SUMMARY

• Global economic outlook for 2H24 is one of cautious optimism which will likely see divergent growth patterns across different regions, with emerging markets showing stronger momentum compared to more mature economies.

• The US may sustain growth momentum in the near term, but could face challenges as the labour market cools. China’s recovery remains sluggish despite government stimulus, with risks from weak consumer spending and geopolitical tensions, though supportive policies may help. While high US interest rates may continue to impede growth, China's expected gradual recovery and India’s strong economy could mitigate the slowdown.

• Current monetary tightness, coupled with improved supply-demand balance, is expected to continue driving inflation lower. However, risks remain from geopolitical tensions, weather disruptions, and US policy changes if Donald Trump wins the US presidency, reigniting inflation pressures.

• Major central banks are expected to start cutting rates in 2H24 due to signs of slowing growth and inflationary pressures, with the exception of the BoJ, which may hike again in 4Q24. Most major central banks are likely to cut rates beginning from September onwards, while the PBoC’s next move may be to lower the RRR.

• The 10-year US Treasury (UST) yield is expected to decline as the Fed eases policy. Inflation is likely to trend lower, and the labour market may cool further. We project the yield to reach 3.73% by end-3Q24 and 3.60% by year-end, driven by strong treasury demand ahead of anticipated rate cuts.

• Malaysia’s GDP growth momentum is expected to taper off going into the 2H24. Nonetheless, due to better-thanexpected performance in 1H24, resilient domestic demand and continued expansion in key sectors, we maintain our GDP growth forecast for 2024 at 4.5% - 5.0% (2023: 3.6%), with an upside bias toward the upper-end of the range. For 2025, we project an expansion of 4.9%, anticipating the economy to normalise and continue its steady expansion.

• Inflation is projected to rise to 2.6% in 2H24 due to increased consumer spending, diesel cost pass-through, higher tourist spending, and geopolitical crises. Following the postponement of RON95 fuel subsidy rationalisation to possibly 2H25, we revised 2024 inflation projection to 2.2%, down from 2.7% previously.

• Bank Negara Malaysia (BNM) is expected to keep the overnight policy rate (OPR) at 3.00% for the rest of the year, possibly extending this stance well into 2025. This approach aims to manage inflationary pressures from the impact of subsidy rationalisation while supporting economic growth amid ongoing fiscal reforms.

• The ringgit, after a prolonged period of weakness, is expected to strengthen further as the USD index (DXY) is expected to decline in 4Q24, driven by a highly expected Fed rate cut in September. With fiscal consolidation, a stable BNM policy rate and solid growth prospects, the ringgit may strengthen to 4.42/USD by end-2024.

• Demand for Malaysian bonds is expected to stay strong throughout the year, supported by anticipated Fed rate cuts, an undervalued ringgit, and a stable OPR. Key drivers include the Madani framework, increased FDI, favorable investment policies, and renewed economic cooperation with China. Sovereign credit ratings with a 'stable' outlook from S&P and Fitch further boost attractiveness, with potential rating upgrades in 2025 on improved public finances and governance.

• Bond issuances in Malaysia are projected to decrease to RM175.0b - RM180.0b in 2024 (2023: RM190.9b) due to a lower fiscal deficit and reduced refinancing needs. We project the fiscal deficit to narrow to 4.6% of GDP. The 10- year MGS yield is forecasted to hover around 3.70% in the near term, reaching 3.56% by year-end, supported by strong local bond demand and lower supply

Source: Kenanga Research - 5 Aug 2024