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Boost in domestic demand [14-01-2011]  
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DOMESTIC demand will be the bright spot in Asian economies in 2011 as strong headwinds from the US and Europe continue to challenge the growth of exports from trade-dependent economies like Malaysia, a regional analyst said.

In the case of Malaysia, part two of the Economic Transformation Programme (ETP) will lead to a growth in domestic demand through consumption and investment, Standard Chartered Bank head of research for Southeast Asia Tai Hui said.

Investment will lead a 5.1 per cent growth with the slew of projects announced in the fiscal budget as well as the ETP, Tai said at a briefing in Kuala Lumpur yesterday.

On Asia, he said although a trade contraction was not expected this year due to the continued strong intra-regional trade, the level may drop.

StanChart said a large share of Asian exports to China was semi-manufactured goods that are ultimately destined for G3 markets (the US, Europe and Japan markets). About 60 per cent of Malaysia's exports to China are destined for the G3.

China is also increasing its share of the manufactured exports market within Asia, and Malaysia and Thailand are under pressure to maintain competitiveness against Chinese exports given the similarity of their export patterns to China's.

Tai said Malaysia would see a slowdown in manufacturing exports this year although total trade would be given a boost due to the demand for commodities.

Consumer spending in Asia will also be strong in 2011, underpinned by a strong job market and also wealth effects.

"Inflation, food and energy prices need to be monitored as growing domestic demand will exert pressures on the inflation level."

He does not think inflation will be a major concern in Malaysia as the government will continue to emphasise on its price policy ahead of the general elections which many expect to take place in the second half of the year.

Tai expects Bank Negara Malaysia to raise interest rates by another 25 basis points to 3 per cent in the first quarter and two more hikes to 3.5 per cent by the end of the year.

StanChart expects the ringgit to strengthen to RM2.98 against the US dollar by the end of the year, in line with the Asian growth story.

Rotation of international investment funds to the US and Europe in early January has lent support to the US dollar.

"For the second half, we expect to see renewed interest in risk appetite for higher risk investments in emerging markets. That is why, we expect the resumption of weakness in the US dollar for the second half of 2011," Tai said.

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