Kenanga Research & Investment

BNM Economic & Monetary Review - Growth to Slow in 2023 Amid External Challenges, Policy to Remain Accommodative

Publish date: Thu, 30 Mar 2023, 10:06 AM


● Bank Negara Malaysia (BNM) forecasts Malaysia’s GDP to grow moderately between 4.0% to 5.0% in 2023 (2022: 8.7%). In comparison, the Ministry of Finance (MoF) forecasted 4.5%, while our in-house estimate of 4.7% is near the upper end of the BNM’s forecast range.

● BNM expects the moderate growth expansion to be supported by firm domestic demand attributable to improvement in employment and income levels, ongoing government infrastructure projects, and higher tourism activity. Nonetheless, the economy continues to face challenges, mainly from external headwinds.

● BNM projects the CA balance surplus to expand further to 2.5%-3.5% (KIBB: 2.6%; 2022: 2.6% of GDP) due to the continued recovery in tourist arrivals and China's prospective demand recovery. While we agree with BNM's assessment, we remain cautious about the potential impact of a possible global recession and weakening global demand.

● BNM reaffirmed its commitment to supporting growth while keeping inflation risks under control. It believes that strong domestic demand will counteract any potential negative impact from external factors, but domestic inflation remains a concern. On balance, although we expect there is room for another 25 basis points (bps) rate hike, we reckon BNM has reached the end of its tightening cycle and the overnight policy rate (OPR) would stay at 2.75% for the rest of the year.

● In the near term, Fed's monetary policy guidance and China's post-reopening recovery is expected to influence the ringgit’s direction. Despite rising uncertainties, BNM expect that the economy would be bolstered by a stronger domestic demand recovery. Combined with political stability, it would support our view that the ringgit would strengthen. Hence, we maintain our end-2023 USDMYR forecast at 4.11.

● BNM highlighted the importance of implementing both short and long-term reforms to tackle Malaysia's insufficient retirement savings and gaps in the current retirement saving system. The proposals include ringfencing retirement funds, improving data and digitalisation, and enhancing old-age assistance and labour participation..

Source: Kenanga Research - 30 Mar 2023

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