KUALA LUMPUR: The Malaysian economy is expected to pick up steam next year on the back of public infrastructure projects and improving commodity prices, says Credit Suisse.
The current account surplus is also likely to see an improvement.
“However, concerns remain on the ringgit’s volatility and that could persist,” it said in its 2017 first quarter outlook.
The local economy is likely to grow 4.5 per cent next year, from 4.1 per cent this year.
“The biggest drag from lower commodity prices is likely behind us, given the rise in both oil and palm oil prices and this should help boost rural incomes and help commodity-related investments and producers over time.”
The government’s revenues are also set to get a boost with the rise in oil prices.
“We note that the government’s current oil price assumption of US$48 for next year looks relatively conservative and, as such, the recent rise in oil prices should give the government more space to increase spending next year.”
The current account surplus is forecast to rise to 2.3 per cent of gross domestic product, from 1.9 per cent this year, and likely reflecting the rise in oil prices due to the recent deal by Organisation of the Petroleum Exporting Countries (Opec) and non-Opec producers to cut output, as well as the higher palm oil and rubber prices this year.
“However, import requirements from the rollout of broader public infrastructure spending will probably help cap the potential extent of current account improvement.”
The Mass Rapid Transit Line 2 (RM27 billion), Light Rail Transit Line 3 (RM9 billion), and the Pan-Borneo Highway (RM29 billion) are infrastructure projects that will fuel the economy, with awarded construction contracts rising to a four-year high.
On the cautious aspect of its outlook, the research house said the range of measures rolled out by Bank Negara Malaysia, which included restrictions on non-deliverable forward (NDF) trading, had reduced foreign exchange (forex) liquidity and raised concerns among foreign bond investors.
The requirements for exporters to convert a minimum 75 per cent of new proceeds into ringgit should also be positive for the local currency in the short term, but the long-term impact remains unclear, especially to foreign direct investments.
“Exporters could be incentivised to find loopholes in the rules or mis-invoice exports to land more forex offshore, if expectations of ringgit depreciation rise further.”
Credit Suisse has raised the forecast for the consumer price index slightly to 2.6 per cent and also expects Bank Negara to continue to keep the rates on hold in view of the ringgit’s volatility.
“While credit growth remains weak, loan approvals have some tentative signs of a pick-up.”
The five per cent weakness in the ringgit since the US presidential election last month as well as Bank Negara’s latest measures have raised concerns of further weakening as the level is close to the weakest post-financial crisis level of 4.46 versus the US dollar.
“Should the currency selloff continue, the key direct risks for the banking system would be tighter liquidity, risk of bond market collapse and pressure on borrowing cost in the debt capital markets.”
On the banking sector, Credit Suisse said CIMB could experience an improvement in credit cost as asset quality stabilised in its offshore Asean operations.
Maybank, which it described as most aggressive on loan growth among local banks in the past five years, could potentially face more asset quality weakness in its Singapore loan book and China loans, and domestic oil and gas exposures.