KUALA LUMPUR (REUTERS) - Malaysia's economy expanded at the fastest pace in more than two years in the second quarter on the back of domestic demand and robust exports, defying expectations for a slight slowdown.
The strong performance is likely to add to speculation over whether Prime Minister Najib Razak will call an early election to take advantage of an economic recovery and a fractured opposition.
Southeast Asia's third-largest economy grew 5.8 per cent in April-June from the same period a year earlier, data showed on Friday (Aug 18), well above a Reuters poll forecast of 5.4 per cent.
Growth accelerated at 5.6 per cent in the first three months of the year, which had also been better than expected.
Following the data, Malaysia's central bank raised its 2017 growth forecast to above 4.8 per cent. The last forecast in March predicted growth of 4.3 to 4.8 per cent.
"Based on the numbers from Q1 and Q2, we expect (full year) growth will go beyond our earlier forecast," Bank Negara Malaysia (BNM) Governor Muhammad Ibrahim told a news conference.
He expected domestic consumption and exports to improve further in the second half, but warned there were always risks related to external factors.
Exports grew 10 per cent on-year in June, short of forecasts and well below the 32.5 per cent pace in May. But analysts believe the weakness may have been due to seasonal factors, noting that global demand, particularly for electronics, still appears to be strong.
Fitch Ratings affirmed Malaysia's 'A-' credit rating with a stable outlook on Thursday, citing its strong economic growth and the government's ability to contain the impact of falling oil prices on its budget deficit.
"It is another recognition for the country's economic management," Najib tweeted earlier in the day about the Fitch ratings.
Other upbeat data on Friday showed the current account surplus grew to RM9.6 billion (S$3.05 billion) over the second quarter from RM5.3 billion in January-March, due to a larger goods surplus and smaller services and primary income deficits.
Investment in Malaysian stocks, bonds and other financial assets also showed a sharp improvement in the quarter, with net portfolio inflows rebounding to 16 billion ringgit, compared with outflows of 31.9 billion in the first quarter.
The turnaround may be partly due to improved confidence in the ringgit currency. It has strengthened 4.5 per cent against the dollar this year since hitting a 19-year low of 4.9880 on Jan. 4.
However, foreign direct investment dropped to RM8.3 billion in the quarter, compared with 17 billion ringgit in the first quarter. While FDI flows can be volatile from quarter to quarter, the weaker reading could point to some loss of economic momentum in the months ahead.
The central bank also said inflation is expected to ease further after moderating to 4 per cent in the second quarter.
"Inflation will still be within the range of 3-4 per cent, but we expect it to track lower for the rest of the year compared to earlier quarters," BNM's Muhammad said.
However, there is widespread public concern about the rising costs of living, which Najib will need to temper heading into the polls.
He may already be facing his toughest election ever as he looks to counter bad press from a corruption scandal involving state-owned fund 1Malaysia Development Berhad (1MDB) and a growing challenge from his former mentor turned foe, Mahathir Mohamad.
On Wednesday, Najib brandished more than US$3 billion in housing packages for the country's majority ethnic group. Last month, he gave cash handouts and offered debt waivers to palm oil farmers, a key voter base.
The increasing handouts have fuelled speculation he will call an election earlier than the scheduled deadline of mid-2018 to take advantage of the economic recovery and a fractured opposition.
Najib lost the popular vote in the 2013 polls, and is expected to roll out a voter-friendly budget this October targeted at the rural Malay electorate.