Malaysian GDP could grow higher than 6.1%: RAM

By Jagdev Singh Sidhu

MALAYSIA'S gross domestic product (GDP)could grow higher than 6.1% based on its impressive economic strength and continued favorable external conditions, said Rating Agency Malaysia Bhd (RAM) in its latest economics publication.

"The economy is on track for a strong first quarter performance following robust industrial output growth accompanied by high export and import demand,'' said RAM.

It said import growth, although outpacing that of exports, indicated that domestic demand was rising and that would be a crucial factor to a self-sustaining recovery and a buffer against the risk of a US economic slowdown affecting Malaysia's export momentum.

"Importantly, the two drivers of final domestic demand, namely private consumption and investment spending, are stregnthening in response to stimulative fiscal and monetary policies implemented over the last two years,'' said RAM.

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"The lagged affects of these policy stimuli will continue this year and this will help sustain the rise in business and consumer confidence.'

It said despite some uncertainties over the ability of the US economy to achieve a "soft-landing'', most recent assessments including those by the International Monetary Fund generally expect a global upturn this year.

"Besides the rapidly recovering crisis-hit Asian economies, faster growth anticipated in the Japanese and European economies are expected to absorb some of the global demand slack should the US economy slow down more sharply than expected in the second half of this year,'' said RAM.

Turning to Malaysia, it said aside from continuing favourable external demand particularly for electronics and other manufactured products, Malaysia's external strength was also underpinned by a stable and competitive real exchange rate.

"In turn, the competitive exchange rate facilitates and raises the relative attractiveness of foreign capital inflow,'' said RAM.

"An examination of the real exchange rate trends since the start of the currency crisis shows that the feared threat of rising prices eroding away the nominal currency depreciation gains has not materialised.

"Rather, the comparatively small domestic price increase in the country relative to its trading partners so far has kept the ringgit at a highly competitive level and contributed to the efficacy of the currency peg so far.''

RAM said the ringgit's fair value, based on the computation of the currency's real effective trade weighted exchange rate, was still 22% below the pre-crisis level with the degree of bilateral differences mirroring the stage of development of its trading partners or competitors and that the current exchange rate remains an important anchor to robust export growth and competitiveness.

The rating agency also said the rising trade surplus augured well for a strengthening in both domestic and export demand but export conetration had, however, increased.

It said the top five export categories contributed 50% of the country's total exports last year, up from 42.4% in 1997.

RAM said its construction-related materials index, which rose 15.1% last year, shot up by 42% in January.

"Output of most construction materials has been trending up since the middle of last year, lending support to the 7.3% increase in value-added projected for the construction sector this year,'' it said.

"Demand is expected to emanate from the residential housing sector and public works and infrastructure-related projects implemented by the government as part of the fiscal spending boost.''

RAM said growth in services was likely to be higher than expected as stronger growth is seen in a number of services, especially in the transport and finance sub-sectors.

Industrial production expanded strongly by 24.3% in the first two months, led by manufacturing which grew by 33.5% from a year ago.

On inflation, RAM said core inflation remained low, rising by 0.7% and 0.9% in the first two months of this year, which confirmed that the threat of inflation had been kept at bay despite the festive seasons.

"Other indicators such as the producer price index and manufacturing unit labour cost ... also point to subdued price pressures,'' it said.

Given the anticipated rise in domestic demand, it expects prices to increase gradually in the second half.

"The likelihood of a pent-up demand and excess liquidity exploding into an inflationary spiral is less strong this year given that the current growth phase is still at the early part of the expansionary cycle,'' noted RAM.

"Short term price pressures may however arise from a US dollar depreciation which will raise import price pressures.

"High world oil prices could also translate into increased import costs should foreign manufacturers pass through the higher prices.''

RAM also said that domestic demand expansion had been a major source of manufacturing growth in the recovery last year.

"A decomposition of the sources of manufacturing sales performance shows that contribution by domestic demand, which contracted by 361% in 1998, expanded by 72% in 1999 while the contribution of exports declined significantly from 872% to 36% in the corresponding two periods.''

It said the outlook for foreign direct and portfolio investment would be favourable this year and expected FDI to increase strongly this year due to the undervalued ringgit and the favourable investment climate particularly the 100% foreign-owned equity permitted until the end of this year.

RAM expects private consumption to grow to 6% from an earlier projected rise of 3% because of increased consumer confidence, wage and asset price increases, stable employmnt prospects and low interest rate environment.

It said with the benign inflation picture, short-term interest rates would continue to be pressured downwards by ample liquidity resulting from strong trade surplus and net capital inflows.