Kuala Lumpur. Malaysia's economy is expected to grow at a faster pace than forecast earlier thanks in part to improving global demand, the central bank said, but it warned of risks to the outlook from monetary tightening in advanced nations and heightened trade protectionism.
In its annual report released on Wednesday (28/03), Bank Negara Malaysia (BNM) said private consumption will also help to boost growth, forecasting 5.5-6 percent expansion in 2018, up from 5-5.5 percent the government had forecast in its annual budget in October last year.
The Southeast Asian nation has enjoyed an export boom, while public spending on infrastructure gave an extra fillip to gross domestic product which was up 5.9 percent in 2017 - its best in three years.
In January, the central bank raised interest rates for the first time in over three years, joining the likes of the Federal Reserve and the European Central bank in tightening monetary policy.
The Malaysian rate hike signaled confidence in the economy, and came well ahead of the general elections that must be held by August, which is set to be a bitter fight between Prime Minister Najib Razak and his one-time mentor and a former premier Mahathir Mohamad.
"Malaysia's export performance will be supported by favorable demand from major trading partners, continued expansion in the global technology upcycle and broadly sustained commodity prices," BNM said.
Malaysia's gross exports were expected to climb 8.4 percent this year, slowing from 2017's preliminary figure of 18.9 percent growth.
It cautioned about risks to exports from any unfavorable shifts in monetary and regulatory policy in advanced economies, rising trade protectionism among major trading partners, and the potential for China's economy to moderate more than expected.
The central bank said these same global factors could rekindle volatility in the ringgit currency, which has continued to strengthen in 2018.
Governor Muhammad Ibrahim said domestic demand underpinned the forecast growth upgrade.
"For our exports this year, IMF projected 3.9 percent (global economic) growth and we will benefit from that, provided there are no trade wars, volatility in financial markets and no surprises on monetary policies,” Ibrahim told reporters.
Private sector expenditure will be supported mainly by continued growth in wages and employment, business optimism and favorable demand, the central bank said.
Headline inflation will average lower to 2-3 percent from 3.7 percent in 2017.
The bank said despite expectations of higher energy and commodity prices, the higher base effect in 2017 will result in a smaller contribution to headline inflation. A stronger ringgit could also alleviate the impact of rising oil prices.
"Given the dependency of domestic inflation on the trajectory of global oil prices, there remains a high degree of uncertainty surrounding the inflation projection," the bank said.
Malaysia, the world's second-largest exporter of liquefied natural gas and crude palm oil (CPO), projected the rise in commodity prices to slow this year. It also expects CPO price to decline due to elevated inventory levels.