Friday 21 March 2014

Strong FDI growth a bright spark

In last week’s issue, we indicated that it was a bit too early to be bullish on exports to boost Malaysia’s economic growth. Slowing growth in China, the “disconnect” of the US economy from Malaysian export performance and ominous signs from the hard commodities sector about the state of the global economy point towards sluggish export growth. 

This week, the spotlight is on private sector investments. It also comes in the wake of Bank Negara Malaysia (BNM) forecasting 2014 real gross domestic product (GDP) growth of 4.5% to 5.5% versus the market consensus of 5%. Can the private sector deliver enough investment growth to power the economy?

Historically speaking, yes.

Since 2010, the private sector has registered strong double digit growth in investments. By growing at an average annual rate of 16.1%, it has outpaced average private consumption growth at 7.2% and helped cushion the substantial contraction in Malaysia’s net exports.  

The strong growth has also driven private sector investment expenditure to become the second largest contributor to Malaysia’s GDP at 16.9% in 2013, placing it behind private consumption at 52%.  What has caused the recent emergence of the private sector as a growth driver?

The answer lies in the government’s Economic Transformation Programme (ETP), which was launched in October 2010 and implemented by PEMANDU. The goal of the ETP is to elevate Malaysia to developed-nation status. One of the ways is by attracting US$ 444 billion in investments. Of this amount, 92% is targeted to be driven by the private sector. 

With such robust growth coming from private sector investments, it appears that the economy has a steady growth driver to depend on. The 10th Malaysia Plan (10MP) states that for Malaysia to become a high-income nation, private sector investment growth has to average 10.9% annually. Historical growth since 2010 has already beaten this benchmark.

However, investors always need to be vigilant about the downside risks in the future. There could already be signs that private sector investments might grow at a slower pace.

Read the full article in The Edge this week.

Friday 14 March 2014

Will our exports save the day?

The Government is forecasting a real economic growth rate of 5% to 5.5% and inflation of 3% for 2014 for Malaysia. Nominal growth for the economy is therefore expected at 8% to 9%. Can it be achieved and where will growth come from?

With rising cost of living coupled with the prevailing high levels of household debts, growth in consumption for 2014 and 2015 will be lackluster. It is also the intention of the Government to rein in its own expenditure, to reduce its fiscal deficit. No doubt measures are also needed to broaden the revenue base of the Government and this will be achieved through the implementation of the GST from April 2015.

So, where then will growth come from in 2014 and 2015?

This week, The Edge focuses on Exports. The week after, we will highlight the prospects of private investments as a growth stimulus.

We looked at three exogenous variables or events to try to understand the potential for the growth of exports for Malaysia in 2014 and 2015.

The first is the growth of the United States economy and how it will affect the growth of exports of emerging countries in general and Malaysia in particular.
Does a growing US economy means our exports will soon pick up steam? What does the evidence of the last seven quarters suggests and why.

The second is the growth of the Chinese economy and its relationship to Malaysian exports.  How far will the Chinese economy slow? What contributed to the growth of the Chinese economy in the past and is this sustainable? How important is China to Malaysia?

Finally, we looked at hard commodity prices. Why have prices collapsed in the face of strong expectations of global economic recovery? Is this not a contradiction? Were manufacturers overly optimistic and overstocking? Is there a story the commodity markets are telling us?

And in reviewing the above, we will continue to tell our story on how we believe the Malaysian economy will unfold. So, stay tuned.