24/06/2011 (Business Times) - Growth is expected to accelerate again in the second half for Malaysia, on the back of a pick-up in global momentum, says Credit Suisse.

It also expects investments from the government’s Economic Transformation Programme to come onstream.

Its economist Wu Kun Lung also expects commodities to continue to support the Malaysian economic growth despite the recent fall in crude oil, palm oil and rubber prices. Prices are still at relatively high levels.

The Singapore-based research house still maintains its real GDP growth forecast at 5.6 per cent for the year, although sequential growth is likely to slow in the second quarter due to weaker global demand and supply chain disruptions.
 
Wu was also encouraged by national oil company Petronas’s capital expenditure (capex) plans.

Petronas announced plans to increase capex to an average of RM60 billon per year (6.8 per cent of GDP) over the next five years to boost domestic capacity, almost double the RM35 billion (four per cent of GDP) spent last financial year and by far its biggest capex in history.

Inflationary risks remain on the upside, Wu noted in a report.

The Consumer Price Index is expected to rise to 3.8 per cent year-on-year by July from 3.2 per cent in April following the average seven per cent hike in electricity tariffs in June.

Although the government did not change subsidised fuel prices in its review in May, it said it will review them again if Dubai oil prices rise to US$110-US$120 per barrel.

“The weight of transport fuel (8.8 per cent) in the CPI basket is much higher than that of electricity (2.9 per cent), hence. even a small hike in subsidised fuel prices, such as the five sen per litre rise in July and December last year, in the next few months would push inflation to four per cent year-on-year or more.”

He also expects Bank Negara Malaysia to hike the Overnight Policy Rate by another 50 basis points to 3.5 per cent by the end of the year.

The real policy rate is negative and is likely to turn more negative in coming months.

Loan growth, at 13.5 per cent year-on-year in April, was at a decade high, while commercial banks’ lending rate remains on a downward trend despite the rise in the policy rate.

He expects BNM to hike the Statutory Reserve Requirement (SRR) ratio further in the upcoming monetary policy meeting to reduce excess liquidity.

On the ringgit, Wu noted that despite the positive balance of payment flows in the first quarter, the ringgit has not appreciated much in trade-weighted terms, reflecting BNM’s forex intervention to counter the rise in short-term inflows.

“We think BNM might allow ringgit outperformance later in the year when there are clearer signs of a pickup in growth momentum.”

Pressure for fiscal consolidation is also building in Malaysia, he added.

With the change in the dividend payout by Petronas to the federal government, the government would most likely need to cut its subsidies spending further and broaden the tax base by implementing the long-delayed goods and services tax.

As an illustration, if the government were to follow the proposed 30 per cent payout ratio, then dividends for this financial year would have amounted to RM19 billion, instead of the RM30 billion negotiated.

“We expect the fiscal deficit-to-GDP ratio to fall more meaningfully after the next general election, which suggests that real GDP growth is likely to slow from 2013 onward unless there are stronger offset from domestic demand or export growth,” Wu said.