According to Bank Negara, the country’s gross domestic product (GDP) is expected to expand at a more moderate pace of around 4% to 4.5% this year, compared with 5% in 2015, with domestic demand still being the principal driver of growth.
The central bank’s GDP growth projection is in line with the forecast published by the Finance Ministry under the recalibrated Budget 2016.
“Domestic demand will be the key driver of growth, sustained primarily by private-sector economic activity,” Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said during her presentation of the central bank’s annual report here yesterday.
“The external sector is also expected to support growth, following the recovery of growth in advanced economies and continued growth in regional economies,” she added.
In what is to be Zeti’s last presentation of Bank Negara’s annual report, the outgoing governor noted that Malaysia had the capacity and capability to manage potential downside risks to growth that stem from global and domestic developments.
“Malaysia has strong fundamentals and we have benefited from earlier reforms and structural adjustments,” she said.
“We now have diversified sources of growth; a favourable external position, with current account remaining in a surplus position; a strong and solid banking system; well-developed capital markets; and (sufficient) policy space which provides Malaysia the enhanced ability to manage these challenges,” Zeti explained.
According to Bank Negara, all economic sectors in Malaysia, save for agriculture, would continue to expand in 2016, with the services and manufacturing segments being the key drivers of overall growth.
Bank Negara, however, acknowledged that domestic demand growth would be slower at 4.3% this year, compared with 5.1% in 2015, amid ongoing adjustments by consumers and investors in the current challenging economic environment.
“Private consumption growth is expected to trend below its long-term average, reflecting largely the continued household adjustments to an environment of higher prices and greater uncertainties.
“These moderating effects, however, will be partially offset by continued growth in income and employment, as well as some support from Government measures targeted at enhancing households’ disposable income.”
Private investment growth is projected to grow 5.5% this year vis-a-vis 6.4% last year.
“Private investment growth mainly reflects investments in the services and manufacturing sectors amid lower capital spending in the mining sector in an environment of low oil prices,” Zeti explained.
Bank Negara said public-sector investment, however, is projected to turn around to register a positive growth of 1.1% this year, compared with a contraction of 1% last year, thanks to higher spending by the Federal Government on fixed assets and the continued implementation of key infrastructure projects by public corporations.
Despite subdued commodity prices, Malaysia’s export performance is projected to remain positive, in line with the modest improvement in external demand. The well-diversified nature of Malaysia’s exports would continue to support the overall growth in exports, Zeti said.
Trade surplus, however, is expected to narrow to RM79.5bil this year from RM94.6bil in 2015, as import growth is expected to outpace export growth.
Overall, Bank Negara said the current account would remain in surplus, albeit at a narrower range of 1%-2% of gross national income (GNI) this year compared with 3% of GNI in 2015.
Meanwhile, headline inflation is expected to be higher at 2.5%-3.5% in 2016, compared with 2.1% last year, due mainly to increases in the prices of several price-administered items and the weak ringgit exchange rate.
Nevertheless, the impact of these cost factors on inflation would be mitigated by low global energy and commodity prices, generally subdued global inflation and more moderate domestic demand.
“However, the rising cost of living continues to affect low and middle-income households, particularly those living in urban areas,” Zeti conceded.
On monetary policy, Zeti said Bank Negara would continue to balance between the risk to growth and risk to inflation in making any changes to the country’s interest rates.
“Monetary policy in 2016 will focus on ensuring monetary conditions remain supportive of the sustainable growth of the domestic economy in an environment of price stability,” Zeti said.
“Malaysia has the policy space to make adjustments should the balance of risk change,” she added, while reckoning that the current level of the country’s overnight policy rate at 3.25% was appropriate.
She also said Bank Negara would continue to ensure sufficient liquidity to support the orderly functioning of the money and foreign exchange markets in the country.
On the ringgit’s performance, Zeti said volatile capital flows would remain the driver. Nevertheless, she said the exchange rate would eventually adjust to a level that would reflect the underlying economic fundamentals of the country.
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