This article first appeared in The Edge Financial Daily on August 22, 2017 - August 28, 2017

KUALA LUMPUR: The structural story of Malaysia, despite having posted a stronger-than-expected growth for the second quarter (2Q) this year, remains one of the weakest in Asean, according to Morgan Stanley Asia (Singapore) Pte Ltd.

The remarks came as part of its assessment of the country’s medium-term economic prospects, notwithstanding the expected cyclical pickup the country is anticipated to experience in the short term.

Bank Negara Malaysia announced last Friday that Malaysia’s 2Q economic growth clocked in at 5.8% year-on-year (y-o-y) — the fastest pace seen in two years. This brought its year-to-date growth on a y-o-y basis to 5.7%, versus 4.2% in the same period last year.

“The erosion of non-commodity competitiveness [as seen in Malaysia’s declining global manufactured export share and the rising share of unemployed being graduates] means that structural reforms are required to improve productivity, particularly in human capital,” said Morgan Stanley Asia’s in a note dated Aug 18 but released to the media yesterday.

In the meantime, Morgan Stanley Asia said Malaysia’s non-commodity export momentum will likely stay healthy for the rest of 2017 and 2018, as it expected the segment to receive a boost from the “global synchronous recovery”.

At the same time, the investment bank also noted that the currency’s depreciation has acted as an automatic stabiliser and helped to restore competitiveness of Malaysia’s non-commodity exports.

“Meanwhile, the improving export momentum has had positive spillover into domestic demand, and we expect domestic demand momentum to be sustained in the run-up to elections, as fiscal policies stay accommodative,” Morgan Stanley Asia’s economists added.

On the country’s upcoming 14th general election, Morgan Stanley Asia noted, citing press reports, the possibility of the general election being called earlier, with the pace of political campaigning appearing to be picking up.

“Historically, domestic demand momentum has accelerated in the run-up to elections before tapering off thereafter,” the economists observed, adding that “fiscal deficits also tend to widen as elections loom from pre-election spending”.

“Additionally, the impact from the series of feel-good measures introduced by the government will likely continue to filter through the economy, in our view,” the economists added, noting that Malaysia’s hosting of the 2017 Kuala Lumpur SEA Games is likely to add to the cyclical momentum.

Malaysia’s upcoming general election must be called on or before Aug 24, 2018.