Malaysia: On the road to recovery

By Lance Connelly from Northern Trust Company

Bank Negara, the central bank, released first quarter growth figures, which confirmed Malaysia's improving outlook. According to the data, Q1 gross domestic product rose 1.1% on the year, although it contracted 2.9% on a quarterly (albeit unadjusted) basis. Bank Negara maintained its forecast of 3.5% growth for the year, although consensus has it around 4.25%. The services sector, which accounts for 55% of total output, provided the biggest boost of 4.6%. Manufacturing remained in the red, slipping 2.1% year-over-year, but an improvement over Q4 data when GDP fell 8.4% on an annual basis. While the improving outlook for the US economy has certainly helped, fiscal policymakers deserve most of the credit for the Q1 GDP figure, given that government spending jumped 11.8% on the year to RM18.6 billion ($4.9 billion).
Malaysia appears to be one the brighter stars in non-Japan Asia, along with South Korea, where Q1 GDP rose an annual 5.7%. While the Kuala Lumpur Stock Exchange tends to track US bourses, there are several reasons to remain bullish on the overall economy. April inflation remained tame at 1.9% year-over-year, which should prevent the central bank from raising rates, at least in the near-term, boosting private demand. The recent weakness in the US$ will give the ringgit (still pegged at 3.8/$1) a slight regional competitive edge just when external demand appears to be on the rise, and should be a plus for hard-hit Malaysian exporters. Finally, international reserves continue to rise and stood at $32.8 billion as of May 15, amounting to 5.5 months of import coverage and five times short-term external debt.

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