Malaysia’s economic outlook is looking brighter with better-than-expected growth figures , providing a boost to Prime Minister Najib Razak ahead of general elections in 2018.

The controversy surrounding Malaysia’s state investment fund, 1MDB, which was reported to be 42 billion ringgit (HK$80.3 billion) in debt when the scandal first erupted in 2015, still lurks in the background as opposition forces led by former leader and ex-mentor Mahathir Mohamed seek to topple Najib.

However, on management of the overall economy, Najib has a strong hand as Malaysia enjoys robust growth over the past year.

The economy grew at a faster pace of 6.2 per cent in the third quarter, according to Malaysia central bank, Bank Negara, driven by domestic demand, particularly in the private sector.

In addition, headline inflation moderated to 3.8 per cent because of lower transport inflation – particularly petrol prices – while the ringgit continues to strengthen against the US dollar.

The 5.8 per cent growth recorded in the second quarter was already better than expected and the third-quarter results mean that Malaysia’s economy is growing at its fastest pace since the second quarter of 2014.

Bank Negara said the economy was expected to register higher growth for 2017.

“Given the continued strong performance in the third quarter, the Malaysian economy is on course to register growth that is close to the upper range of the official projection of 5.2-5.7 per cent,” the bank said.

“Domestic demand is expected to support this expansion. On the external front, exports will continue to benefit from the favourable global demand conditions.

“Headline inflation is expected to average at the upper end of the forecast range of 3-4 per cent for 2017 as a whole.”

The ringgit has been one of the best-performing currencies in the region over the past year. The currency experienced a surge in November, appreciating 3.47 per cent month-on-month to around 4.09 to the US dollar by mid-December.

AmBank Economics Research said that the ringgit could expect to strengthen in 2018 on the back of improving macro fundamentals and fiscal position, along with healthy consumer and business sentiment, potential normalisation of the policy rate and the currency’s general undervaluation.

“With an undervalued ringgit – our fundamental analysis shows a fair value of 3.95 while the real effective exchange rate presents a fair value of 3.76 – there is still plenty of room for this laggard currency to gain momentum, it said..

“We expect Bank Negara Malaysia to consider reviewing its current monetary policy by factoring in a 25 bps [basis point] rate hike in January 2018 from its current rate of 3 per cent with rates expected to normalise at 3.50 per cent,” it said.

Global market research firm Natixis said the Malaysian government made two important moves in helping to sustain vibrant growth in 2017 – allowing the ringgit to depreciate and constraining the deficit.

“Malaysia’s economic outlook has brightened, thanks to a rise of gradual oil prices and an uplift of global trade,” it said.

“The economy has grown vibrantly in 2017 [real GDP growth rates averaged 5.9 per cent in the first three quarters],” it said.

It added that the Malaysian authorities had committed the ringgit to depreciate, which would make exports far more attractive, but fuel inflation.

However, Natixis said there might be a price to pay for fiscal consolidation in terms of investment in future growth, with the revenue ratio unlikely to recover materially.

This may force the government to cut development expenditure further, though growth is expected to stay positive with Natixis projecting 5.4 per cent in 2018.

Natixis expects inflation to rise to 4.5 per cent in 2018 on the back of robust domestic demand and higher oil prices.

“We expect the ringgit to outperform the rest of Asian currencies,” it said.

“With robust growth along with inflation edging up, we expect the Bank Negara Malaysia to hike 50 bps to 3.5 per cent in 2018.”

The company also flagged the general election as a potential obstacle.

“Prime Minister Najib Razak is busy preparing for the general election – expected to be held in 2018 – by proposing a populous budget,” it said.

“This limits policy space for longer-term development.”

The central bank, too, is implementing several measures to curb capital flows.

“Although it will likely prove effective at shoring up the currency and sheltering the financial sector from spillovers of capital flows, foreign investors are likely [to be] deterred in the short-term from investing in Malaysian securities.”

In its quarterly reports, Bank Negara expressed concern about the imbalances of the property market.

It said supply-demand imbalances in the residential and commercial property markets have increased since the problem was first flagged by the bank two years ago.

The bank said that there was an oversupply of non-affordable housing.

“History has shown that excesses in the property market can pose risks to the wider economy,” it said.

“Given that there are imbalances in both the residential and commercial property markets in Malaysia, this is a source of concern as the property sector has linkages to more than 120 industries, collectively accounting for 10 per cent of GDP and employing 1.4 million Malaysians.

“Currently, the property market is characterised by an oversupply of non-affordable housing and idle commercial space, and conversely, an undersupply of affordable homes.

“This situation could worsen if the current supply-demand conditions persist.”