4Q2013 GDP better than expected

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1 Mohd Afzanizam Abdul Rashid Chief Economist Q2013 GDP better than expected GDP above expectation Malaysia s GDP scorecard for 4Q2013 released on Wednesday saw the country recording higher than expected growth in the final quarter 2013 at 5.1% (3Q2013: 5.0%) against Bloomberg s survey estimates of 4.8%. Improved export growth of 2.9% (3Q2013: 1.7%) coupled with higher private investment activities (16.5% in 4Q2013 vs. 15.2% in 3Q2013) was the main driver. However, private consumption decelerated to 7.3% (3Q2013: 8.2%) as weaker sentiment caused households to be more cautious in their spending plans. On the supply side, manufacturing and services sector were the main star performers as both industries posted 5.1% (3Q2013: 4.2%) and 6.4% (3Q2013: 5.9%) growth respectively. Within manufacturing space, both export-oriented and domestic-oriented industries showed promising growth. Export oriented industry recorded 4.5% expansion (3Q2013: 4.2%) driven mainly by demand for electronics and electrical (E&E) products. Similarly, domestic-oriented industries grew by 5.6% (3Q2013: 4.4%) owing to continued strength in demand for transport equipments. For the whole year, GDP grew by 4.7%, lower than 5.6% recorded in the previous year. This was due to moderation in domestic demand to 7.6% (2012: 10.6%) following a sharp deceleration in public investments (0.7% in 2013 vs. 17.1% in 2012) as well as further contraction in real exports (-0.3% in 2013 vs. -0.1% in 2012). Table 1: Gross domestic product (GDP) growth Quarterly Yearly 4Q Q Q Q Q GDP 6.5% 4.1% 4.4% 5.0% 5.1% 5.6% 4.7% by demand Domestic Demand 7.8% 8.2% 7.4% 8.3% 6.4% 10.6% 7.6% Consumption Expenditure 4.9% 6.2% 8.1% 8.1% 6.7% 7.1% 7.3% Private Consumption 6.2% 7.5% 7.2% 8.2% 7.3% 7.7% 7.6% Public Consumption 1.2% 0.6% 11.8% 7.8% 5.1% 5.1% 6.3% Investment 16.0% 13.1% 6.0% 8.6% 5.8% 19.9% 8.2% Exports -1.6% -0.6% -5.2% 1.7% 2.9% -0.1% -0.3% Imports -0.6% 3.6% -2.0% 1.8% 4.4% 4.7% 1.9% by industry Agriculture 5.6% 4.2% 5.7% 17.6% 6.4% 1.0% 2.1% Mining & quarrying 6.0% -1.9% 0.3% 14.2% 6.1% 1.4% 0.5% Manufacturing 0.4% 4.1% 3.5% 9.9% 5.0% 4.8% 3.4% Construction 2.1% 1.7% 4.2% 10.2% 5.9% 18.1% 10.9% Services 0.2% -1.5% 5.1% 9.8% 6.4% 6.4% 5.9% Source: CEIC For Internal Circulation Page 1

2 Household debt continues to march higher The level of indebtedness among households continues to rise in At RM848.1 billion, the size of household debt as a percentage of GDP now stands at 86.1%. We have highlighted before that the private consumption has been credit-driven. Thus, in 2014 it is set to decelerate as debt roll-over will be increasingly difficult given that household balance sheet is very stretched at this juncture. In addition, the ongoing fiscal consolidation via subsidy rationalisation programme will lead to consumers becoming more vigilant in their spending habits. We foresee a deceleration in household debt growth in 2014 versus the nominal GDP growth (growing above the nominal GDP for a sustained period suggests a potential bubble in the economy). Chart 1: Household debt as percentage of GDP Sources: BNM, CEIC & Economic Research, Strategic Planning Chart 2: Household debt vs nominal GDP growth 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Household debt Nominal GDP growth Y03 Y04 Y05 Y06 Y07 Y08 Y09 Y10 Y11 Y12 Y13 Sources: CEIC & Economic Research, Strategic Planning For Internal Circulation Page 2

3 but fiscal current account balance looks favourable The fiscal deficits for 2013 came in at RM38.6 billion or 3.9% of GDP. The outturn was much better in comparison with the earlier estimates of RM39.2 billion or 4.0% of GDP, indicating that fiscal consolidation is well on track. This was largely achieved on the back of lower operating expenditure growth of 2.8% (2012: 12.6%) to register RM211.3 billion. Likewise, net development expenditure contracted by 8.2% (2012: -2.2%) to record RM40.7 billion. Meanwhile, government s revenue recorded 2.6% growth to RM213.4 billion. Apart from that, Malaysia s balance of payments also performed favourably despite facing heightened threats from capital outflows. In the 4Q2013, current account reported a surplus of RM16.2 billion which is equivalent to 6.4% of GNI. This was much higher compared to RM9.8 billion (4.1% of GNI) in the prior quarter. Meanwhile, financial account recorded a deficit balance of RM9.7 billion (3Q2013: RM11.5 billion) led by higher outflows in the portfolio investment. All in all, overall balance remained in surplus of RM14.5 billion in 2013 from RM3.9 billion in the previous year. Table 2: Federal government finances (RM Billion) Q Year 3Q 4Q Year Revenue % annual growth Operating expenditure % annual growth Current account % of GDP Net development expenditure % annual growth Overall balance % of GDP Total Federal Government debt (as at end-period) % of GDP Source: BNM For Internal Circulation Page 3

4 Table 3: Balance of payments (RM billion) Q Year 3Q 4Q Year Current Account (% of GNI) Goods Services Primary income Secondary income Financial Account Direct investment Assets Liabilities Portfolio investment Assets Liabilities Financial derivatives Other investment Errors & omissions Overall Balance Source: BNM Outlook for 2014 We maintain our 5.2% GDP growth forecast for Growth drivers will mainly come from improved external demand as well as increase in private investment activities. One of the sectors that will drive the economy in 2014 would be oil & gas sector as more than RM40 billion contracts awarded in 2013 are set to be implemented in Manufacturing sector particularly the E&E industry will also see a lot of action taking place given the 4.1% growth in Global Chip Sales forecasted by the Semiconductor Industry Association (SIA). This will benefit our local players. Similarly, the ongoing Mass Rapid Transit (MRT 1) project worth RM23 billion will continue to play an important role for the economy. Despite that, we have reasonable grounds to believe that the Overnight Policy Rate (OPR) will remain unchanged at 3.00% for the rest of the year as demand conditions are still fairly stable. Nonetheless, the direction will always be on the upside especially in the context of rising inflation expectation given the ongoing subsidy rationalisation programme and the Goods and Services Tax (GST) implementation next year. On ringgit, we believe it will stay weak in the region of RM3.30 to RM3.35 in the 1H2014 as QE tapering is expected to continue and complete in However, ringgit is set to appreciate towards its mean level of RM in the 2H2014 as sentiment on higher OPR level is expected to intensify. In addition, our strong fundamentals such as narrowing fiscal deficits and sustained surplus balance in the current account should provide some relief for Malaysia and set it apart from twindeficit countries such as Indonesia, India, Turkey and to some extent, Thailand. For Internal Circulation Page 4

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