This article first appeared in The Edge Financial Daily on June 15, 2017 - June 21, 2017

KUALA LUMPUR: Morgan Stanley has revised upwards its gross domestic product (GDP) growth forecasts for Malaysia to 5% for 2017 and 2018, from earlier projections of 4.5% and 4.6% respectively.

“Malaysia is one of the ‘momentum’ economies where we see an upswing in cyclical growth, supported by export recovery or currency depreciation and pre-election spending,” it said in a report entitled “Asean, South Korea and Taiwan Economic Mid-Year Outlook — The Export Recovery is for Real” released yesterday.

Morgan Stanley said the revised growth forecasts are due to better-than-expected export growth, which provides an offset to a bumpy domestic demand trajectory. It noted that Malaysia’s exports have seen a recovery amid global trade recovery.

“Indeed, as at March 2017, export value and volume had risen by a cumulative 19.9% and 19.4% respectively since January 2016. The improvement in export momentum was driven by not only commodities (mainly rubber, oil and crude palm oil), but also non-commodities (mainly electronics), which accounted for 50% of the cumulative export value recovery,” said Morgan Stanley.

The global financial services firm has also revised its 2017/2018 headline Consumer Price Index forecasts for Malaysia to 3.8%/2.2% from 3%/3.1% respectively.

“Overall, we expect headline inflation to pick up in 2017 on higher global oil prices before normalising in 2018,” it said.

Apart from the better external outlook, Morgan Stanley pointed out that currency depreciation has acted as an automatic stabiliser and helped restore competitiveness of Malaysia’s non-commodity exports.

“The global synchronous recovery means that Malaysia’s non-commodity export momentum will likely stay healthy for the rest of 2017 and 2018,” it added.

Nevertheless, Morgan Stanley is of the view that Malaysia and Indonesia need to move away from commodities, towards non-commodities, by improving the quality of its human capital (in Malaysia’s case) and ramping up infrastructure or attracting more foreign direct investment (in Indonesia’s case).

“For the latter, fiscal reforms to raise government revenue will be needed to raise infrastructure spending,” it added.

Morgan Stanley also noted that policymakers who capitalise on the export recovery to implement difficult structural reforms will enable their economies to be on a better footing when the next cyclical downturn takes hold.

“Structural reforms rarely happen in a straight line. In Asean, we see structural reforms gradually under way in Indonesia and the Philippines, with measures undertaken to raise fiscal revenue and channel more resources towards infrastructure.

“However, structural policy reforms lag in Malaysia and Thailand,” it said.

Nevertheless, Morgan Stanley believes that potential pre-election spending or fiscal easing should help lend momentum to Malaysia.

It expects Bank Negara Malaysia (BNM) to maintain the overnight policy rate at 3% in the near term. “Historically, GDP growth has gone higher into 5+% territory before BNM started to ratchet up the policy rate from the 3% level.”