Posted Date : 31 Dec 2013

MARC today released its report on the Economic Outlook for 2014, entitled “Focusing on Domestic Challenges”.

We foresee Malaysia's real gross domestic product (GDP) growth will be respectable at 5.0%, although it will likely be at the lower range of the government’s forecast due to numerous challenges ranging from softer consumer spending in the wake of rising prices partly attributed to the rationalisation of subsidies as well as stricter lending standards by financial institutions. In our view, a meaningful recovery of global trade is the key to Malaysia's ability to maintain a decent 5.0% growth in 2014. 

We are of the view that commodity prices will stabilise and palm oil prices, will rebound in 2014, although a sharp increase is not foreseen at this juncture. The outlook of the electronics and electrical industry is also more promising judging by the improvement seen in the United States book-to-bill ratio which continued to gain strength. Another positive indicator is the uptrend in the US Institute for Supply Management (ISM) new orders which is supportive of Asian and Malaysian export performances. The role of domestic demand is also crucial to achieving the 5.0% headline GDP growth in 2014. In particular, the positive contribution from private investments may prove to be the saviour for the economy in 2014 as the pace of private consumption may moderate due to rising consumer prices.

Inflation is a key concern in 2014. We believe that the consumer price index will spike up by more than one-percentage point from its average level in 2013 due to several developments which have taken place or are likely to happen in the near term. These include, amongst others, tariff hike for electricity, further reduction in fuel subsidy expected in 2H2014, pre-Goods and Services Tax price hikes and a possible hike in toll charges. We have penciled in a 3.5% rate of inflation for 2014.

Although price developments possibly call for a monetary response, making an interest rate call may still prove to be tricky in 2014. The key will be the trend in the core CPI which we think is a critical factor in determining the official rate (overnight policy rate or the OPR). Based on a slew of increases in food, petrol, electricity and other goods and services, we are of the view that there is a high possibility of a rate hike in the OPR by 25 basis points in 2014 as the BNM positions itself to be ahead of the curve to avert an excessive price increase following some of the measures to be undertaken by the government to reduce the burden on its coffers.

On the issue of the government budgetary position in 2014, we are less pessimistic unless economic growth momentum weakens excessively. We are of the view that the government can achieve the targeted deficit of 4.0% of GDP in 2013, premised on the favourable performance in the first three quarters of the year where the deficits amounted to only RM24.8 billion, compared with the overall projection of RM40 billion deficit for 2013. Going forward, the government is likely able to achieve the targeted deficit level of 3.5% of GDP in 2014.

For a copy of MARC’s 2014 Economic Outlook, please click here.