‘Inflation may kick-in next year’

“The downward pressure on the ringgit would also become a concern if outflows continue to increase following the US Federal Reserve’s intention to cutback bond purchases.” 

(Bernama) – Despite strong economic growth in recent times, the external environment remains a key challenge to Malaysia to maintain a positive growth in near-term.

Weak commodity prices, anemic global demand for electrical and electronic products and waning strength of emerging economies such as China and India will pose a challenge to an open economy including Malaysia.

Malaysian Rating Corp Bhd Chief Economist Nor Zahidi Alias said global economic uncertainties and jitters that surrounded the 13th General Election were major factors that dragged Malaysia’s economy in the first half of the year.

“At the same time, weak commodity prices dented the export sector and affected the headline growth,” he said.

Nor Zahidi said the situation was also being amplified by weaknesses in some emerging economies, including China, which is expected to experience a slower-than-expected growth of between seven percent and 7.5% this year.

Nomura in its latest global market research that focused on China remarked that one percentage point drop in China’s gross domestic product would lower global growth outside the world’s second biggest economy with the hardest hit economies being in Asia.

The biggest casualty would be Hong Kong, with growth falling by one percentage point or more, it said.

The impact is also large on commodity-producing countries including Malaysia, Australia and those in Latin America despite being located much further away from China.

China is the word’s largest consumer of commodities including natural rubber and copper.

Standard Chartered Bank Regional Head of Research Edward Lee said there were many factors to affect long-term sustainable growth such as a stable macroeconomic environment.

“Malaysia has been very successful in maintaining high and sustained growth. Naturally, the battle does not stop here,” he said.

Higher global food, oil prices

However, inflationary pressure may start to kick next year especially if the electricity tariff was adjusted and petroleum subsidy was further reduced, Nor Zahidi said.

Lee said global food and oil prices have picked up recently and turned positive on a year-on-year basis.

“This may add to inflation although any impetus currently is expected to be moderate. We expect a full year inflation at about 2.1 per cent,” he said.

Nor Zahidi said the price pressure would also come from the goods and services tax (GST) if it was implemented next year.

“We view the impact of GST, if introduced next year, will be a one-off event, but its implication on consumer spending cannot be underestimated,” he said.

Lee expects further fiscal consolidation to take place in near-term for the government to sustain its long-term fiscal position and to address rising household debts.

“Lending conditions may gradually tighten in some areas. For example, the BNM has already introduced new micro prudential rules to address the high household debt,” he said.

The downward pressure on the ringgit would also become a concern especially if outflows continue to increase following the US Federal Reserve’s intention to cutback bond purchases, said Nor Zahidi.

“The concern may deepen if Malaysia’s current account surplus continue to shrink,” he said.

Less worrying for Malaysia

On the domestic side, the situation was less worrying as some imbalances such as high household debts may induce policymakers to implement measures that will moderate the pace of private consumption, Nor Zahidi added.

Malaysia’s current account surplus has narrowed to RM8.7 billion in the first quarter 2013 from as high as RM40 billion in the third quarter of 2008.

Malaysia’s current account surplus has narrowed significantly over the last two years, reaching a 10-year low of 3.7% of GDP in Q1 2013 from over 10% of GDP in 2011.

The narrowing has been driven by a combination of weak exports, strong domestic demand and low commodity prices.