KUALA LUMPUR: Ongoing economic reforms in Malaysia are helping to instil investor confidence in the country’s economy.
This is expected to support fund inflows into Malaysia’s capital market and the strength of the ringgit.
CIMB Research said in its report yesterday that despite being work in progress, the initial implementation of reform measures already had a positive impact on sentiment.
“The nascent rollout of policy changes and a pragmatic approach burnishes the government’s reform credentials and defuses concerns that fragmented politics post-15th General Election are an impediment to structural changes,” it said.
“Alongside improving investor sentiment and potential US policy rate cuts, the crystallisation of reforms and a firmer standing of Malaysia’s domestic fundamentals are catalysts to our constructive outlook on Malaysian Government Securities’ (MGS) yields and the US dollar-to-ringgit exchange rate,” it added.
The brokerage pegged its 12-month target for the benchmark 10-year MGS yield at 3.75% to 3.80%, and the exchange rate at RM4.53 per US dollar (fair value: RM4.30).
CIMB Research’s report was written in conjunction with the recent investor engagement seminar in Singapore that it co-organised, focusing on topics covering Malaysia’s growth and inflation drivers, fiscal sustainability, reform efforts, investments and the ringgit.
Held on July 26, the seminar was headlined by Finance Minister II Datuk Seri Amir Hamzah Azizan and Bank Negara governor Datuk Shaik Abdul Rasheed Abdul Ghaffour.
According to CIMB Research, Malaysia’s economy remained on target, with gross domestic product (GDP) growth likely to reach the upper-end of Bank Negara’s projection of 4% to 5% for 2024.
The robust growth would likely be aided by the country’s resilient labour market and household spending, ongoing multi-year investments, higher foreign direct investment (FDI) realisation, trade recovery and improving tourism.
CIMB Research expected RON95 petrol subsidy cut to be forthcoming but policy design and timing remained crucial.
“Reforms are fundamental with backing from the Prime Minister and cabinet, but need to be accompanied by mechanisms that can manage consequences to vulnerable segments, it said, noting RON95 petrol subsidy change would be a litmus test.
“The revealed preference for policy design that broadens public acceptance, raises reform stickiness and minimises the risk of reversals, reinforces our view that RON95 price adjustments will be gradual and the impact on inflation (less than 3.5%) and monetary policy manageable,” it added.
Cited as a key lever to delivering subsidies in a more targeted manner, the readiness of the Central Database Hub, which in Phase 2 of data analysis, suggested the earliest timeline for RON95 changes would be the fourth quarter of 2024, coinciding with measures to shore up incomes – such as minimum wage adjustments and civil servant salary hikes, CIMB Research said.
It noted that while the goods and services tax (GST) was not part of the government’s reform agenda at the moment, GST might be considered as part of the government’s broader tax overhaul in the future.
Meanwhile, it pointed out that the ringgit had thus far outperformed its peers as coordinated action moderated pressure from rate differentials, global developments and geopolitical risks.
“Bank Negara has observed healthier two-way foreign-exchange flows amid investment income and export conversions in addition to the fast-track flexibility for corporates to invest aboard, reiterating that interventions are market-driven and not a prelude to capital controls,” CIMB Research said.
“The build-up of short forward positions is aimed at managing domestic ringgit liquidity,” it added.
CIMB Research noted that there were ongoing efforts by the government to direct liquidity to investments to unlock growth.
It explained that government-linked investment companies had the capacity to deploy RM400bil to RM500bil into investments over the next five years, so the initiatives are key to develop incentives and regional ecosystems (for example, electrical and electronic, Johor Special Economic Zone and Forest City and industrial parks), match funding with projects, and extend FDI mileage with onshore supply chains.
