Williams anticipates the GDP to grow by a more modest 1.5% in 2023.
PETALING JAYA: Malaysia is well-positioned to manage global macroeconomic challenges as developed central banks continue to hike rates in the face of volatility and inflation.
Stable domestic demand, continued fiscal support and a pause in Bank Negara’s interest rate hike will help the domestic economy to remain relatively resilient despite signs of slowing growth in the developed countries, according to economists.
However, it is generally expected that the domestic economy will grow at a much slower rate than the 8.7% growth achieved in 2022 – the strongest growth rate since 2000.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid said the economy should able to withstand the external uncertainties.
“During the global financial crisis from 2008 to 2009, our gross domestic product (GDP) contracted by 1.5% in 2009 which was far shallower than 5.5% contraction in 2020 when our economy was plagued by the Covid-19 pandemic. The country has learned so much. I think we should be able to navigate better,” he told StarBiz.
Mohd Afzanizam projects the domestic GDP to expand by 4% this year.
Apart from a slowdown in global growth, Malaysia University of Science and Technology economics professor Geoffrey Williams expects Malaysia to be affected by the economy’s normalisation towards more sustainable growth, following excessive growth last year due to government spending and withdrawals from the Employees Provident Fund.
“There is still support from government spending and from the recovery phase, but we are in a transition in Malaysia to a more normal economic environment,” he said.
Williams anticipate the GDP to grow by a more modest 1.5% in 2023.
“However, the economy is more likely to grow in the 4% to 5% range if the worst global slowdown scenario is avoided,” he said.
Asked if the recent events in the global banking industry such as the fall of the Silicon Valley Bank and Credit Suisse Group AG would affect Malaysian banks and the economy, Williams said it would have little effect in Malaysia.
However, a contagion to other banks will weigh down on the global financial system.
“Malaysia’s financial system is largely protected by heavy domestic support from government-linked investment companies and from the Islamic finance system which offers protection from the different way in which risk is managed.
“I do not foresee a more restricted lending environment here and this will help support investment and growth,” said Williams.
Mohd Afzanizam echoed a similar stance. He acknowledged that banks would naturally be more cautious when they foresee any incoming shocks.
“But at the same time, it is business as usual, which means they still need to deliver good results to the shareholders.
“I suppose the robust regulatory oversight by Bank Negara should give us the comfort that banks will continue operate as per normal should external threats heightened.
“This means that borrowing and lending activities in Malaysia will continue lubricating economic growth,” he added.
The fact that Bank Negara has avoided a hike in overnight policy rate (OPR) for two consecutive rounds so far this year has provided a relief to borrowers.
Experts said the move to retain the OPR at 2.75% would help to support lending activities in Malaysia, in anticipation of any slowdown this year.
Easing inflationary pressures could provide room for the central bank to refrain from tightening its monetary policy further.
Nevertheless, economists generally anticipate Bank Negara to resume hiking its OPR in the second half of the year (2H23) as compare to earlier expectations of a 50 basis points (bps) hike in the 1H23, subject to prevailing economic conditions.
In its previous statement, the central bank has said it is not on any pre-set course.
This means that monetary policy decisions will continue to be data-driven based on evolving conditions and their implications on the overall outlook to domestic inflation and growth.
“Any adjustments to the monetary policy settings going forward would continue to be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support sustainable economic growth in an environment of price stability,” according to the central bank. Bank Negara is set to release its 2022 annual report today.
In February, Malaysia’s input inflation, as measured by the producer price index (PPI), contracted for the first time in two years.
The Statistics Department reported on March 27 that the PPI shrank by 0.8% year-on-year and 0.2% month-on-month, mainly due to persistent contraction of crude materials cost and moderation of intermediate materials cost.
Looking ahead, MIDF Research foresees lower cost pressure for Malaysian producers, amid lower global commodity prices and easing global supply chain pressure.
The reopening of China and better supply of labour and materials globally would further ease the supply chain pressure.
“The continuous decline in PPI inflation provides positive signal especially for consumer price index (CPI) trajectory in the near term.
“However, higher interest rate in major economies, elevated energy prices, currency fluctuations and continuous geopolitical tensions will continue to pose downside risks to global inflation including Malaysia’s price growth pressure in 2023,” it said.
Kenanga Research projects the headline CPI to decrease gradually to 3% to 3.5% on average in the second quarter of 2023 (2Q23) due to government’s efforts to reduce cost of living, a stronger ringgit and falling commodity prices.
It cautioned that 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,” the research house added.
Looking ahead, Kenanga Research expects the Malaysia’s economic expansion to moderate sharply to 3.5% in 2Q23, following an estimated GDP growth of 5.1% in 1Q23.
This is 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% as we expect domestic demand to remain resilient, backed by sizeable fiscal policy support and positive optimism over China’s reopening.
“Risk to Malaysia’s growth outlook remains, chiefly from external sources such as the ongoing concerns about a recession in the United States amid further Federal Reserve rate hikes and the impact of recent global banking instability, as well as escalation over geopolitical tensions,” it said.
Kenanga Research said 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.
“The Fed’s tightening cycle is nearly over, probably raising rates once more in May before cutting rates by 50bps in 4Q23, while the Bank of England seems to have finished hiking and could follow with rate cuts by year-end,” it said.
