that Malaysia's real GDP has outperformed industrial production growth since the global financial crisis during which the services sector contributed most to the real GDP growth.

Credit Suisse kept its GDP growth forecast for this year at 4.8%, above the consensus forecast of 3.8%.

Industrial production was stronger than Credit Suisse's expectations, rising 3% in December compared with the previous corresponding month, higher than market expectations of 1.7%.

Malaysia's sequential industrial production performance was also stronger than its regional peers in the last quarter of 2011, expanding 2.5% while most export-orientated economies around the region recorded a contraction.

In the mining sector, production had improved with a 8.2% rebound month-on-month but -0.8% year-on-year.

Credit Suisse noted that mining was a drag on overall industrial production growth in the second quarter as facilities were shut down for maintenance and repair, “but it is now back to its long-term trend.”

It said that better industrial production would not be limited to mining and estimated a 4.5% rise for the manufacturing industrial production.

Another factor pointing to domestic demand as a main GDP growth driver was import growth outpacing export growth since the global economy wavered.

“External trade remained strong. Exports rose 6.1% year-on-year in December, while imports rebounded 10.4%. Imports are now 7.6% higher than their pre-crisis peak, while exports are still 4.3% below their pre-crisis peak,” it reported.

As for the ringgit's performance, it has outdone most Asian currencies so far, with a 5.4% appreciation against the US dollar.

“We noted in Malaysia's Economy and Markets in 2012 that Bank Negara might allow some ringgit appreciation in 2012, as the recent improvement in US economic activity bodes well for Malaysia's non-commodity exports, while its commodity exports, domestic demand, and FDI (foreign direct investment) inflows remain relatively strong,” it said.

The financial services group added that the “ringgit appreciation would also help support foreigners' demand for Malaysian government bonds and act as a feel good' factor before the general election.”

“However, following the appreciation in recent weeks, we estimate that the ringgit trade-weighted exchange rate is nearly back to its high in the first quarter of 2011.”

Credit Suisse believed that the central bank would take steps to keep the ringgit from further outperforming as Malaysia was “highly exposed to a disorderly outcome in the eurozone, both from a growth and capital flows perspective.” Bank Negara has been keeping the ringgit from appreciating beyond 2.999 against the US dollar.