Summary

● Bank Negara Malaysia (BNM) expects Malaysia’s economy to sustain its recovery momentum, projecting a further GDP expansion of 5.3 – 6.3% in 2022 (2021: 3.1%). This is marginally lower than the Ministry of Finance forecast (5.5 – 6.5%), but in line with the market’s GDP consensus of 6.0%. However, our in-house growth forecast is slightly less optimistic (KIBB: 5.0 – 5.5%) as the global economy is still threaten by impending geopolitical uncertainties.

● BNM expects a broad-based recovery across the demand and supply side, chiefly led by a solid expansion in the private consumption and the services sector. This aligns with our view as BNM backed its forecast on progressive developments in vaccination rates, full easing of pandemic-related restrictions, border reopening optimism and extended fiscal measures.

● BNM projects the CA balance surplus to expand further to 4.2%-4.7% (KIBB: 3.9%; 2021: 3.5% of GDP) as the goods surplus is expected to increase due to higher commodity prices and solid demand for E&E products. We echo BNM’s view but are still cautious about the prolonged impact of global supply chain disruptions and China’s zero-Covid policy.

● In line with our house view, BNM reassured that it will continue to focus on ensuring stable economic growth by maintaining an accommodative monetary policy throughout the year, while expecting the inflation pressure to remain manageable with the headline inflation rate projected to average between 2.2% - 3.2% (KIBB: 2.9%).

● In the near term, the ringgit is expected to remain volatile and trade under pressure due to the uncertainties surrounding the Russia-Ukraine crisis and COVID-19 pandemic. Nevertheless, we concur with the BNM’s view that the ringgit may be supported by stronger economic recovery and maintain our end-2022 USDMYR forecast at 4.10.

● BNM expects the Malaysian economy to sustain its recovery, projecting GDP growth to range between 5.3 – 6.3% in 2022 (2021: 3.1%)

• This is marginally lower than the government’s official forecast of 5.5 – 6.5%, but in line with forecasts from international institutions (IMF: 5.75%; World Bank: 5.8%) and within consensus estimates of 6.0%. However, our inhouse view is slightly less upbeat, as we project a range of between 5.0 – 5.5% (point forecast: 5.3%).
• BNM expects the economic recovery to gain momentum in 2022, underpinned by a further expansion in external demand, full easing of domestic COVID-19 restrictions, reopening of international borders, and improvements in labour market conditions. Furthermore, the implementation of investment projects and targeted policy measures should provide additional support to economic activity overall.
• Nonetheless, BNM cautioned that risks to growth remain tilted to the downside, mainly stemming from the lingering threat of COVID-19, slower-than-expected deployment of public infrastructure projects, labour shortages, global supply chain disruptions, and higher inflation. Furthermore, the ongoing military conflict in Ukraine may impact global growth, although Malaysia will likely find support from the corresponding rise in global commodity prices.

● Growth to remain broad-based and particularly driven by private sector expenditure

• Domestic demand (BNM: 7.2%; KIBB: 5.3%; 2021: 1.9%):
• Private spending (BNM: 8.2%; KIBB: 5.9%; 2021: 2.0%): BNM expects private consumption to record a strong growth of 9.0% (2021: 1.9%), as household spending will be supported by a recovery in domestic income and employment, following the easing of strict COVID-19 containment measures. The government decision to allow another EPF withdrawal is expected to also contribute to higher consumption in the short term.The emergence of pent-up demand for previously restricted discretionary items, as well as an improvement in consumer confidence, is also expected to provide support to overall spending. Similarly, private investment is anticipated to chart a sustained recovery of 5.3% (2021: 2.6%), reflecting the resumption of existing projects, commencement of new capital spending by businesses, and the ongoing recovery of external demand. However, we are relatively less optimistic regarding private spending growth, taking into account the impact of surging local COVID-19 cases, the occurrence of flash floods across the country, and the delayed reopening of international borders.
  • Malaysia’s household debt-to-GDP ratio fell to 89.0% in 2H21 (1H21: 89.6%), indicating a sustained downtrend from the record high 93.2% registered at the end of 2020. BNM highlighted that household debt grew at a slower pace due to the reimposition of COVID-19 restrictions in 3Q21, and that growth in debt was still driven by housing loans, as households utilised incentives under the Home Ownership campaign that ran until the end of 2021. BNM stressed that the lower debt-to-GDP ratio was primarily due to stronger nominal GDP growth, and that Malaysia’s level remained towards the higher end compared to other regional economies.
• Public spending (BNM: 3.2%; KIBB: 3.0%; 2021: 1.6%): In line with our house view, BNM expects public consumption to expand by 1.2% (2021: 6.6%), but to moderate due to slower growth in emoluments, as well as a contraction in supplies and services expenditure. However, in contrast to our expectations, BNM projects a stronger expansion in public investment of 9.6% (2021: -11.4%), with capital spending driven by both the government and public corporations. Investment by corporations will likely see a broad-based improvement, in line with the resumption of economic activity. Whilst government investment will largely be concentrated on public projects in transportation, education, health care, and public utilities, including major infrastructure projects such as the LRT 3 and Pan Borneo Highway.

- Net exports (BNM: 2.6%; KIBB: -0.6%; 2021: -5.8%):

• Exports (BNM: 4.8%; KIBB: 5.3%; 2021: 15.9%): BNM expects exports to continue being supported by a gradual recovery in global demand, especially from major trading partners and for E&E products, amid the ongoing technology upcycle and global 5G rollout. Meanwhile, commodities exports will be lifted this year on improved production and higher prices of crude oil, liquified natural gas and crude palm oil. With that said, BNM highlighted that the ongoing Russia invasion of Ukraine will likely impact global growth and external demand. Meanwhile, our house view that a direct impact would be minimal at this juncture given Malaysia’s low trade exposure to both Russia and Ukraine (less than 0.5% of total exports).  
• Imports (BNM: 5.1%; KIBB: 5.8%; 2021: 18.5%): expansion to be underpinned by higher intermediate imports amid continued growth in manufactured exports. Furthermore, BNM expects sustained capital imports and consumption imports as investment activity recovers and consumer spending improves amid better income and labour market conditions.

● Expansion is projected across all sectors, driven by a recovery in domestic-oriented sectors

• Services (BNM: 6.9%; KIBB: 5.8%; 2021: 1.9%): BNM expects higher growth in 2022 driven by a strong pick up in the consumer and tourism-related subsectors amid the reopening of borders. Nonetheless, activities in some subsectors such as food, beverage and accommodation would remain below pre-pandemic levels due to the expectation of a gradual recovery in tourist arrivals. In addition, business-related services and information and communication subsectors will continue to support growth. While the magnitude of growth is higher on the BNM side, we are less sanguine mainly because the impact of rising COVID-19 infections could still weigh on the level of productivity and consumer confidence despite higher vaccination rates.
• Manufacturing (BNM: 5.2%; KIBB: 5.9%; 2021: 9.5%): BNM opines that growth would remain above the long-term average, albeit moderating than last year. Growth will be supported by ongoing expansions and continued demand for the E&E sector. This will be further bolstered by higher demand for primary-related manufacturing clusters such as refined petroleum, rubber and chemical products amid higher mobility and continued health and hygiene awareness. In addition, BNM sees an expansion in the production of construction-related manufacturing clusters following the resumption of construction projects and improvement in the residential property market. The consumer-related manufacturing cluster is also expected to improve in line with the recovery in demand activity. We concur with the BNM growth projection although our forecast is slightly higher than the official’s, overall, it is in line with house view.
• Agriculture (BNM: 1.5%; KIBB: 2.1%; 2021: -0.2%): Growth is expected to rebound this year, which is in line with our projection, underpinned by higher palm oil production on the expectation that labour supply issues will resolve. This will also be supported by higher palm oil yields due to improved soil moisture thanks to the exceptionally heavy rainfall. BNM also expects the recovery in domestic demand to support expansion in livestock and other agriculture subsectors. Nonetheless, we believe there is a downside risk to growth due to higher fertiliser and feed costs, which potentially limit output.
• Mining and Quarrying (BNM: 2.5%; KIBB: 3.3%; 2021: 0.7%): BNM sees higher growth this year primarily due to increasing output by new facilities such as the Pegaga gas project off the coast of Sarawak, while further boosted by higher production from existing oil and gas facilities such as the Petronas Floating Liquefied Natural Gas-2 (PFLNG2). The end of the OPEC+ oil production cut agreement in 2H22 would also drive higher production. However, the house views that growth projection could be higher amid elevated crude oil prices brought by the Russia-Ukraine crisis and rising demand on the back of borders reopening and higher mobility.
• Construction (BNM: 6.1%; KIBB: 6.5%; 2021: -5.2%): Growth rebound is expected by BNM and in line with our projection mainly due to the reopening of the economy and the lifting of COVID-19 pandemic restrictions. Projects under the 2022 Budget measures will support civil engineering and special trade subsectors’ growth, while the residential subsector will further improve amid a recovery in demand in tandem with improved income and employment prospects.

● Current account (CA) balance to remain in surplus, higher than the preceding year

• BNM had predicted that the current account balance to further expand in 2022 (4.2%-4.7%; 2021: 3.5% of GDP) driven by the expected sustained good surplus on the back of improvement in external demand and higher commodity prices. BNM forecast gross exports to grow by 10.9% (2021: 26.0%), underpinned by strong agriculture and minerals exports. In addition, import growth is expected to moderate to 8.1% (2021: 23.3%), subsequently expanding the trade balance to RM307.5b (2021: RM252.6b). Meanwhile, BNM expects the services account to remain in deficit, albeit higher than the previous year, given the higher payment for transportation services as trade activity strengthens. Nonetheless, this would likely be capped by the lower travel deficit amid the reopening of international borders to foreign tourists.
• Overall, BNM’s CA balance projection aligns with our in-house view that the CA balance will expand further in 2022. In comparison, we forecast the CA balance to expand by 3.9% of GDP, slightly lower than BNM’s projection, mainly because we forecast lower export growth (6.9%) for this year on continued global supply chain disruption and partly due to the base effect.

● BNM to avoid premature policy tightening and maintain an accommodative monetary policy stance to support a sustainable economic recovery

• BNM reiterated that the bank’s monetary policy stance will continue to be data-driven and any potential adjustments to the degree of accommodation will be undertaken in a measured and gradual way. BNM acknowledged that despite the ongoing domestic economic recovery, growth outlook remained subject to downside risks due to uncertainties surrounding the COVID-19 pandemic developments and a weaker-than-expected global growth recovery. Meanwhile, the risks to inflation were assessed to remain manageable despite some upward cost pressures from higher global commodity prices and supply-side disruptions. Therefore, for the time being, the BNM will continue to keep the overnight policy rate (OPR) unchanged at 1.75% until the economic recovery is firmly entrenched.
• This is to some extent in line with our house view that BNM will keep the OPR unchanged at 1.75% at least until 3Q22 to ensure Malaysia’s smooth transition to endemicity. Malaysia’s decision to open up the economy for international visitors is seen to boost the economy, especially in the services sector. This is expected to be one of the main drivers of the country’s economic recovery in the next three to six months. While there is a low chance of the BNM raising the OPR sooner than the 3Q22, it is still a possibility, especially if inflation turns out to be much hotter-than-expected due to demand-driven domestic as well external factors.

● Inflation to remain manageable due to price controls and subsidies

• In 2022, BNM expect headline inflation to remain under control, averaging between 2.2% and 3.2% (2021: 2.5%). Despite higher global crude oil prices, BNM projects fuel inflation to moderate, assuming that the price ceiling on domestic retail fuel prices would remain in place. However, high input costs from rising non-energy commodity prices may exert inflationary pressure on selected food prices, especially in the 1H22. Nevertheless, the rise in food inflation will continue to be partly mitigated by the government’s staple food price controls.
• This is within our house forecast of 2.9% in 2022 and we agree with BNM’s outlook that headline inflation will be mainly driven by higher food prices due to the worsening global supply chain disruptions amid China’s zero-COVID- 19 policy and the ongoing Russia-Ukraine war. To add, we reckon that the reopening of Malaysia’s international border on April 1, coupled with the further relaxation of the COVID-19 restrictions may potentially add to price pressures. Nevertheless, for now, we concur with BNM’s view that consumer prices is still manageable.

● Ringgit to benefit from a stronger domestic economic recovery, but downside risks remain elevated

• In the near term, the direction of the ringgit is expected to be influenced by stronger Malaysia economic recovery, further monetary policy tightening by the US Fed and developments surrounding the Russia-Ukraine conflict. Due to the continued uncertainty in the global economic outlook amid heightened geopolitical tensions and lingering concerns over the COVID-19 economic impact, ringgit exchange rate flexibility will continue to play a major role as a shock absorber by facilitating appropriate adjustments in Malaysia’s international transactions and cushioning the domestic economy from adverse global shocks. On top of that, BNM would continue its two-way foreign exchange rate interventions and promote access to hedging instruments to ensure that the volatility in the ringgit is not disruptive.
• Due to the ongoing Russia-Ukraine war, continued uncertainty around the global COVID-19 developments and the Fed’s aggressive rate-hiking stance, we expect the USDMYR pair to remain under pressure and trade in the range of 4.19 to 4.23 with a downside bias in the next few months. However, the ringgit is set to benefit from the further reopening of the Malaysia economy, higher commodity prices and BNM’s accommodative monetary policy. Moving into 2H22, the local note may attempt to gain ground against the USD and hover around the 4.10 – 4.15 level amid expectations of a broader economic recovery, stabilising Brent crude oil price and stronger domestic fundamentals. Hence, at this juncture, we still maintain our end-2022 USDMYR forecast at 4.10.

Source: Kenanga Research - 31 Mar 2022