BNM projected 2022 GDP to strengthen by +5.3 to +6.3% YoY (point estimate: +5.8% YoY; 2021: +3.1% YoY) on the back of continued expansion in external demand, lifting of containment measures and reopening of international borders. Inflation is expected to average between +2.2 to +3.2% YoY (2021: +2.5% YoY), driven by supply side pressures. Nevertheless, BNM noted that balance of risks remains tilted to the downside. We maintain our 2022 GDP forecast at +5.5% YoY and expect BNM to increase OPR by 25bps in 4Q22.

We attended BNM’s Economic and Monetary Review 2021 briefing with the following key takeaways.

BNM projected GDP growth of +5.3 to +6.3% YoY in 2022 (point estimate: +5.8% YoY), slightly lower than MOF’s forecast range of +5.5 to +6.5% YoY (point estimate: +6.0% YoY). The lower range reflects the downside risks to growth from (i) worsening supply chain disruptions, (iii) elevated inflationary pressures and (iv) ongoing geopolitical conflicts.

On the demand side, BNM expects growth to be underpinned by private consumption (+9.0% YoY; 2021: +1.9% YoY), supported by rising consumer sentiment, pent-up demand, alongside targeted policy measures. Investment activity is anticipated to strengthen, supported by healthy investment intentions as approved investments reached a record high of RM306.5bn in 2021 (2020: RM167.4bn). On the external front, moderate imports (+8.1% YoY; 2021: +23.3% YoY) and exports growth (+10.9% YoY; 2021: +26.0% YoY) are projected, driven by high commodity prices and continued manufacturing growth. On the supply side, BNM projects an expansion in all economic sectors. Growth will be contributed by the services sector (+6.9% YoY; 2021: +1.9% YoY), mostly driven by consumer and tourism-related subsectors following reopening of international borders. This is followed by the manufacturing sector (+5.2% YoY; 2021: +9.5% YoY), supported by demand for electronics, primary and construction-related manufacturing. Ongoing activity in large infrastructure projects will drive growth in the construction sector, while the commodity sectors are also projected to record higher growth. While we largely concur with BNM’s GDP forecast range of 5.3-6.3% (point estimate: 5.8% vs ours at 5.5%), we opine that private consumption forecast may be optimistic given BNM’s forecast of below full employment, rising cost of living and global uncertainty.

BNM forecasts inflation to average between +2.2 to +3.2% YoY (2021: +2.5% YoY), driven primarily by supply side pressures especially food prices. BNM also sees higher core inflation of +2.0 to +3.0% YoY (2021: +0.7% YoY) following recovery in economic activity after recording modest growth of 0.7% in 2021. The increase in headline inflation is also in line with our revised headline CPI forecast of 2.7% YoY due to rising cost pressures. BNM opined that country-specific factors suggest that overall consumer inflationary pressures are likely to be relatively manageable in the medium term, given some structural and policy factors. We agree with BNM’s assessment that the increase in inflation is a reflection of cost push pressures that does not necessitate BNM to react with higher interest rate, as Malaysia is still in the early stages of recovery. We opine the inflation dynamics in Malaysia is dissimilar to the one we observe in the US economy, where labour demand exceeds unemployed person leading to jump in wages.

While BNM expects recovery to strengthen in 2022, they continue to expect negative output growth gap, albeit narrower than in 2021. This implies BNM continues to see slack in the economy as well as labour market (unemployment rate forecast 2022: 4.0%). Consequently, given the increased uncertainty on the global front, we maintain our expectation for BNM to be cautious and raise the OPR by 25bps in 2022.

Source: Hong Leong Investment Bank Research - 31 Mar 2022