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Malaysia Business Forecast Report Q4 2014

  • July 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Core Views
Malaysia's economy continues to post strong domestic demand-led expansion, and we remain confident that the ongoing reform efforts and the economic transformation programme will continue to support strong medium-term growth. We forecast real GDP to grow by 4.5% in 2014, slightly below consensus estimates of 5.1%, as we expect
weakening Chinese import demand and cooling domestic liquidity conditions to undermine external and domestic demand respectively. Malaysia's fiscal deficit came in at 3.9% of GDP in 2013, the lowest level since 2007, thanks to large subsidy reductions. We expect the deficit to narrow further in 2014 to 3.6% of GDP, and believe that the
government's aim of returning the country to a long-overdue budget balance by 2020 is very much on track.

BNM held its benchmark interest rate at 3.0% at its May monetary policy meeting, in line with broad-based expectations for no change in borrowing costs. Consensus expectations, however, are heavily biased in favour of a H214 hike, which we do not expect to see. While we acknowledge that consumer price inflation is slightly elevated,
coming in at 3.5% y-o-y in March, making real interest rates negative, more forward-looking indicators suggest that inflationary pressures will subside over the coming months and quarters.

A bullish technical picture, cheap valuations, rising real interest rates and strong real GDP growth should all contribute to an appreciating ringgit over the coming quarters. We continue to forecast the ringgit to appreciate to MYR3.1100/USD by end-2014 and MYR2.9500/ USD by end-2015. Given our broad-based bullish view on the US dollar, though, we continue to see MYR gains being greatest against non-USD developed market FX. The debate over the possible introduction of Hudud law in Malaysia's Kelantan state continues to rage on, stoking tensions between political parties as well as Muslim and non-Muslim voters. The Hudud debate is likely to see the politicisation of Islam rise over the coming years in the lead up to the general election in 2018 as the ruling UMNO (United Malays National Organisation) and opposition PAS (Pan-Malaysian Islamic Party) compete for the Muslim vote.

Major Forecast Changes
We have not made any significant changes to our forecasts since the Q314 Business Forecast Report. We continue to see real GDP growth easing yet remaining strong, waning inflationary pressures, a narrowing current account deficit, further fiscal consolidation, and a strengthening currency over the coming quarters.

Table Of Contents

Malaysia Business Forecast Report Q4 2014
Executive Summary.... 5
Core Views..5
Major Forecast Changes ....5
Key Risks To Outlook....5
Chapter 1: Political Outlook.. 7
SWOT Analysis.... 7
BMI Political Risk Ratings. 7
Domestic Politics .... 8
Hudud Debate Continues To Dominate.8
The debate over the possible introduction of Hudud law in Malaysia's Kelantan state continues to rage on, stoking tensions between
political parties as well as Muslim and non-Muslim voters. The Hudud debate is likely to see the politicisation of Islam rise over
the coming years in the lead up to the general election in 2018 as the ruling UMNO and opposition PAS compete for the Muslim
vote.
table: POLITICAL OVERVIEW....8
Long-Term Political Outlook.. 9
Race Relations Still Cloud The Horizon9
Malaysia's ethnic diversity will continue to influence domestic politics, and the rise of a stronger opposition presents myriad possibilities
in the political arena over the longer term.
Chapter 2: Economic Outlook.. 13
SWOT Analysis.. 13
BMI Economic Risk Ratings. 13
Economic Activity.. 14
Positive Trends Underpin GDP Figures...14
Malaysia's economy continues to post strong domestic demand-led expansion, and we remain confident that the ongoing reform efforts
and the economic transformation programme will continue to support strong medium-term growth. We forecast real GDP to grow by
4.5% in 2014, slightly below consensus estimates of 5.1%, as we expect weakening Chinese import demand and cooling domestic
liquidity conditions to undermine external and domestic demand respectively.
table: Economic Activity....14
Fiscal Policy . 15
Budget On Track To Meet Targets..15
Malaysia's fiscal deficit came in at 3.9% of GDP in 2013, the lowest level since 2007, thanks to large subsidy reductions. We expect
the deficit to narrow further in 2014 to 3.6% of GDP, and believe that the government's aim of returning the country to a long-overdue
budget balance by 2020 is very much on track.
TABLE: Fiscal Policy....16
Monetary Policy 17
BNM Holds, More Of The Same To Come17
Bank Negara Malaysia's decision to hold fire on interest rate hikes at its May meeting was in line with expectations, and we maintain
that rate hikes will be put off until 2015. Collapsing money supply growth and a stabilising property market support our view, while bond
yields are showing signs of topping out, which would suggests broad-based expectations of a H214 hike will not be forthcoming.
table: Monetary Policy.18
Exchange Rate Policy 18
MYR: No End In Sight To Bull Market..18
A bullish technical picture, cheap valuations, rising real interest rates and strong real GDP growth should all contribute to an
appreciating ringgit over the coming quarters. We continue to forecast the ringgit to appreciate to MYR3.1100/USD by end-2014 and
MYR2.9500/USD by end-2015. Given our broad-based bullish view on the US dollar, though, we continue to see MYR gains being
greatest against non-USD developed market FX.
tab le: Exchang e Rat e ....19
table: BMI CURRENCY FORECAST...19
Balance Of Payments . 21
Taking Further Steps To Support Export Growth...21
The Malaysian government continues to take steps forward to improve the country's business environment, and in particular to increase
openness to international trade. Malaysia is one of the most open economies in the world, both in terms of exports as a share of GDP,
and its 'market orientation' component in our Business Environment Ratings. We believe continued progress on this front bodes well for
real GDP growth over the coming years.
table: Current Account21
Chapter 3: 10-Year Forecast 23
The Malaysian Economy To 2023... 23
Productivity Gains To Support 4.0% Real Growth..23
Owing to strong demographic trends, a continually improving business environment, and further ASEAN economic integration, we see
Malaysian real GDP seeing a compound annual average growth rate of 4.0% (8.3% in nominal US dollar terms) over the next decade.
While this is slightly below the 4.3% (10.5% in nominal US dollar terms) rate seen over the past decade, this largely reflects lower
growth in the working age population, while labour productivity growth is set to rise. The lofty level of household debt, and uncertainty
regarding the fiscal trajectory are risks, but are not likely to derail the economy's strong prospects.
table: Long-Term Macroeconomic Forecasts..25
Chapter 4: Business Environment 27
SWOT Analysis.. 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions.... 28
Tab le: BMI Busin ess And Operation Risk Ratings ...28
Tab le: BMI Lega l Fram ework Rating ...29
Infrastructure 30
Table: Labour Force Quality.30
TABLE: ASIA - ANNUAL FDI INFLOWS31
Market Orientation.. 32
Table: Trade And Investment Ratings....32
Tab le: Top Export Destinations (USDmn ) ...33
Operational Risk 34
Chapter 5: Key Sectors.. 35
Pharmaceuticals and Healthcare.. 35
tab le: Malaysia Pharmac eutica l Sales, Historica l Data and For ecasts , 2010-2018.. 36
tab le: Healthcar e Governm enta l Indicators 2010-2018 ....37
tab le: Healthcar e Exp enditur e Indicators , 2010-2018 ...37
tab le: Healthcar e Pri vat e Indicators 2010-2018 ...38
Telecommunications... 39
tab le: Telecoms Sector - Mobi le - Historica l Data and For ecasts . 40
TABLE : Telecoms Sector - Wir elin e - Historica l Data and For ecasts .. 41
Other Key Sectors.. 43
tab le: Oil and Gas Sector Key Indicators .43
tab le: Defenc e and Security Sector Key Indicators 43
tab le: Infrastructur e Sector Key Indicators .43
tab le: Food and Drink Sector Key Indicators ...44
tab le: Autos Sector Key Indicators .44
tab le: Freight Key Indicators ....44
Chapter 6: BMI Global Assumptions. 45
Global Outlook... 45
Global Recovery Still On Track..45
Table: Global Assumptions....45
Tab le: Develop ed Stat es, Real GDP Growt H, %.46
Tab le: BMI VE RSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 46
Tab le: Em erging Mark ets , Real GDP Growth , %47

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