Malaysia has benefited from a global trade recovery and a pickup in domestic spending, with economic growth probably reaching 5.8% last year, according to the median estimate in a Bloomberg survey of economists. Growth is seen moderating to 5.3% in 2018.
A booming economy and higher oil prices have boosted government coffers, allowing Najib to funnel funds to voters burdened by rising cost of living. He’s managed this without compromising on his fiscal targets, pledging to narrow the budget deficit to 2.8% of GDP this year, from an estimated 3% in 2017.
The election, which must be held by August, is among the key issues investors are watching for this year, along with the following:
Interest Rates
Bank Negara Malaysia (BNM) may be the first in Southeast Asia to raise borrowing costs this year, with some economists seeing a move as early as in three weeks.
The central bank signaled in November it may be preparing to adjust policy given the strength of the economy, with BNM governor Muhammad Ibrahim clarifying later to say any adjustment would be a “normalisation”, rather than a tightening.
Inflation eased to 3.4% in November after reaching a five-month high in September, but that hasn’t changed economists’ expectations of rate hikes.
“Our base case assumes BNM will raise the overnight policy rate in the first quarter of 2018, followed by an extended pause before hiking it again in 2019,” analysts at CIMB Group Holdings Bhd wrote in a note.
They added that the central bank may consider another hike in the second half of the year if inflation risks intensify.
CIMB is projecting an inflation rate of 2.9% this year, while the government is forecasting 2.5% to 3.5%.
General election
The timing of the general election may affect the outlook for interest rates, with some economists predicting the central bank will hold off until after the vote.
Najib is in a strong position, having weathered the financial scandal around 1MDB, and benefiting from a rebounding economy and a political opposition in disarray.
“Investors are likely to be a little bit cautious around the election,” said Rahul Bajoria, a senior economist at Barclays Plc in Singapore. “Once we are through the election, then we’ll have a bit more clarity as to what kind of economic reforms, particularly on the fiscal side, can be undertaken in the course of the next two to three years.”
Currency strength
The ringgit ended 2017 as Asia’s second-best performer with a 10.9% appreciation against the US dollar, its first gain in five years.
The Malaysian currency is projected to climb to RM3.96 per dollar by the fourth quarter, according to the median estimate in a Bloomberg survey of economists. It traded as high as RM4.016 against the dollar yesterday in Kuala Lumpur.
With the currency still cheap and the central bank likely to raise interest rates, the ringgit may strengthen past RM4 per dollar this year, said Sook Mei Leong, Southeast Asian head of global markets research at Bank of Tokyo-Mitsubishi UFJ.
Investors previously underweight in the ringgit are rebuilding positions in the new year, with sentiment underpinned by Malaysia’s improving economic growth, prospects for a smaller fiscal deficit, as well as an improved current-account surplus and foreign reserves, according to Ray Choy, head treasury strategist at CIMB Bank in Kuala Lumpur.