MARC Ratings Bhd chief economist Ray Choy
PETALING JAYA: Despite tensions in the Middle East and the US Federal Reserve (Fed) signalling that it will not cut interest rates soon, the Malaysian economy is unfazed and appears to be on track to grow between 4% and 5% this year in line with official estimates.
Most economists expect the gross domestic product (GDP) growth projection by Bank Negara to be in sync with their forecasts, but said they were awaiting for the introduction of the planned fuel subsidy rationlisation to gauge how it would affect consumption.
Furthermore, the timing of the Fed funds rate cuts could also have some impact on the domestic economy, they noted.
The recent advance estimate showed that the domestic economy grew by 3.9% in the first quarter of 2024 (1Q24) from 3% in 4Q23, backed by steady domestic demand and a rebound in external demand.
MARC Ratings Bhd chief economist Ray Choy told StarBiz it is still possible for the economy to grow between 4% and 5% this year, adding that he is maintaining his forecast for 2024 at 4.2%.
MARC Ratings Bhd chief economist Ray Choy
He said the advance estimate of 1Q24 GDP growth stood at 3.9%, accompanied by a turnaround in export growth which reached 2.2% year-on-year (y-o-y) for the quarter, which is a vast improvement from a minus 6.9% in 4Q23, signalling an improving external environment.
“This improvement is further supported by the global semiconductor upcycle, showing an increase of 14.9% y-o-y in revenues for the first two months of the year.
Additionally, the resilient growth of Malaysia’s trade partners such as the United States and signs of a recovering China provides support to external demand.
“Other regional peers with an improving growth trajectory include India and Japan,” he said.
Choy felt the escalation in geopolitical risks in the Middle East at the moment is also limited, as the recent actions by Iran and Israel suggest an avoidance of a wider conflict.
RAM Rating Services Bhd senior economist Woon Khai Jhek reckons Malaysia’s GDP growth is still poised to rise higher for this year.
He said notwithstanding the underwhelming economic growth performance of 3.7% in 2023, the rating agency believes there is an upside lift for the economy and has maintained its GDP growth forecast for 2024 at 4.5% to 5.5%, slightly higher than Bank Negara’s estimates of 4% to 5%.
RAM Rating Services Bhd senior economist Woon Khai Jhek
Although there are still some lingering and prevailing headwinds this year, he sees budding signs of recovery.
The recently released advance estimates by the Statistics Department for Malaysia’s GDP indicated that economic growth accelerated to 3.9% in 1Q24 from 3% in 4Q23, underlined by steady domestic demand and a rebound in external demand, he noted.
The services sector is estimated to have expanded by 4.4% in 1Q24, inching up from 4.2% in 4Q23, primarily supported by the wholesale and retail trade sub-sector.
Furthermore, he said the manufacturing sector which took a beating last year amid a slowdown in global demand and tech downcycle is also showing signs of recovery.
The manufacturing sector is estimated to have rebounded to 1.9% in 1Q24 after contracting by 0.1% and 0.3% respectively in 3Q23 and 4Q23.
“We expect that exports and the manufacturing sector will continue to boost the country’s GDP growth throughout the rest of this year, as global trade continues to improve.
“The chance of a ‘soft landing’ appears to be higher for the global economy, with the International Monetary Fund (IMF) upping its 2024 global growth forecast for the second consecutive quarter to 3.2% (plus 0.1 percentage-points from the previous forecast) this month.
“Coupled with the predicted upcycle in trade and semiconductors, we may be seeing early signs of a turnaround in global trade,” Woon said.
In the World Trade Organisation’s latest Global Trade Outlook and Statistics report released earlier this month, the international body forecasts global merchandise trade growth to recover to 2.6% this year after contracting 1.2% last year.
On the other hand, he anticipates domestic demand would continue to be a significant driver of the nation’s GDP growth in 2024.
This would be supported by a robust job market and supportive financial conditions, he said.
Furthermore, Woon said private consumption growth last year was weighed down by high base effects from 2022, elevated price pressures and the lapse of large policy support (e.g. Covid-19 related financial assistance and Employees Provident Fund (EPF) withdrawal schemes).
As these pressures dissipate, he said private consumption growth should also trend higher this year. To some extent, further recovery in the tourism sector may also contribute to some upside to domestic consumption and services activities, he noted.
Expressing his optimism on the local economy, Bank Muamalat (M) Bhd chief economist Mohd Afzanizam Abdul Rashid, who is forecasting a GDP growth of 4.3% this year, said Bank Negara’s growth target of 4% to 5% in 2024 is within reach.
He said the stable environment in the labour market, cash transfers programme, the implementation of infrastructure projects along with the turnaround in external demand are the key drivers for this year’s economic growth. He said the latest move by the EPF to allow for flexible withdrawal from Account 3 could also be an important catalyst for growth as the tendencies to spend among Malaysians are quite high.
OCBC Bank senior Asean economist Lavanya Venkateswaran said she is still holding on to the 4.2% y-o-y GDP forecast, noting that this based on the view the global electronics export down cycle would bottom by the first held of this year, government infrastructure focussed spending would continue, and the private consumption would stabilise.
“If the increase in global oil prices extends to other commodities such as palm oil, rubber and liquefied natural gas, it could add to tailwinds for export growth. However, if the price increases are restricted to global oil prices, the impact is less clear cut. We see limited improvements to export growth, with subsidy spending picking up. This may motivate us to press ahead with targeted fuel subsidy rationalisation,” she said.
However, UCSI University Malaysia associate professor of finance Liew Chee Yoong is not too upbeat on the economy. “I don’t think the local economy will continue to grow between 4% to 5% this year. There is a high risk that the conflict in the Middle East will become a larger conflict and this could occur anytime.
“If this occurs, the price of crude oil is likely to exceed US$100 per barrel resulting in drastic increase in global inflation and the risk of global stagflation. On top of that, Malaysia have to be prepared for other possible external macroeconomic shocks as well resulting from the possible invasion of China on Taiwan, the possibility of a military conflict between China and the United States in the South China Sea, the possible widening of the Russia-Ukraine conflict, a possible new and sudden terrorist attack similar to 9/11, etc,” he said.
Liew, who is also a research fellow at the Centre for Market Education, said his GDP growth forecast is between 1% and 3% this year, which is relatively similar with the IMF’s global economic growth prediction for this year.
He said other indicators to watch that may impact the local economy include global oil prices, particularly relevant due to the geopolitical tensions in the Middle East. “Additionally, trade tensions between major economies and changes in global supply chains could also influence Malaysia’s export-oriented sectors.
“It is essential for the government to monitor these global economic dynamics closely as they will play crucial roles in determining the actual economic growth and currency strength of Malaysia in 2024,” Liew said.
UCSI University Malaysia associate professor of finance Liew Chee YoongOCBC’s Venkateswaran said the bank is awaiting the announcement regarding the targeted fuel subsidies to gauge its impact on economy, adding that its house view is for the ringgit to trade at RM4.66 against the greenback by year-end, and with its end-2Q24 forecast at RM4.74.
MARC’s Choy said the planned subsidy rationalisation may weaken consumption due to a higher cost of living, although this may be mitigated by consumers reallocating how money is being spent within their personal budgets, leading to a limited net effect.
He expects the ringgit to improve to the range of RM4.4 to RM4.7 against the US dollar towards the second half, supported by US rate cuts, the implementation of Malaysia’s structural reforms as well as a higher current account surplus caused by higher oil prices and exports.
Downside risks on the ringgit would stem from the increased likelihood of fewer Fed rate cuts in 2024, which he said may result in a persistently wider interest rate differential compared to the United States, potentially leading to more outflows of foreign funds from the local market.
On the local currency, Afzanizam said: “We are of the view that the US interest rates could be cut sometime in the 4Q24. “Our sense is that the Fed has been reducing their balance sheet size from as high as US$.97 trillion in April 2022 to currently at US$7.41 trillion as of April this year.
“That’s a US$1.56 trillion reduction in Fed’s assets which are predominantly held in the form of US Treasury notes and bonds. Our estimates indicate that the quantitative tightening could end sometime September or October this year.
“Should the inflation continue to moderate and signs of economic weaknesses become more prevalent, we shall see the Fed start to cut the interest rate by then. That’s our baseline narrative. On that note, the ringgit should appreciate towards the later part of 2024. We are projecting that the US dollar-ringgit exchange rate could end the year at RM4.65.”
Meanwhile, RAM’s Woon said the timing of interest rate cuts in the United States remains one of the key risks on the horizon. The potential market volatility and ringgit weakness could introduce more widespread imported price pressures if prolonged, he said.
