KUALA LUMPUR (June 26): Bank Islam Malaysia Bhd has maintained its projection of Malaysia’s gross domestic product (GDP) growth at 4.5% this year, but may revise its forecast should there be any policy changes following the upcoming elections in six states.

Its chief economist Firdaos Rosli said slower growth is inevitable in the second half of the year (2H2023) because of the challenging global environment brought about by higher interest rates and tighter credit, which would take a toll on economic activities.

“We were the fastest growing economy last year (8.7% year-on-year growth), but it is unlikely that we can retain that this year because of the base effect,” Firdaos told a media briefing in conjunction with Bank Islam’s 2H2023 macroeconomic outlook on Monday (June 26).

Touching on the upcoming elections, Firdaos said there may be policymaking changes post elections which could strengthen economic growth.

“The timing of announcements of key economic plans is a sign of things to come.

“With a sound economic plan in the current political mandate, Malaysia’s political landscape should improve if the ruling coalition pursues formal registration as a political bloc,” he said.

Ringgit to recover to 4.28, supported by China reopening

On the ringgit, Firdaos projected it would trade at 4.28 to the greenback at end-2023, amid global headwinds limiting the upward potential of the ringgit’s recovery. The local unit is currently trading at around 4.69 to the US dollar.

“Our projection is further supported by optimism about China's reopening based on the positive outlook from the Multilateral Development Banks’ (MDB) latest stance and the unveiling of a new economic narrative in the third quarter of 2023,” he said.

He explained that the depreciation of the ringgit against the US dollar is not unique to Malaysia, as other currencies experienced a similar trajectory.

“Thus, the fluctuations in the local note should be expected to occur every so often given Malaysia’s flexible exchange rate regime.”

According to him, small movements in the exchange rate are common, especially in a financially integrated world which are often influenced by global developments and not necessarily reflective of the country’s economic fundamentals.

“However, it is notable that if such a situation persists, the economy may be adversely impacted as 60% of our food supply is imported, at the present. As a result, containing inflation may be complicated,” he said.

OPR hike expected on labour improvement

In terms of the overnight policy rate (OPR), Firdaos does not rule out another hike in 2H2023 should the unemployment rate improve to 3% in August, before the final Monetary Policy Committee meeting in November.

“In our view, labour market recovery means the OPR should progressively return to its new terminal level as it correlates more strongly with the unemployment rate rather than inflation,” he added.

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