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Inflation hike on the cards as Malaysia recovers next year, says ADB

A seafood stall keeper returns change to a customer at a market in Kuala Lumpur August 27, 2013. — Reuters pic
A seafood stall keeper returns change to a customer at a market in Kuala Lumpur August 27, 2013. — Reuters pic

KUALA LUMPUR, Oct 6 ― Despite cutting its outlook for Malaysia this year, the Asian Development Bank (ADB) has predicted that the country’s economy will pick up in 2014 ― but at the cost of rising inflation.

In an update to its April report, released earlier this week, the ADB predicted that Malaysia’s inflation rate will increase to 2.2 per cent following a revised outlook of gross domestic product (GDP) growth at 5.0 per cent in 2014.

“The pace of growth is expected to quicken in 2014 on the back of improved economic performances in the US and Europe and a gradual acceleration in global trade, but partly offset by the dampening impact fiscal consolidation will have on domestic demand,” the bank said in a report released earlier this week.

ADB also predicted that, on average, Southeast Asian economies would expand by 5.3 per cent next year.

In comparison, ADB forecast in the same report that Malaysia will grow by only 4.3 per cent this year and not 5.0 per cent as previously expected; the rate was 4.9 per cent for the rest of Southeast Asia.

According to ADB, the sub-region will benefit from stronger growth in the US and the Europe predicted next year, while recent depreciation of Southeast Asian countries’ currencies will help raise exports.

Malaysia’s lacklustre performance for 2013 was due mostly to lower exports of agricultural commodities, namely palm oil and rubber, in the first half of the year, it said.

With the moderate recovery expected next year, ADB also warned that countries with major fiscal deficit gaps would embark on fiscal consolidations to stimulate growth.

“Consumers might well remain cautious as the federal government, which was returned to office in national elections in May, frames policies to rein in the fiscal deficit that will involve raising prices for consumers,” ADB said in its report.

Though Bank Negara Malaysia (BNM) has committed itself to keeping the interest rate at its current figure, ADB warned that inflation could rise if subsidy cuts are more extensive than expected, which may prompt gradual monetary tightening.

Pump prices of RON95 petrol and diesel were raised by RM0.20 per litre starting from September 3, to RM2.10 and RM2.00 per litre respectively.

The subsidy cut was announced by Putrajaya to consolidate its fiscal position, especially after global ratings agency Fitch revised Malaysia’s sovereign debt outlook from “Stable” to “Negative” in August.

Anticipating a backlash from the public, the Najib administration said it would announce measures to ease the burden on the lower and middle-income group in the 2014 Budget, including the possibility of increasing payments on the 1 Malaysia People’s Aid (BR1M) from the present RM500.

Last month, Maybank Investment Bank (IB) Research had predicted that gas and electricity prices are likely to be next in a round of price hikes following the fuel subsidy cut.

In its daily report, Maybank IB has predicted further subsidy rollbacks since the total savings from the Performance Management and Delivery Unit’s Subsidy Rationalisation Roadmap in 2010 has been much less than intended.

In light of the first half performance, Bank Negara Malaysia (BNM) had revised its outlook for 2013’s GDP growth from 5.6 per cent to between 4.5 and 5 per cent.

The latest inflation rate for August 2013 was also recorded at 1.9 per cent. BNM had previously announced that average inflation for 2013 has also increased to 1.8 per cent in the second quarter, up from 1.5 per cent in the previous quarter.

Minister in charge of financial affairs Datuk Seri Abdul Wahid Omar also predicted in September that average inflation rate may reach up to 2.3 per cent this year, resulting from the subsidy cut.

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