Malaysia's central bank predicts another year of volatile flows

[KUALA LUMPUR] Malaysia's central bank said the nation will probably be confronted by another year of volatile capital flows amid uncertainty in the global economy.

Monetary policy will be focused on supporting growth as private consumption and public spending eases, Bank Negara Malaysia said in its annual report in Kuala Lumpur Wednesday.

Malaysia's gross domestic product is projected to expand 4 per cent to 4.5 per cent this year, the central bank said, reiterating the government's trimmed forecast.

Global stocks have had a roller-coaster first quarter and are rallying from the worst January plunge in seven years as oil prices recovered and the Federal Reserve slowed the path of interest-rate increases.

In Malaysia, the ringgit has rebounded in recent weeks as crude climbed even as the economic outlook remains clouded by rising costs and weaker consumption.

"The international economic and financial landscape is likely to remain challenging and will be a key factor that will influence the prospects of the Malaysian economy in 2016," the central bank said.

"Given the expectation of a challenging global financial environment, Malaysia will likely be confronted by volatile movements in capital flows."

PERIODIC SELLOFFS

Malaysian stocks, bonds and currency saw periodic selloffs last year as investor sentiment hurt by financial scandals surrounding Prime Minister Najib Razak and a state investment company. Both have consistently denied wrongdoing. Foreign funds pulled 30.6 billion ringgit (S$10.5 billion) from stocks and bonds in 2015 and helped send the currency to a 17-year low.

The central bank said the country still faces significant challenges over the medium term and there's an increased urgency to accelerate the economy's transition to a higher-income nation.

Malaysia needs to move away from depending on being a low-cost production center to drive growth and intensify efforts to boost productivity.

ADJUSTMENT PERIOD

"The Malaysian economy continued to be in a period of adjustment, with the ongoing implementation of fiscal reforms," the central bank said. "These reforms are crucial and have a vital role in supporting the sustainable growth of our economy. In the interim, however, these domestic adjustments, alongside the impact of weaker ringgit exchange rate, have affected the cost of living for households."

Inflation is forecast to average 2.5 per cent and 3.5 per cent this year, quickening from a pace of 2.1 per cent in 2015 and higher than an October prediction of as much as 3 per cent.

Price gains will be driven by increases from highway toll charges to electricity tariffs and a weaker ringgit, the central bank said. This will be countered in part by lower global commodity prices, it said.

Malaysia is expected to record an overall trade surplus in 2016, the central bank said. The current account surplus is projected to be 19.1 billion ringgit in 2016, narrowing from 34 billion ringgit last year, according to the report.

BLOOMBERG