The economy is forecast to grow 5% year-on-year in 2013, with domestic demand remaining the main support amid a still volatile external environment.
Alliance Investment Bank Bhd chief economist Manokaran Mottain expects growth to come from private consumption and investment, brought about by the various incentives announced in Budget 2013 as well as other factors such as a healthy labour market, steady income growth as well as an accommodative monetary policy.
He has revised upwards gross domestic product (GDP) for this year to 5.2% based on an expected 5% GDP expansion for the fourth quarter after the 5.2% growth in the third quarter.
Manokaran said growth for next year would gain traction from the third quarter after bottoming out in the middle of the year.
“Therefore, we expect the domestic economy to either bottom out by the first quarter or mid-second-quarter of 2013.
“In anticipation of a pick-up in trade activity and a calmer sentiment after the 13th general election, we expect the rebound to gain traction from the third quarter onwards, but still below the pre-crisis levels,” he added.
Manokaran said there was minimal risks from the election as economic management would still take charge after a brief uncertainty.
Domestic demand is expected to expand by 7.8% year-on-year (2012 estimated to be 11.6%) while Economic Transformation Programme projects would continue to be a major factor in supporting private investment, which is expected to grow by 6.9% next year.
Domestic demand would also be supported by Government policy measures including the Bantuan Rakyat 1Malaysia payments, higher wages and bonus payments to civil servants.
However, there would be several downside risks to growth including a further deterioration in global investor confidence, a significant US slowdown as a result of the fiscal cliff, prolonged eurozone debt crisis and steeper slowdown experienced by major economies such as China.
Manokaran expects the benchmark policy rate to remain unchanged next year at 3% with the trigger point for monetary or fiscal stimulus to be growth slowing down to below 4%.
“In view of the anticipated steady growth, along with ample policy room in the event of an unexpected global slowdown, we expect the ringgit to appreciate slightly to 2.95 per US dollar by end-2013,” he said.
Manokaran said the country needed urgent reforms, failing which productivity, capabilities and competition might lag. Among the structural reforms in the pipeline would be the minimum wage plan, subsidy rationalisation as well as the goods and services tax (GST).
He said subsidy reduction remained a possibility next year as the Government sought to curb an increase in deficit, with the deficit target for 2013 at 4% of GDP. However, innovative ways would be introduced to continue subsidising the targeted low-income groups.
Manokaran said the GST might be introduced in 2014 after a period of adequate education and awareness of the tax system.
“The key is to set a clear and credible GST roadmap to ensure its smooth implementation,” he pointed out.
He added that GST would also contribute towards a better management of the taxation system, shifting from the heavy reliance of direct taxes on income (currently at 48.6% of Government's total revenue) to indirect taxes on consumption (17.1%).
Meanwhile, it would be essential for the government debt level to be reduced further although it remains near the self-imposed 55% level (from 51.8% in 2011) in order to promote fiscal sustainability in the medium term.
“While government debt figures indicate the amount the country owes, the budget surplus/deficit can arguably be said to be the proxy for the country's ability to repay this debt. As such, the continued reduction in the deficit, from 6.6% in 2009 to an expected 4.5% this year, is reassuring,” Manokaran said.
He said key risks remained in the rising levels of household debt, with household debt-to-GDP levels at 76.7% as at end-September 2012 versus 75.4% in the second quarter, with household borrowings having risen by an about 12.5% annually in the last 10 years.