Background Summary

This report aims to share our thoughts on the global and domestic economy, which align with BNM's latest publications. We have carefully examined our macroeconomic projections, which seem to fall within the central bank's assessment. However, we noticed some minor differences, especially regarding inflation. Based on recent government announcements regarding ongoing supply-side changes, we foresee a higher possibility of inflation coming in on the higher side of the official range. Nevertheless, we remain optimistic about the overall outlook of the economy, and we are confident that the Malaysian banking sector is well-oiled and can withstand any shortterm financial stress.

We reiterate our stance that the OPR will maintain its current rate of 3.0% throughout 2024 without discounting the possibility of a monetary action should private consumption growth and external demand improve higher than expected. There are trigger points that could tilt our assessment downwards. However, as it stands, we are enthusiastic about the near-term of the global and domestic economy despite the higher-for-longer interest rate environment.

Global growth in 2024

BNM is looking at global real GDP growth to come in at around 2.7-3.2% in 2024, complemented by the growth in global trade of between 2.9-3.4%. Despite the sanguine outlook, the central bank gives an equal weightage to upside and downside risks to global growth this year, possibly due to the rough pathway of a global election year. We agree with BNM’s assessment of global growth in 2024, which appears to be leaning more towards the IMF’s take than the World Bank's.

Malaysian economy in 2024: Likely a rebound amid a global soft landing

BNM expects the Malaysian economy to grow between 4.0-5.0% in 2024 from 3.7% in 2023. We agree with BNM; our in-house projection falls at the mid-point of the central bank’s forecast range at 4.5%. We believe that statistical rebound plays a role, with private consumption and net exports to come in higher in the year.

We note BNM’s take that private consumption is underpinned by improving income and other policy support such as the possible revision of the minimum wage, civil service pay review, higher cash assistance and other special incentives. However, we are taking a different stance about the impact of the tourism sector on the economy, mostly due to inconsistent measurements for the industry. Tourism receipts make more sense than tourist arrivals as about half of Malaysia’s tourism arrivals data is from Singapore alone, suggesting an increasing number of JohorSingapore labour migrants over the years and distorting the usefulness of tourist arrivals data.

Additionally, BNM posits Malaysia’s current account to improve to 1.8-2.8% in 2024 of GDP from 1.2% in 2023. According to BNM, the upbeat outlook is not only because of the anticipation of a higher tourism receipt but also because of higher commodity prices and the recovery in the global trade and tech cycle. We agree with this notion, as China’s Caixin and S&P Global manufacturing purchasing managers’ index (PMI) increased to 51.1 from 50.9 in February 2024. Its retail sales data and export data are on the rise as well. Ergo, as China’s prospects improve, so will the global commodity demand. Malaysia’s manufacturing PMI, however, dropped to 48.4 in March 2024 from 49.5 in February, extending its contraction mode since September 2022. Commodity prices remain elevated amid geopolitical tensions and will likely persist throughout 2024.

Having said that, we are cautiously pessimistic about Malaysia’s current account recovery in 2024 as the government pursues deficit reduction. There is a tendency for the current account balance to reduce or remain low as the fiscal deficit declines amid higher wage growth and higher tax collection. Furthermore, as fiscal deficit reduces, trade balance may come in lower under the pretext of higher wage levels. This short-term phenomenon may be challenging for the government if the OPR and the foreign exchange landscape remain as is.

According to BNM, Malaysia’s growth in 2024 will follow through from last year but at a higher pace amid continued expansion in household spending and investments, while higher external demand will boost trade recovery and tourist arrivals.

Private consumption is expected to grow by a whole percentage point, from 4.7% to 5.7%, amid a higher expected nominal Compensation of Employees and the services sector. On the other hand, investments will benefit from the continued improvements in multi-year projects such as the East Coast Rail Link (ECRL) and the Sabah portion of the Pan-Borneo Highway. The central bank also believes technology upcycle and higher inbound tourism will complement this year’s growth. We agree with BNM’s take on private consumption growth in 2024, and posit Malaysia could record higher export growth than projected.

BNM highlights three key downside risks to growth: weaker-than-expected external demand, further escalation of geopolitical conflicts and a larger decline in commodity production. We concur with the central bank’s assessment here. Additionally, we posit the US Dollar's continued strength, the US Fed's prolonged hawkishness, and the over-acceleration of domestic reforms are another three downside risks to Malaysia’s growth in 2024.

Inflation: How high is high?

BNM projects headline inflation to average between a wide range of 2.0-3.5% in 2024, with core inflation to average slightly lower between 2.0-3.0%. The potential upside risk for the former will emanate from subsidy rationalisation, higher input costs due to exchange rate developments and higher global commodity prices amid worsening geopolitical tensions and weather disruptions. On the other hand, softer commodity prices from weaker global growth present a downside risk to BNM’s headline inflation outlook. Core inflation is expected to trend lower amid stable cost and demand conditions.

We concur with BNM's inflation outlook for this year. The government has yet to provide details on its subsidy rationalisation priorities, such as the new subsidy structure/distribution and the new pricing mechanism for the RON95 price. We believe the market remains business-as-usual for now, without pricing in the anticipated impact on business operations and profit margins. Inflation expectations will be more pronounced when details start to surface. Based on the official announcements thus far, we think inflation may come in much higher than expected due to the successive and accelerated supply-side interventions the government plans to undertake in 2024.

In any case, our inflation projection stands between 2.5% - 3.5%. The wide range reflects the complexities in estimating inflation this year amid scant details on subsidy rationalisation. For now, we expect inflation to rise by 0.3% above baseline should RON95 be priced higher by 10 cents. Further on the upside risks, we are also cautious against the impact of the prolonged unfavourable USD/MYR exchange rate, especially on our imports of foods. The greenback may be able to hold its strength throughout 2024, putting emerging market currencies, including ringgit, under pressure for longer. Nonetheless, our current baseline inflation outlook is leveraging on the continued moderation in production costs among firms as commodity prices moderate and global supply pressure has already eased.

OPR to remain flat at 3.0% unless a spike in private consumption

In this year’s annual report, BNM explains the scope of its Monetary Policy Committee (MPC) and the statement. There is also a box article explaining the increased interaction between monetary and fiscal policies that, from BNM’s viewpoint, is not inherently detrimental to the economy. In 2024, the central bank expects its policy will remain conducive to sustainable economic growth while ensuring price stability amid being mindful of other upside risks to inflation and financial market volatility due to the prolonged high interest rates in advanced economies.

As it stands, we believe that BNM will keep the overnight policy rate (OPR) steady at 3.0% throughout 2024. While this is increasingly becoming an industry viewpoint, we cannot discount the possibility of a rate hike should inflation and growth come in higher than expected. From the demand side, the government recently announced several incentives that could increase private consumption while waiting for a holistic overview of the civil service pay scheme in 4Q2024. Minimum wage and the planned progressive wage model are also expected to take shape this year. Malaysia’s unemployment rate will trend at pre-pandemic levels this year. Thus, productivity per worker should be higher. On the supply side, the rollout of subsidy rationalisation in 2Q2024 would be inflationary, together with other indirect tax revisions. All of these feed into BNM’s belief that the output gap will turn positive in 2024. As Malaysia’s growth will rebound to around 3.5-4.5% in 2024, or probably higher, this could prompt a monetary response to favourable indicators for Malaysia in the year.

Preserving and maintaining Malaysia’s banking ratios amid heightened external risks

Preserving the banking system capital and liquidity buffers is of utmost importance not only due to the persistently long high-interest rates environment in advanced economies but also the unintended consequences that may arise, just like the collapse of tech and regional banks in the US last year. We can take comfort that Malaysia’s key banking metrics – total capital ratio, liquidity coverage ratio, and net stable funding ratio – remain high and robust as of December 2023. BNM’s stress test simulation suggests that Malaysian banks can weather a severe GDP drop in 2024 and a milder one in 2024, with their total capital ratio remaining double digits.

Source: AmInvest Research - 5 Apr 2024