Malaysia growth heading downhill: RBSM

The country's consumption-led growth has become unsustainable and will trigger a slide.

The warning was sounded after Malaysia posted better-than-expected growth of 5.2% yoy in 4Q2011 due to massive government and domestic spending, which RBSM deems is bound to hit a correctional wall.

Here's more from RBSM:

At 5.2% yoy (7.5% qoq annualised), fourth quarter GDP was above expectations. As was the case in the previous quarter, a surge in government spending was the main driver. Sustained growth in consumption and a moderate pick-up in investment also helped. The full year outturn was 5.1%. However, for 2012, we forecast slower growth of 4.5% yoy. This does not necessarily a reduction in policy rates.

The main driver of Q4 2011 growth was government current spending. Rising by 23% yoy, it made the largest contribution to growth equivalent to 4.1%. Consumption and investment also increased 7.1% yoy and 8.5% yoy respectively. The contribution to net exports continued to decline largely reflecting higher import demand to feed the domestic economy. As a final point on Q4 2011 growth was that inventories declined (-1.6% of GDP) – the stock reduction process has started.

Without downplaying the better than expected outturn, we believe that growth is set to slow. Consumption growth has over the last few months been driven by increased leverage – consumer credit and consumption related borrowings have been rising at a rapid clip. With consumer credit (incl. mortgages) already at 76% of GDP, maintaining this growth in leverage will be hard to maintain. Consumption will have to realign with income growth which in turn, is reasonable but not sizzling. On the public side, the government is targeting a lower deficit of 4.7% of GDP (2011: 5.4% of GDP). The flexibility on the fiscal front will be more limited. Investment could potentially coast at the current rate but a further acceleration is unlikely. This is all the more the case because the Economic transformation programme (ETP) related projects will take off in full earnest only towards the latter part of 2013. Meanwhile, the stock adjustment process has just started and will continue over the next few quarters. Overall, we think that growth will be much more sober at 4.5% yoy.

This however, should not be viewed as dismal. We believe the authorities are content with this growth rate considering that it is still employment generating. Moreover, real interest rates are only marginally positive and therefore, supportive of growth. Neither does the slowdown imply increased intervention in the FX market. A weaker MYR is unlikely to lift exports – the problem on the external front is depressed external demand and not competitiveness. In general, Bank Negara has been amongst the least interventionist central banks in the region and we expect status quo.