Malaysia faces higher interest rates, currency risks and a contentious election battle in 2018 that will test Prime Minister Najib Razak?s grip on power.

Malaysia has benefited from a global trade recovery and a pickup in domestic spending, with economic growth probably reaching 5.9% in 2017. We expect trade to slow from 10% in 2017 to 7% in 2018. This will impact economic growth this year but, one-off cash handouts to civil servants ahead of the general election and infrastructure projects like the east coast rail line (ECRL) will contribute to growth, which will moderate to around 5.4%. . This on the proviso that Barisan Nasional will win the election and the continuation of current government policy.

We estimate economic activity associated with the ECRL with construction due to begin soon and the High Speed Rail (HSR) next year could add 0.3% to 0.5% to growth for each project.

As commodity prices appear to be rising, this will add inflationary pressures to the economy. While we still expect headline inflation to drop this year from 3.9% to 2.4%, we believe core inflation will accelerate. We also expect Bank Negara (Malaysia?s Central Bank) to increase interest rates by 0.25% twice this year; most likely once during Q1 and once during the second-half of this year. As a result, we believe there will be greater capital inflow into Malaysia from U.S. and China with China attempting to invest in both the ECRL and HSR projects as well as several port and property projects.

On expectations of continued domestic growth potentially from rising oil prices, stable current account balance and benign inflation, we expect the Ringgit to continue to strengthen against the U.S Dollar with the USD/MYR to appreciate closer towards RM3.75 to RM3.80 before ending the year around RM3.90.

Against the Singapore dollar, the ringgit hit RM2.99; its highest level since October 2016. Malaysia is an exporter of base commodities while Singapore does not have any commodity export. With Malaysia being the top oil exporter in the region, stronger crude oil prices is helping propel the ringgit higher.

HXL Partners

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