Malaysia: Unlocking the potential

• We raise our 2011 GDP growth forecast to 5.5% (from 5.2%) and CPI forecast to 3.6% (from3.4%).
• We revise our MYR forecasts to 2.98, 2.90 and 2.85 for USD/MYR from 3.00, 2.95 and 2.90 in 3, 6 and 12 months respectively.
• Growth targets this year should be easily met, while inflationary pressures continue to build.
• The bigger issue is meeting the 6% growth targets over the next 10 years.
• Structurally, ambitious plans are in place to propel Malaysia through the next stage of development.
• The key challenge is to raise the level of private investments, which has been anemic since the Asian crisis.
• Pace of change has always been tied to the complexities of the political landscape.
• We think overall, the potential for success looks more promising than before…
• …but tough decisions on reforms are ultimately what is needed to catalyze the economic transformation process.
• We still expect rate hikes to re-commence in 2Q2011 totaling 50 bp this year, with high household debt likely a consideration against sharper moves.
• We expect other tightening measures in the form of further SRR hikes and macro-prudential measures.
• A stronger exchange rate is consistent across the various economic objectives—we have revised stronger our already bullish MYR forecasts.