PETALING JAYA - Malaysia's economic growth next year will likely be subdued, falling below the Government's target, as a result of fiscal consolidation, Nomura Securities Co Ltd predicts.
The Japanese financial services giant said it expected Malaysia's gross domestic product (GDP) growth in 2014 to remain at 4.5 per cent, compared with the Government's forecast for a 5 per cent-5.5 per cent GDP growth next year.
"We think the Government's assumption of 5 per cent-5.5 per cent GDP growth may be ambitious because of fiscal consolidation. We continue to expect a GDP growth of 4.5 per cent in 2014," Nomura said in its report.
Nomura lauded the recently announced Budget 2014 as a strong indication of the Government's commitment to fiscal consolidation, that is, reducing its fiscal deficit and debt levels, through key reform measures such as continued subsidy rationalisation and the implementation of the Goods and Services Tax (GST).
"These were the key ingredients to put the fiscal position on a more sustainable footing," Nomura said.
The financial-services group noted that while the reform measures highlighted in Budget 2014 could somewhat strain the country's short-to-medium-term growth, getting the fiscal priorities right were more pressing.
"Removing the fiscal overhang, which has been a persistent area of concern for Malaysia's economic prospects, may ultimately have a positive impact on longer-term growth," it explained.
In tabling the Budget 2014 last Friday, Prime Minister Datuk Seri Najib Tun Razak announced that the GST would be implemented on April 1, 2015. He also announced a lower allocation for subsidies at RM39.4bil next year, compared with RM46.7bil in 2013.
"For 2015, the implementation of the GST will likely significantly lower private consumption, which makes up a significant 50 per cent of GDP," Nomura said, adding that it was currently reviewing its 2015 GDP forecast growth for Malaysia.
Nomura believed that the government's fiscal deficit projection of 3.5 per cent of GDP in 2014 was achievable.
It expected the Government to meet its budgeted fiscal deficit of 4 per cent of GDP this year, while the public debt to GDP ratio was expected to be 54.8 per cent in 2013, compared with 53.3 per cent in 2012.
Nomura was also convinced that the public debt to GDP ratio would stay at similar levels next year, avoiding a breach of the self-imposed debt ceiling of 55 per cent of GDP. "Overall, the key measures should reduce significant bondholder concerns over both Malaysia's negative debt dynamics and a potential downgrade of Malaysia's sovereign credit rating," it argued.
"We believe the budget announcement will prompt a broad change in (investor) perceptions/allocations," it said, adding that with the potential for foreign capital inflows, the ringgit could strengthen to 3.02 per US dollar in the first quarter of 2014.
On inflation, Nomura said it had revised up its forecast for Malaysia to 3.5 per cent next year from an earlier projection of 2.8 per cent, while for 2015, its initial estimate put inflation at an average of 5.2 per cent as a result of the GST implementation.
Nomura said it expected Bank Negara to raise interest rate by 50 basis point to 3.5 per cent next year.
It pointed out that the risk was rising that the interest rate hike could be front-loaded to the first half of 2014 compared with its current expectation of late second half of the year.
"We think it is unlikely for Bank Negara to be more aggressive in rate hikes as these are administrative, supply-side increases in inflation, while growth remains relatively subdued," Nomura said.
"That said, if inflation expectations are not anchored due to substantial second-order effects or perhaps in expectation of GST implementation in April 2015, the need to deliver more policy tightening may arise," it added.