OCBC sees challenging year ahead for Malaysia economy

MAIN CATALYST: Fiscal spending will likely continue to support the economy next year, says the bank’s research team



THE Malaysian economy is expected to face a challenging 2012, despite its strong domestic demand performance this year.
OCBC Bank expects fiscal spending to support the economy next year,
especially with the possibility that the government may call for an
early election.
Fiscal spending played a huge part in providing a
boost to the overall economy in 2011, as seen in the 21.8 per cent
growth year-on-year in the third quarter, the bank’s research team said
in a note.
This has not taken into account the indirect impact
from fiscal spending on private investment and household consumption,
which averaged modest expansion of 5.2 per cent and 6.8 per cent
year-on-year, respectively, this year.

“The momentum seen in
private investment growth has been sustained well throughout the year,
hardly surprising if we consider the fact that the government has kicked
off its Economic Transformation Plan.”
The government, under the
2012 Budget, highlighted a two-pronged approach to boost the corporate
sector and bolster household spending.
It has provided new
funding schemes for small and medium enterprises, liberalised several
services sub-sectors as well as taken up joint-venture programmes to
develop the rural areas.

“The decision to maintain the current subsidy system, meanwhile, would urge more spending among households.

“As it is, double-digit fiscal expenditure growth looms even as the
government aims for a smaller budget deficit target of 4.7 per cent of
gross domestic products (GDP).”





OCBC Bank warned that the impact from an extended slow patch in the
global economy will be quite significant next year and recent rhetoric
from the government has clearly indicated increasing concerns on this
front. Total exports to the euro zone alone represented about 10.5 per cent of Malaysia’s GDP in 2010.
“Exports growth remains a dominant factor that leads overall economic
growth, and given its high dependence on exports, domestic economic
activities are likely to remain weighed in line with declining export
earnings,” it said.
The marked drop in shipments of major
commodities, like crude oil and palm oil, suggests that the economy will
not escape the adverse impact of further softening of global growth
momentum.
A further slowdown in global demand would only
exacerbate the worsening employment conditions in the domestic
manufacturing sector, which has seen a surge in the number of retrenched
workers in the second half of 2011.
The OCBC research team
identified the marked moderation seen in capital goods import growth as
the most worrying sign, saying it may indicate slowing investment growth
ahead.
Net foreign direct investment (FDI) has reversed to the
negative in the third quarter of 2011 and may remain weighed by the
lingering uncertainties in the global economy, at least for the first
half of 2012.
The anticipated financial market volatility and a
weakening bias in the ringgit that are likely to kick off may lead to
further softening of
domestic sentiment, prompting businesses to hold back the bulk of
their investment plans until the global economy regains a stronger footing.
“As such, we expect private investment growth to slow towards 3.0 to 4.0 per cent in 2012.”
On the monetary policy front, it said the authorities will not
hesitate to lower its benchmark interest rates if growth momentum is to
soften further.
“Given Malaysia’s region-high fiscal deficit
position, the government may not be in the best position to pump-prime
the economy, leaving Bank Negara Malaysia with most of the brunt.”
OCBC Bank expects Malaysia to chalk up a 3.8 per cent year-on-year expansion in 2011.