KL economy up 5.8% on robust exports, domestic demand

A worker collecting palm oil fruit inside a palm oil factory in Sepang, outside Kuala Lumpur in this June 18, 2014 file photo.
A worker collecting palm oil fruit inside a palm oil factory in Sepang, outside Kuala Lumpur in this June 18, 2014 file photo.PHOTO: REUTERS

Strong performance in Q2 defies forecast of slight slowdown, fuels talk of early polls

KUALA LUMPUR • 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 that Prime Minister Najib Razak will call early polls to take advantage of improving economic conditions and a fractured opposition.

South-east Asia's third-largest economy grew 5.8 per cent in the April-to-June period compared with a year earlier, data showed yesterday, well above a Reuters poll forecast of 5.4 per cent. Growth accelerated from 5.6 per cent in the January-to-March period, 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, from a prediction of 4.3 per cent to 4.8 per cent. "Based on the numbers from Q1 and Q2, we expect (full-year) growth will go beyond our earlier forecast," said Bank Negara governor Muhammad Ibrahim.

Construction, services and manufacturing grew at a faster pace in the quarter, offsetting weakness in mining and agriculture. The governor expected domestic consumption and exports to improve further in the second half, but warned of risks related to global factors.

Exports grew 10 per cent in June from a year earlier, well below May's 32.5 per cent. But analysts believe the slide may be due to seasonal factors, noting that global demand still seems 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," Datuk Seri Najib tweeted earlier yesterday about Fitch.

The current account surplus grew to RM9.6 billion (S$3.05 billion) over the second quarter from RM5.3 billion in the first quarter, due to a larger goods surplus and smaller service and primary income deficits.

Investment in Malaysian stocks, bonds and other financial assets also improved sharply, with portfolio inflows rebounding to RM16 billion, compared with outflows of RM31.9 billion in the first quarter.

The turnaround may be partly due to improved confidence in the ringgit. It has firmed 4.5 per cent against the US dollar this year since hitting a 19-year low of RM4.988 on Jan 4. But foreign direct investment (FDI) fell to RM8.3 billion from RM17 billion in the first quarter. While FDI flows can be volatile, the weaker reading could point to 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. It has kept interest rates unchanged since July last year.

Mr Najib may be facing his toughest election yet as he looks to counter bad press from a graft scandal involving state-owned fund 1Malaysia Development Berhad and a challenge from his former mentor Mahathir Mohamad.

On Wednesday, Mr Najib brandished more than US$3 billion (S$4 billion) in housing packages for the majority ethnic group. Last month, he gave cash handouts and offered debt waivers to oil palm farmers, a key voter base. The handouts have fuelled speculation he will call an election earlier than the scheduled deadline of the middle of next year.

"Although this is a cyclical upturn rather than a structural one, it certainly gives PM Najib some respite, given the clouds hanging over the administration's management of the economy," said Ms Trinh Nguyen, senior Asia economist of Natixis Asia in Hong Kong.


A version of this article appeared in the print edition of The Straits Times on August 19, 2017, with the headline 'KL economy up 5.8% on robust exports, domestic demand'. Print Edition | Subscribe