Press Release 2014

UOB sees firm growth in Malaysia despite GST and interest rate concerns

Kuala Lumpur, 29 August 2014 - United Overseas Bank Group (UOB) forecasts solid and stable growth for Malaysia's economy at a rate of 5.4 per cent over the next 12 months. The Bank expects the hike in interest rates and the introduction of the goods and services tax (GST) to have a short-term minimal impact on the economy.

Malaysia's Gross Domestic Product (GDP) grew 6.3 per cent in the first half of 2014, compared with 4.4 per cent in the first half of 2013 and 5.1 per cent in the second half of 2013. The exceptional growth was backed by stronger exports and investments, as well as resilient domestic demand. As the favourable effect from comparatively lower growth rates from the previous quarters wears off, UOB expects GDP growth in the second half of this year to moderate to 5.6 per cent.

Mr Jimmy Koh, Head of Global Economics and Markets Research at UOB, said that the export sector in Malaysia will continue to grow while foreign investments and domestic demand will remain buoyant.

"The anticipated sustained rebound in China's economy following the Chinese government's stimulus measures will benefit Malaysia as it is an exporter of commodities to China.

"As such, we are confident that Malaysia will be able to attain strong growth in 2014 and have revised our full year growth forecast upwards to 5.9 per cent," he said.

Mr Koh said that the implementation of GST on 1 April 2015 may have a short-term negative impact on private consumption and inflation in Malaysia. However, private consumption could rise ahead of the GST implementation and this would reduce the full-year impact on GDP. In the longer term, the GST will help the Malaysian government to reduce its budget deficit from the current year's 3.5 per cent to below 3.0 per cent of GDP in 2015, and to achieve the target of balancing its budget by 2020.

UOB's forecast for Malaysia's annual inflation remains at 3.0 per cent for 2014 and 4.0 per cent for 2015, higher than the annual average of 2.5 per cent over the last eight years.

Mr Koh does not foresee Bank Negara Malaysia raising its interest rate any further in 2014 after the central bank increased its Overnight Policy Rate (OPR) by 25 basis points (bps) in July.

"The easing of the inflation rate in the short term allows the central bank to hold its interest rate until the first quarter of 2015. We maintain our forecast that the next 25-bps OPR increase will take place in the first quarter of 2015 ahead of the GST implementation. That will restore the OPR back to 3.50 per cent, a level last seen before the global financial crisis," he said.

The stronger-than-expected economic growth in Malaysia and interest rate increase has resulted in the US dollar (USD) weakening against the Malaysian Ringgit (MYR) recently. As quantitative easing tapering in the US is expected to be completed by October 2014, Mr Koh expects the USD to trade higher against the MYR to 3.20 by the end 2014.