Malaysia's gross domestic product (GDP) growth projections this year, which has been estimated in the range of 5% to 6% by policymakers at Bank Negara, is considered reasonable considering the challenging external front.
However, economists told StarBiz that optimism would be tinged with caution due to the volatile and changing dynamics of the global economic environment.
They cited the geopolitical problems in oil-producing regions of the Middle East and North Africa, the still unresolved euro debt crisis and the still unknown impact from the earthquake and tsunami in Japan as factors that would make decision-making difficult in the coming months.
“I think we should take note of the challenges that are being faced by policymakers in the current environment and that's why I think the growth projections are reasonable,” AmResearch Sdn Bhd senior economist Manokaran Mottain said. Last year, the country's economy expanded by 7.2%.
Meanwhile, Kenanga Investment Bank Bhd economist Wan Suhaimie Saidi said the estimate was “fair”, given the uncertainties on the external front.
“The central bank has indicated before that the complexities of fund flows, combined with high commodity prices, will definitely be a concern in managing monetary policy,” he said.
Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz noted in a statement following the release of the central bank's Annual Report 2010 and Financial Stability and Payment Systems Report 2010 that there remained risks to the growth projection.
These included sharper-than-expected deterioration in external conditions, significant volatility in capital flows given the continued uncertainty in international markets, and higher-than-anticipated inflation emanating from supply-driven factors, she said.
Manokaran said the 5% to 6% range was comfortable “because nobody knows how far external factors like high oil prices will go, as nobody knows how long the troubles in the Middle East will last”.
He said the central bank had made adjustments to earlier estimates for crude oil prices. “Bank Negara is looking at prices of US$90 to US$100 per barrel from US$85 to US$90 before,” Manokaran said.
He added that GDP growth would be at the lower end of the range should unrest in oil-producing regions prolonged, thereby pushing prices higher. Manokaran estimated growth to be around 5.2% in this scenario.
Zeti said headline inflation was expected to increase further this year to average at 2.5% to 3.5%, driven primarily by the significant increases in global commodity and energy prices.
She said there were also some incipient signs that domestic demand factors could result in possible upward pressure on prices in the latter part of the year, in line with sustained economic activity.
Manokaran said the central bank would not review the benchmark overnight policy rate (OPR which stood at 2.75%) should the volatility be temporary.
“Monetary policy will continue to be accommodating to growth while any rate hikes in the OPR will depend on events like prolonged high oil prices but if oil prices averaged below US$100, that's comfortable,” he said.
Wan Suhaimie said any OPR hikes would come in July, with the possibility of 25 to 50 points hike for the entire year.
“At the moment, policymakers have other options like the statutory reserve requirement (SRR) to mop up excess liquidity, with another hike of 2% in the SRR as a possibility,” he said.