SINGAPORE, Nov. 10 (UPI) -- Recent economic data are indicating that strong GDP growth in Malaysia may have been sustained in the third quarter, outperforming most of its neighbors. Stronger imports are also pointing to a pickup in investment and consumption, which could be an important new economic development for the country. While most economists anticipate a slowdown in growth in 2005, prospects for investors remain bright, especially as the government appears committed to weed out corruption.
On Tuesday, rating agency Fitch lifted the country's sovereign rating into single-A territory, citing political stability and the government's demonstrated commitment to fiscal consolidation as key reasons for the upgrade. Fitch's upgrade brought it on par with Standard & Poor's and one notch above Moody's.
Further rating upgrades are in the pipeline. JP Morgan expects Moody's to lift Malaysia by one notch to A3 before year-end, while CSFB believes that all 3 debt agencies are currently under-rating Malaysia, given its strong external liquidity (FX reserves now cover a comfortable 7.4 months of retained imports) and the fact that fiscal consolidation is now firmly underway.
"We expect Moody's to upgrade Malaysia by one notch by end-2004 to be on par with Fitch and S&P," said CSFB economist Sailesh Jha.
Malaysia's economic fundamentals remain encouraging for investors.
The strong trade performance in September suggested the third quarter GDP growth momentum could surprise on the upside.
Exports growth continued to exceed expectations in September, surging 28.8 percent year-on-year after a 23.7-percent increase the previous month, powered by demand for commodities products such as crude oil.
More importantly, import data, up 34.9 percent year-on-year in September, pointed to strong increases in consumption, intermediate and capital goods demand.
"This is interesting because it suggests that both investment and consumption has picked up. If sustained, this would be a very important development as the country has depended largely on external demand to drive this year's economic revival," noted Sanjeev Sanyal, economist at Deutsche Bank, in a recent study.
"The economy is experiencing a complete recovery, which we define as domestic demand replacing external demand as the driver of GDP growth. We consider the official 7 percent GDP growth forecast for 2004 subject to upside risk," said Tim Condon, ING Financial Market economist.
Economists do note industrial production did slow in September to 9.8 percent year-on-year after 10.6 percent growth in August. This growth divergence with exports growth reflects the different weight of several sectors in the composition of manufacturing and exports. Exports growth in recent months has been driven mainly by robust rises in electronics and crude oil and these two components account for about 59 percent of total exports, versus about 43 percent for manufacturing, economists said.
While economists are pretty much in agreement over growth prospects for this year, they differ in their forecast for 2005. JP Morgan predicts full-year 2004 GDP is likely to hit a four-year high of 7.2 percent before moderating to a sustainable 6 percent next year, but Deutsche Bank is forecasting growth of 7 percent this year and 4.4 percent next year.
The Malaysian Institute of Economic Research, the country's leading think-tank, recently published its latest economic prognosis pegging GDP at 7.2 percent this year and 5.5 percent in 2005.
The difference hinges on the interpretation higher oil prices will have on global demand for exports.
"Going forward, we expect growth momentum to ease further. Leading indicators are suggesting that exports are likely to be weaker," said DBS economist Wong Chee Seng. "That said, Malaysia remains an attractive Asian economy that continues to deliver better returns than the rest of the world. Over the last 5 years, the rate of returns on investment (income as a percentage of cumulative investment) for U.S. companies in Malaysia has been consistently above 18 percent," Wong said in a research note.
Investors are expected to show increased interest in Malaysia if Prime Minister Abdullah Badawi continues to push through his reforms.
Now a year in power, Abdullah has managed to stamp his own unique style on the country, while rubber-stamping his legitimacy by winning a landslide victory in national elections (He had been pushed forward by his predecessor Prime Minister Mahathir Mohamad).
Abdullah has proven determined to weed out corruption by clearing up a backlog of graft cases, bringing to justice new culprits and cutting bureaucratic red tape. Some faith in the judiciary has been restored after former deputy prime minister Anwar Ibrahim was released from prison on appeal.
The prime minister has also been keen to cut down the federal budget deficit and let go of mega-projects started by his predecessor.
There are also hopes that government-linked companies will be restructured after Abdullah decided to turn government investment arm Khazanah Nasional into a regional investment powerhouse similar to Temasek Holdings in Singapore.
The ownership of some of these corporations will soon be transferred to Khazanah.
