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MEO 1Q 2011

Executive Summary

Recent statistical data indicate that the world economy seems to be gaining momentum and price pressure slowly building up. Inflation is expected to trend upwards due to the effects of quantitative easing in the U.S., geopolitical tensions in the Middle East and North Africa, and on the reconstruction of Japan. In addition, the sovereign debt issue continues to affect parts of the Eurozone with repercussions on the global economy. Meanwhile, major currencies will consolidate against the USD, while emerging currencies likely appreciate further.

In Malaysia, economic growth is projected to moderate to 5.2% yoy in 2011, before rising to 5.5% in 2012. Structural impediments in net exports will drag down overall GDP growth in 2011, while domestic demand likely strong due to supportive government policy measures.

Meanwhile, the in-house CSI moderated to 108.2 in 1Q11 on weaker access to finances and firming inflationary expectations. In contrast, firms' outlook remains bright as suggested by stronger BCI of 113.3 and CEO of 118.1. The property sector is reasonably healthy (RPI of 130.0), while tourism weakened on more frequent occurrences of natural disasters (TMI of 113.1). Mimicking the trend in CSI, RTI also eased to 99.1. The automotive industry (AII of 140.0) continues to be supported by favourable policy measures.

With GDP growth within the potential level of 5.0-6.0%, coupled with manageable CPI forecast of 3.2% yoy in 2011; the BNM is expected to lift the OPR marginally higher to 3.25% by end-2011. As the economy gathers momentum in 2012, CPI may edge higher to 3.3% prompting further hikes in OPR to 3.50%.

The RM/USD is projected to hit 3.05 in 2011 on larger capital inflows. Improving macroeconomic fundamentals will see an average RM/USD of 2.95 in 2012.

Posted by suzy at 08:35 AM