Key Highlights

• We attended briefings by Bank Negara Malaysia (BNM) in conjunction with their release of Economic and Monetary Review (EMR) 2023, together with BNM Annual Report 2023 and the Financial Stability Review for Second Half 2023. It was chaired by Dato’ Marzunisham Omar, Deputy Governor (DG) and joined by senior officers of the central bank.

• Overall, most of our forecasts are within the official projections. Collectively, Figure 1 below shows the comparison of key macroeconomic statistics between ours, BNM and the Ministry of Finance (MOF) as published in their updated Economic Report 2023/24.

Growth Projections

• Our in-house forecast of 4.7% stays within the official projection range. The central bank came out with a new GDP forecast of 4% to 5% YoY for this year, matching the MoF’s projection. According to Bank Negara, growth will be driven by resilient domestic expenditure, with additional support from the expected recovery in exports. (Refer to table 5 for further growth explanation).

• The 4% to 5% growth expansion this year has taken into consideration of few factors and catalyst of growth, including:
   
  • Bank Negara predicted global GDP to grow by 2.7% to 3.2% this year after an estimated 3.1% growth in 2023. Headwinds from continued tight monetary policy and withdrawal of fiscal support are expected to be cushioned by supporting factors such as moderating inflation, resilient labour markets and a rebound in global trade. During the Q&A session, DG Marzunisham commented that there would be monetary policy easing in the US, but subject to the timing which he believed depending on the US economic situation.
     
  • Global trade to rebound strongly between 2.9% and 3.4% this year after a small growth of 0.4% in 2023, driven by the global technology upcycle, further recovery in tourism activity and low base from 2023. The global technology upcycle is projected to be driven by the replacement cycle of consumer electronics and global inventory correction, as firms replenish depleting stocks. Structural factors will also lend further support, including rising demand for electric vehicles, industrial automation, and the incorporation of artificial intelligence in consumer and industrial goods. Supporting these arguments, the World Semiconductor Trade Statistics (WSTS) is projecting global semiconductor sales to grow by 13.1% in 2024 (2023: -8.2%).
     
  • Both manufacturing and, especially, exports to rebound strongly this year driven by the expansion in the E&E cluster amid the global tech upcycle. Improvement in regional economies will also benefit the non E&E exports. Bank Negara commented despite the poor exports reading in February 2024, the 3MMA growth is suggesting an upward momentum. Comparing with regional peers, there is a lag between regional trade performance and Malaysia.
     
  • Private consumption to grow by 5.7% this year, better than last year’s growth 4.7% but slower than our assumption of 6.2%. Improving labour market conditions amid higher income growth and targeted government assistance are expected to partly cushion the impact of higher cost of living, the implementation of low-value goods (LVG) tax, and increase in sales and services tax (SST) on household spending.
     
  • The central bank predicts the jobless rate to improve slightly from 3.4% in 2023 to 3.3% in 2024. Employment will continue to expand, with growth trending closer to its historical average (2024E: 16.5mn or 1.5%), supported by sustained demand for workers amid the ongoing recovery in tourism related sectors and external trade activity. There was no guidance or indication of Progressive Wage Model (PWM) - slated to undergo dry-run from June this year. As highlighted in our previous report, this PWM pilot project is seen to have a small impact or contribution to the economy this year.
     
  • Despite the rising household debt of 84.2% of GDP at the end of 2023 up from 81% of GDP as at end 2002, Bank Negara assured that the situation remains under control due to a very low gross impaired loan (GIL) of only 1.6%. DG Datuk Jessica further explained that enrolments into AKPK’s Debt Management Programme (DMP) increased notably in 2023 but was to higher level of awareness among borrowers of AKPK’s services. Household borrowings managed under the DMP remain very small at 0.54% of total household loans from banks and development financial institutions.
     
  • Tourist arrivals and spending are expected to improve further. Of note, Tourism Malaysia targets 27.3mn tourist arrivals in 2024, surpassing 2019 levels of 26.1mn persons (2023: 20.1mn). This will be spurred by improved flight connectivity and government measures, such as more tourism promotion activities abroad as well as the 30-day visa-free travel for nationals from China and India. Furthermore, higher overall spending and a diversified source of tourists will also lift tourism activities this year.
     
  • Subsidy rationalisation to be implemented in the second half of this year, as scheduled.
     
  • The implementation of new and on-going multi-year projects by both the private and public sectors would support investment activities. Of significance, the progress of approved projects in recent years is well on track, with 74% of manufacturing projects approved from 2021 to 2023 having been implemented in various stages. Mentioned in the Annual Report, catalytic projects under the National Energy Transition Roadmap (NETR) such as the Kasawari Carbon Capture and Storage (CCS) by PETRONAS, the Hybrid Hydro-Floating Solar (HHFS) Photovoltaic project by Tenaga Nasional Berhad and installation of Electric Vehicle (EV) charging stations led by Gentari are in progress, and will lend support to investments well beyond 2024.
     
• The risks to Malaysia’s growth projection are fairly balanced, although we opine it is slanted to the downside emanating from external and domestic factors such as weaker than expected global growth and further escalation of geopolitical conflict. The IMF will come out with the latest assessment on the global economy next month after global GDP to grow by 3.1% in 2024 and 3.2% in 2025.

• The implementation of subsidy rationalisation could also weigh on the growth outlook. However, DG Marzunisham expected these potential setbacks could be partially offset by targeted cash assistance from the government. No further indication whether the amount of Sumbangan Tunai Rahmah (STR) will be raised. The maximum rate for STR has been increased to RM3,700 from the previous amount of RM3,100. The STR allocation has been increased by 25% or RM2bn from RM8bn to RM10bn as according to Budget 2024, which benefits 9mn recipients or 60% of the country’s adult population. The payment for the first phase has been made in January.

Inflation Developments and Projections

• BNM is flagging upside risks this time around, with wider headline inflation projection range of 2.0% to 3.5% this year as compared to 2.5% in 2023. Meanwhile, core CPI projection (which measures domestic-driven inflation by excluding volatile items and other price-administered items) is expected to be at 2%-3% this year against the 3% average in 2023.

• To note, the wider forecast range has taken into account of potential upside from: 1) the implementation of fuel subsidy rationalisation; 2) price pressures from tax changes and utility tariffs which are expected to have a marginal impact on headline inflation. For record, the service was increased to 8% from 6% beginning 1 March 2024; 3) higher cost of imports following external pressures on Ringgit. However, this will be contained by administered prices and relatively stable firm pricing behaviour; and 4) global commodity price developments. Key commodities price assumptions are Crude Oil price of USD80-90 per barrel this year, LNG price range of RM2,200 – RM2,300 per tonne and CPO price range of RM4,200 – RM4,400 per tonne.

• Explaining further on the impact of subsidy rationalisation, BNM predicts that the direct impact on headline inflation will likely dissipate within a year. The short-term impact will depend on the size, timing and scope of target assistance. This would also be influenced by the accompanying mitigating measures, such as the proposed targeted diesel subsidies to key business segments and disbursement of cash transfers, which are essential to alleviate the impact of higher cost of living to Malaysian households

• We will have until the end of this month to register and update our information in the Central Database Hub (PADU) system. Recently, Economy Minister Rafizi Ramli mentioned that individuals who are eligible for government assistance but do not update their data in PADU are being risk of being left out of first round of aid eligibility determination after the targeted subsidy programme is implemented. Those individuals would have to wait for the next round when PADU reopens for updates at a regular frequency level that will be determined by the government later.

• Bank Negara also highlighted several other measures / methods in measuring core inflation by filtering out the transitory and idiosyncratic elements from headline CPI inflation. According to the Article Box in the Annual Report 2023, it can be grouped into three broad categories: 1) permanent-exclusion-based measures; 2) statistical-exclusion-based measures; and 3) model-based measures. Generally, all these measures aim to remove shortterm volatile CPI components to reveal the underlying trend in the general price level, which corresponds to macroeconomic factors, such as excess demand or tightness in the labour market. Basically, all methods are showing the same growth momentum.

• Despite the potential upside risks to inflation outlook, we are convinced that the OPR would remain at 3.00% throughout this year. The central bank will ensure that the monetary policy stance remains conducive to sustainable domestic economic growth in the long term amid price stability. The next MPC meeting is scheduled on 8-9 May 2024.

Ringgit Developments

• Collective actions are needed to safeguard the value of our currency, said BNM. Thus, the central bank is committed to playing its part to preserve confidence in the Ringgit.
  
  - Bank Negara has collaborated with the government to increase inflows that would allow Ringgit to appropriately reflect the fundamentals and prospects of the economy. For instance, GLCs and GLICs have been encouraged to consistently repatriate foreign investment income and convert it to Ringgit.
  
  - BNM has also stepped-up engagements with exporters and international investors to further promote conversion and to underscore Malaysia’s investment appeal. Further, it remain committed to maintain orderly conditions in domestic financial markets through our liquidity and foreign exchange operations.
   
• By strengthening our fundamentals, Bank Negara commented that we will able to secure more enduring strength in the Ringgit as well as a stronger and more competitive country. The central bank guided that the Ringgit is expected to strengthen towards the end of 2024, similar to market expectation. YTD, the Ringgit has weakened by more than 3% to average at $4.6372 against the US Dollar.

• The government has no plans to peg the ringgit at this time, as according to our Finance Minister II Amir Hamzah Azizan recently. We are maintaining our average 2024 forecast at $4.45 with expectation of a stronger performance towards the end of the year.

Source: TA Research - 21 Mar 2024