SUMMARY

● Tighter financial conditions, due to monetary policy tightening by major central banks to fight inflation, the ongoing Russia-Ukraine crisis, and the emergence of global banking fears brought by the collapse of Silicon Valley Bank pose elevated headwinds to the global growth outlook.

● In 2Q23, price pressures could be further alleviated by slowing global economic activity, the easing of supply bottlenecks, declining commodity prices and the persistence of global financial instability.

● The US Fed's tightening cycle is nearly over, probably raising rates once more in May before cutting rates by 50 basis points (bps) in 4Q23, while the Bank of England (BoE) seems to have finished hiking and could follow with rate cuts by year-end. The European Central Bank (ECB) prioritises fighting inflation, is expected to continue raising rates and looks unlikely to cut rates this year. The Bank of Japan (BoJ) may adjust its monetary policy soon under new governor Kazuo Ueda, while the People’s Bank of China (PBoC) is expected to remain dovish.

● The 10Y US Treasury (UST) yield may be volatile in 2Q23 due to the regional banking crisis and uncertainty over the Fed's policy. For end-2023, we expect the 10Y UST yield to settle at 3.10%.

● Crude oil prices may endure a period of volatility amid the fears of a global economic slowdown due to financial tightening and the prolonged Russia-Ukraine crisis. However, China's reopening and OPEC+ output restraint would likely support oil prices. Therefore, we maintain the average Brent crude oil price forecast at USD80.0/bbl for 2023 (2022: USD99.0/bbl).

● Malaysia’s economy is projected to moderate sharply to 3.5% in 2Q23 (1Q23F: 5.1%) due to a waning low base effect and as the economy returns to normalcy. We maintain overall GDP growth forecast for 2023 at 4.7% (2022: 8.7%) as we expect domestic demand to remain resilient, backed by sizeable fiscal policy support and positive optimism over China’s reopening.

● Headline CPI is expected to decrease gradually to 3.0% - 3.5% on average in 2Q23 due to government’s efforts to reduce cost of living, a stronger ringgit and falling commodity prices. Potential risks of increased tourism and geopolitical uncertainty could push prices upwards. However, inflation may continue to trend lower and average around 2.5% in 2023.

● Due to a decline in inflationary pressures and the continued global economic slowdown, Bank Negara Malaysia (BNM) is anticipated to maintain the overnight policy rate (OPR) at its current level of 2.75% for the remainder of the year.

● Meanwhile, the Fed’s recent transition to a more dovish monetary policy stance may shift the ringgit's bearish narrative moving forward, potentially leading to the local note trading below the 4.40 level by the end of 2Q23. While Malaysia's robust economic fundamentals should also support the ringgit's performance, external factors may still influence its trajectory. Despite this, we are still maintaining our earlier projections of 4.35 and 4.11 for 2Q23 and end-2023, respectively.

● Domestic bonds are expected to remain less sensitive to the volatility among developed market sovereigns, whilst decent domestic demand and improving foreign demand, as investors seek portfolio diversification outside of the US and Europe mainly towards the emerging markets, are expected to lower MGS yields. We expect the 10Y MGS yield to reach 3.65% by end-2023.

● Risk to Malaysia’s growth outlook remains, chiefly from external sources such as the ongoing concerns about a recession in the US amid further Fed rate hikes and the impact of recent global banking instability, as well as escalation over geopolitical tensions. Nonetheless, China’s economic reopening is expected to support global growth.

Source: Kenanga Research - 28 Mar 2023