UBS raises Malaysia's 2010 growth forecast to 6%

UBS economist Paul Donovan has forecast the Malaysian economy to grow by 6 per cent next year, probably the most bullish view yet, to be driven by solid consumer spending and a gradual global recovery.

Malaysia's economy is likely to see one of the sharpest rebounds in the region and grow faster than Indonesia and Singapore next year, because there are less negative forces that could drag down the economy, the London-based economist said in a media briefing in Kuala Lumpur yesterday.

Malaysia does not face political upheavals like in Thailand, nor does it have a financial sector to fix like in Singapore. It also does not share South Korea's credit card problem.

Still, this bullish view on the economy does not necessary mean Malaysian shares will surge, because stock markets in general have rallied ahead of the growth expectations, Donovan said.

Investors worldwide have already priced in a sharp global recovery next year, but the rebound is more likely to resemble a "swoosh" akin to the famous Nike trademark, he said.

"There is probably a limited upside for Malaysian shares next year, at less than 10 per cent (from the current level), unless the earnings recovery seen this year can sustain into next year," head of Malaysia equities at UBS, Leong Fee Yee, added.

"Public spending will be less next year and the private sector will have to pick up the slack. But it is still uncertain how much could the private sector contributes," Leong said.

Malaysian shares have risen 45 per cent this year, trailing the 82 per cent surge in Indonesia, 59 per cent gain in Singapore and 55 per cent jump in Thailand.

The Malaysian government is projecting a 3 per cent growth in the economy next year, after shrinking an estimated 3 per cent this year.

The world has just reached its turning point in the third quarter and is about to embark on a recovery, Donovan said. But the recovery will be slower than many investors or stock analysts have expected, he said.

The global economy is set to grow 3.6 per cent next year, while the US would expand by 2.6 per cent and the Europe at 2.4 per cent. Asia will probably grow 7.5 per cent next year, according to UBS forecast.

He said economic recovery in the US and Europe is constrained by two key hurdles: the restricted bank lending is limiting consumer spending; while small companies, faced with a double credit crunch from both banks and the stalled inter-company credit, are cutting their stockpiles.

"The market has underestimated the importance of small companies. This was why corporate earnings have greatly beaten forecast in the third quarter, but the gross domestic product growth was slower than market expectation in the quarter," Donovan said.