| KUALA LUMPUR
KUALA LUMPUR Malaysia's economy grew at a better-than-expected 5.6 percent the first quarter, easily beating expectations, as buoyant exports and solid domestic demand produced the fastest growth in two years.
January-March growth, announced by the central bank on Friday, was well above a Reuters poll forecast of 4.8 percent and the previous quarter's 4.5 percent expansion.
"We expect growth to be sustained," Bank Negara Malaysia (BNM) Governor Muhammad Ibrahim told at a news conference.
He said the central bank was keeping its full-year growth forecast at 4.3-4.8 percent. In the first quarter, he said, it saw "strong growth in private investments and exports".
March exports surged 24.1 percent from a year earlier in ringgitterms, and those in February 26.5 percent.
But the current account surplus, which has generally been decreasing, narrowed in the first quarter to 5.3 billion ringgit from 12.5 billion ringgit in 2016's last period, due to lower goods surplus and larger services deficit.
"A recovery in commodity prices should help bolster the current account surplus in the coming quarters, though the surplus is still likely to remain low by past standards," Capital Economics said in a note.
Portfolio investments saw a big net outflow of 31.9 billion ringgit, compared to a 19.1 billion outflow in the fourth quarter.
Capital outflows hit a record in November-January, when foreign investors divested holdings of government bonds to the tune of 27.9 billion ringgit ($6.46 billion).
In early 2016, tepid demand for Malaysia's oil and other commodity exports pulled full-year growth down to 4.2 percent, the lowest since contraction in 2009, from 5.0 percent in 2015.
The ringgit, one of the region's worst performing currencies, in 2016, hit a 19-year low of 4.9880 on Jan. 4 but so far this year has strengthened about 3.7 percent against the dollar.
The BNM governor said that stability measures have reduced volatility in the ringgit and the domestic forex market.
"We think the ringgit will further reflect the strength of the Malaysian economy," Muhammad said.
The central bank has said inflation averaged at 4.3 percent in Q1.
Annual consumer price inflation hit an eight-year high in March at 5.1 percent, though it slowed to 4.4 percent in April.
"The spike (in inflation) was largely due to higher oil prices. We still expect inflation to come in at 3-4 percent. Again, there is some uncertainty in global markets, but what is important is its cost driven and not due to demand," Muhammad told reporters.
Rising living costs could eat into support for Malaysia's long-ruling political coalition led by Prime Minister Najib Razak, who is widely expected to call for early polls later this year to take advantage of a weak and divided opposition.
Najib, whose popularity took a hit from a corruption scandal involving state-owned fund 1Malaysia Development Berhad (1MDB), also needs a strong economy to bolster his electoral chances.
(Additional reporting by Rozanna Latiff; writing by Praveen Menon; Editing by Richard Borsuk)