Malaysia's economy grew by 5.8% y-o-y in Q217, bringing H117growth to 5.7%. Continued strong demand for electronics will bodewell for exports while higher oil prices will be supportive of overallgrowth. In addition, the increase in election-related spending willprovide a boost to headline GDP growth, while domestic demandis likely to remain resilient. We are thus upgrading our 2017 and2018 real GDP growth forecasts to 5.3% and 5.0%, respectively,from 4.7% and 4.6% previously.
The announcement of a special incentive for Felda settlers anda likelihood of a one-off increase in election-related spending areunlikely to pose a significant risk to the government's ongoing fiscalconsolidation attempts as higher oil prices and the revised tourismtax are likely to provide the government with some fiscal room toincrease expenditure. As such, we maintain our view that the governmentwill be able to achieve its 2017 3.0% (of GDP) deficit target.
BNM's decision to maintain its OPR at 3.00% during its monetarypolicy meeting on September 7 was in line with our expectations.
The Malaysian economy appears to be in a growth-inflation sweetspot while the MYR is gradually strengthening, and we maintain ourforecast for BNM to remain on hold at 3.00% throughout 2017.
We maintain our positive outlook on the MYR, with the currencyshowing signs of consolidation following a break of resistance. Overthe longer term, we expect the currency to appreciate as it remainssupported by a stabilising political outlook, an improving fiscal position,and still-undervalued real effective exchange rate.
The political situation in Malaysia is likely to remain broadly stabledespite the run-up to the upcoming general elections amid persistentbickering within the opposition, which raises the possibility of threecorneredfights. With the ruling BN coalition having been strengthenedby the defection of a high profile opposition member, we believethat PM Najib has further consolidated his position, boding well forcontinued political stability and the business environment.
Major Forecast Changes
We have upgraded our 2017 and 2018 real GDP growth forecaststo 5.3% and 5.0%, respectively from 4.7% and 4.6% previously.
We have upgraded our end-2017 forecast to MYR4.05/USD fromMYR4.20/USD previously and end-2018 forecast to MYR4.00/USDfrom MYR4.10/USD to reflect the ringgit's stronger than expectedappreciation so far this year.