By RAM Rating Services on the FY2010 economy
KUALA LUMPUR: Malaysia's economy performed slightly better than market consensus growing at 7.2% in 2010, albeit slightly lower than RAM's projected growth forecast of 7.4% as per our mid-year review last August, said RAM Rating Services on Friday, Feb 18.
Given the marked improvement in economic growth in the first half of the year, domestic demand was clearly the chief momentum driver for the recovery.
As such, it is no surprise that private consumption and overall investment activities recorded robust year-on-year growth rates of 6.6% and 9.4%, respectively.
Exports improved vastly in 2010, chalking up a 9.8% growth after the significant 10.1% contraction amid the global financial crisis.
Domestic demand to lead growth in 2011
Moving forward, the country is anticipated to register a robust GDP growth of 5.6% in 2011, with domestic demand once again acting as the back-bone for momentum.
Both consumption and investment activities are envisaged to remain resilient, underpinned by stable employment and more robust investment activities arising from the implementation of the much-awaited first phase of projects under the Economic Transformation Programme (ETP).
The strategic reform initiatives underlined in the New Economic Model towards achieving the nation's high-income aspirations will also be integral to stimulating further growth in domestic demand.
Moreover, the proposed measures for a more competitive economic environment will help industry players become more dynamic and responsive to the demands of the global marketplace.
Against this backdrop, overall consumption is expected to maintain a healthy growth of 8.0% this year (2010: 5.3%).
Encouraging labour patterns have undoubtedly played a part in sustaining a resilient level of consumer spending while contributing to the strong expansion of the services sector.
The trends in consumer credit and purchases of durable goods underline consumers' robust and sustained consumption behaviour.'' The positive wealth effects from lofty commodity prices also lending additional support.
Meanwhile, the pace of investments, which has historically been rather volatile, is anticipated to be boosted by the earmarked ETP projects. It is therefore envisaged to keep trending upwards, with a projected growth of 10.7% in 2011 (2010: 9.4%).
Notably, private investment activities should advance 15.1% this year, spurred by more upbeat business sentiment.
External demand to moderate amid phasing out of low-base effects and industrialised economies' moderate growth
Malaysia's export performance surged in 2010, fuelled by the substantial low-base effects at play and also the genuine improvement in external economic conditions.
Although these initial factors were instrumental in the rebound, they are not expected to continue through 2011 and 2012.
While the performance of crisis-hit economies has indeed been revitalised (especially in the latter half of 2010), their persistently high unemployment levels have cast doubts on whether the recovery is sustainable.
This is exacerbated by the limited scope of further fiscal injection and skepticism over the continued use of accommodative monetary policies.
Our projections for external demand components are based on the expectation that the growth performance of industrialised economies will remain status quo, with some upside potential.
Given that growth rates are hovering around 3% for the United States and 2% for the Euro region, exports to these markets are likely to be maintained. Nonetheless, much of domestic export growth will be driven by Asian demand.
The Euro zone, in particular, will continue facing a trade-off in terms of growth (and employment) as it strives to address macroeconomic imbalances within its various economies. All said, the European Union is expected to lean towards policy initiatives that favour economic stability for the region as a whole.
Elsewhere, exports to South-East Asia and the Newly Industrialised Economies will still be healthy, on the back of steady economic growth in the coming year that will contribute to stable external demand. In this scenario, we expect exports to increase 7.2% in 2011, with a corresponding 8.2% rise in imports.
Export-driven sectors to chart slower growth; domestic-oriented sectors to gain from ETP spillovers
The manufacturing sector is expected to maintain a healthy expansion of 6.1% this year. As export growth moderates against maturing global inventory cycles, this sector's performance will become more in line with its historical trend as base effects wear off in 2011.
Domestic-driven sectors will out-perform the export-oriented ones, benefiting in particular from the implementation of ETP projects (i.e. CONSTRUCTION []) while also enjoying positive spillovers from the more conducive economic environment (especially the services sector).
We envision yet another year of domestic-driven growth and capacity-building, in line with the Government's target for Malaysia to become a high-income nation by 2020.
Notably, the construction sector is expected to receive the most direct benefits from the rollout of the ETP projects, amid the implementation of larger-scale jobs in the coming year.
However, the build-up of residential and commercial property is expected to moderate somewhat in 2011, as credit tightening will help alleviate upward price pressures while increased commercial activity will absorb the perceived overhang in office space.
We anticipate the construction sector to perform slightly better in 2011 registering growth of 5.3%.
The services sector, meanwhile, is expected to record another year of strong growth in 2011 (+6.8%), attributable to the continued uptrend in consumer and business spending as economic prospects improve.
Domestic consumer-based services such as wholesale and retail, restaurants and hotels, and real estate are expected to benefit the most from this sector's sustained progress.
The further liberalisation of the services sector should also bode well for maintaining this resilient level of growth into the medium term.
Revived mining sector, but agriculture to face headwinds
Mining output was only lifted marginally last year, after having emerged from 2 consecutive years of decline.
We anticipate this sector to keep improving in the year ahead, with 1.0% growth. Oil and gas activities are expected to accelerate in light of strengthening global demand and the development of new marginal oilfields.
The quarrying sub-sector is also envisaged to heighten its contributions to sector growth towards the end of the year.
On a separate note, output from the agriculture sector is expected to rise 2.7% in 2011, on the back of more robust demand for raw materials and resource-based manufactures.
The prices of commodities and resources have been going up since the later part of 2010; we expect pricing pressures to persist in 1H 2011 due to heightened global liquidity and supply constraints.
Still key risks and challenges remain
The resilience of our recovery momentum will remain a chief concern vis-a-vis Malaysia's economic performance in 2011, along with the effective implementation of policies and projects related to the New Economic Model.
Monetary and financial considerations will also be critical to the sustainability of growth in the short term. In particular, strong inflationary pressures driven by high commodity prices, bringing about further fiscal consolidation in the coming year, and greater domestic demand will inevitably exert upward pressure on prices - supporting our forecast of 3% for inflation.
At the same time, capital is expected to continue flowing to emerging economies as positive interest-rate differentials remain and macroeconomic prospects stay more favourable in the East.
With such dynamics in play, risks prevail in both the magnitude and volatility of these financial flows.
One consideration in particular relates to volumes of capital flows becoming erratic due to changing investor sentiments and herding behaviour, which may derail stable growth. Another point of note is where these large capital inflows are headed within the beneficiary economy.
There is a need for liquidity to be channelled to productive use, as opposed to non-productive assets - to prevent asset price bubbles that may threaten overall economic resilience. Under the circumstances, we expect the overnight policy rate to reach 3.25%-3.50% this year.
''
KUALA LUMPUR: Malaysia's economy performed slightly better than market consensus growing at 7.2% in 2010, albeit slightly lower than RAM's projected growth forecast of 7.4% as per our mid-year review last August, said RAM Rating Services on Friday, Feb 18.
Given the marked improvement in economic growth in the first half of the year, domestic demand was clearly the chief momentum driver for the recovery.
As such, it is no surprise that private consumption and overall investment activities recorded robust year-on-year growth rates of 6.6% and 9.4%, respectively.
Exports improved vastly in 2010, chalking up a 9.8% growth after the significant 10.1% contraction amid the global financial crisis.
Domestic demand to lead growth in 2011
Moving forward, the country is anticipated to register a robust GDP growth of 5.6% in 2011, with domestic demand once again acting as the back-bone for momentum.
Both consumption and investment activities are envisaged to remain resilient, underpinned by stable employment and more robust investment activities arising from the implementation of the much-awaited first phase of projects under the Economic Transformation Programme (ETP).
The strategic reform initiatives underlined in the New Economic Model towards achieving the nation's high-income aspirations will also be integral to stimulating further growth in domestic demand.
Moreover, the proposed measures for a more competitive economic environment will help industry players become more dynamic and responsive to the demands of the global marketplace.
Against this backdrop, overall consumption is expected to maintain a healthy growth of 8.0% this year (2010: 5.3%).
Encouraging labour patterns have undoubtedly played a part in sustaining a resilient level of consumer spending while contributing to the strong expansion of the services sector.
The trends in consumer credit and purchases of durable goods underline consumers' robust and sustained consumption behaviour.'' The positive wealth effects from lofty commodity prices also lending additional support.
Meanwhile, the pace of investments, which has historically been rather volatile, is anticipated to be boosted by the earmarked ETP projects. It is therefore envisaged to keep trending upwards, with a projected growth of 10.7% in 2011 (2010: 9.4%).
Notably, private investment activities should advance 15.1% this year, spurred by more upbeat business sentiment.
External demand to moderate amid phasing out of low-base effects and industrialised economies' moderate growth
Malaysia's export performance surged in 2010, fuelled by the substantial low-base effects at play and also the genuine improvement in external economic conditions.
Although these initial factors were instrumental in the rebound, they are not expected to continue through 2011 and 2012.
While the performance of crisis-hit economies has indeed been revitalised (especially in the latter half of 2010), their persistently high unemployment levels have cast doubts on whether the recovery is sustainable.
This is exacerbated by the limited scope of further fiscal injection and skepticism over the continued use of accommodative monetary policies.
Our projections for external demand components are based on the expectation that the growth performance of industrialised economies will remain status quo, with some upside potential.
Given that growth rates are hovering around 3% for the United States and 2% for the Euro region, exports to these markets are likely to be maintained. Nonetheless, much of domestic export growth will be driven by Asian demand.
The Euro zone, in particular, will continue facing a trade-off in terms of growth (and employment) as it strives to address macroeconomic imbalances within its various economies. All said, the European Union is expected to lean towards policy initiatives that favour economic stability for the region as a whole.
Elsewhere, exports to South-East Asia and the Newly Industrialised Economies will still be healthy, on the back of steady economic growth in the coming year that will contribute to stable external demand. In this scenario, we expect exports to increase 7.2% in 2011, with a corresponding 8.2% rise in imports.
Export-driven sectors to chart slower growth; domestic-oriented sectors to gain from ETP spillovers
The manufacturing sector is expected to maintain a healthy expansion of 6.1% this year. As export growth moderates against maturing global inventory cycles, this sector's performance will become more in line with its historical trend as base effects wear off in 2011.
Domestic-driven sectors will out-perform the export-oriented ones, benefiting in particular from the implementation of ETP projects (i.e. CONSTRUCTION []) while also enjoying positive spillovers from the more conducive economic environment (especially the services sector).
We envision yet another year of domestic-driven growth and capacity-building, in line with the Government's target for Malaysia to become a high-income nation by 2020.
Notably, the construction sector is expected to receive the most direct benefits from the rollout of the ETP projects, amid the implementation of larger-scale jobs in the coming year.
However, the build-up of residential and commercial property is expected to moderate somewhat in 2011, as credit tightening will help alleviate upward price pressures while increased commercial activity will absorb the perceived overhang in office space.
We anticipate the construction sector to perform slightly better in 2011 registering growth of 5.3%.
The services sector, meanwhile, is expected to record another year of strong growth in 2011 (+6.8%), attributable to the continued uptrend in consumer and business spending as economic prospects improve.
Domestic consumer-based services such as wholesale and retail, restaurants and hotels, and real estate are expected to benefit the most from this sector's sustained progress.
The further liberalisation of the services sector should also bode well for maintaining this resilient level of growth into the medium term.
Revived mining sector, but agriculture to face headwinds
Mining output was only lifted marginally last year, after having emerged from 2 consecutive years of decline.
We anticipate this sector to keep improving in the year ahead, with 1.0% growth. Oil and gas activities are expected to accelerate in light of strengthening global demand and the development of new marginal oilfields.
The quarrying sub-sector is also envisaged to heighten its contributions to sector growth towards the end of the year.
On a separate note, output from the agriculture sector is expected to rise 2.7% in 2011, on the back of more robust demand for raw materials and resource-based manufactures.
The prices of commodities and resources have been going up since the later part of 2010; we expect pricing pressures to persist in 1H 2011 due to heightened global liquidity and supply constraints.
Still key risks and challenges remain
The resilience of our recovery momentum will remain a chief concern vis-a-vis Malaysia's economic performance in 2011, along with the effective implementation of policies and projects related to the New Economic Model.
Monetary and financial considerations will also be critical to the sustainability of growth in the short term. In particular, strong inflationary pressures driven by high commodity prices, bringing about further fiscal consolidation in the coming year, and greater domestic demand will inevitably exert upward pressure on prices - supporting our forecast of 3% for inflation.
At the same time, capital is expected to continue flowing to emerging economies as positive interest-rate differentials remain and macroeconomic prospects stay more favourable in the East.
With such dynamics in play, risks prevail in both the magnitude and volatility of these financial flows.
One consideration in particular relates to volumes of capital flows becoming erratic due to changing investor sentiments and herding behaviour, which may derail stable growth. Another point of note is where these large capital inflows are headed within the beneficiary economy.
There is a need for liquidity to be channelled to productive use, as opposed to non-productive assets - to prevent asset price bubbles that may threaten overall economic resilience. Under the circumstances, we expect the overnight policy rate to reach 3.25%-3.50% this year.
''
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