Malaysian economic outlook perspective for 2013

‘Malaysia must start to balance its books’

Business times
4 December 2012

KUALA LUMPUR: Malaysia must start to balance its books via fiscal consolidation next year but in the event of further external shocks the country can still rely on monetary policies.

“The government will have to return quickly to its medium-term fiscal consolidation target, adding to the external drag to the second half that we see intensifying as China slows,” says Nomura International.

The 2013 Budget which aims to reduce the fiscal deficit to 4.0 per cent from 4.5 per cent in 2012 suggests the government recognises the need to get its medium-term fiscal consolidation plans back on track.

Nomura, however, thinks the 4.0 per cent target is ambitious as it implies a negative fiscal and is based on high GDP growth assumptions (4.5-5.5 per cent).

The Malaysian economy, which remained resilient despite the strong headwinds in 2012, is expected to sustain its resilience, said its economist for Southeast Asia Euben Paracuelles. The GDP growth is expected to slow to 4.3 per cent in 2013 from an expected 5.3 per cent in 2012.

“Open economies like Singapore, Thailand and Malaysia will see a drag but can outperform depending on the policy support to domestic demand,” he said at a media briefing yesterday.

In the case of Malaysia, the fiscal policy will continue to be expansionary as there is still time for more stimulus if the general election is to be held in March.

In the event of another external shock, Malaysia can still rely on its monetary policy which has remained on hold.

Bank Negara remains cautious as lowering rates risk increasing financial imbalances and stoking the already high debt levels.

Meanwhile, Nomura International chief economist Rob Subbaraman said Asian central banks will likely fall behind the curve next year as inflationary pressures increase.

The monetary policy has been loose in most Asian countries but Malaysia, China, Taiwan, Indonesia and the Philippines are all likely to announce a hike in interest rates in the second half of 2013.

Paracuelles expects Bank Negara Malaysia to raise the Overnight Policy Rate, the key benchmark interest rate, by 50 basis points bringing the OPR to 3.50 per cent, in the third and fourth quarters of 2013.

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