16.01.2012 (Business Times) - Malaysia's growth outlook for the first half of the year could outperform the other small open economies in the region, but it hinges on developments in the eurozone.

Credit Suisse raised its 2011 gross domestic product (GDP) growth forecast to five per cent (from 4.6 per cent) and still maintains its forecast of 4.8 per cent for 2012.

"The good news is that we think the most likely outcome remains that a break-up of the eurozone can be avoided or postponed beyond 2012.

"Malaysia's private consumption growth has been among the strongest in the region, and we expect it to remain robust in 2012, supported by high energy and palm oil prices, government cash transfers, and pay rises and bonus payments for civil servants and pensioners announced in the 2012 Budget," said economist Wu Kun Lung.

Credit Suisse is also optimistic about fixed investment this year, saying the government's Economic Transformation Programme should help boost investment, led by capital spending by government-linked companies.

Fixed investment growth in recent quarters rose only by 4.5 per cent year-on-year in the first three quarters of 2011, lower than the government's 10 per cent target.

Wu thinks there is much more scope for foreign direct investments (FDIs) to rise, provided the government continues with its structural reform plan.

FDI inflows were broad-based in the first three quarters of last year, with a significant rise in investments from Japan and Singapore.

While Malaysia has made some progress in terms of structural reforms, as seen in the global competitiveness index and the ease of doing business survey, its ranking on the corruption perception index has deteriorated, he noted.

On the scenario of a likely disastrous outcome should the eurozone break up, Wu said: "The risks of a eurozone break-up remain uncomfortably high. In a crisis scenario, we think Malaysia's GDP could easily contract by over one per cent in 2012," he said.

Capital outflows to GDP ratio could also surpass 30 per cent while the fiscal deficit could rise, he added.

According to Wu, the share of exports to GDP in Malaysia has fallen by about 16 per cent since the global financial crisis.

"We estimate that a 12.5 per cent fall in import growth from the US and Europe would shave 5.5 per cent off Malaysia's GDP."

Meanwhile, Credit Suisse expects Bank Negara Malaysia to leave the overnight policy rate at three per cent till year-end.

It also expects the ringgit to appreciate to RM3.05 against the US dollar by end of this year from RM3.14, and expects the central bank to limit the ringgit's outperformance against other Asian currencies to avoid hurting growth.