Bank Negara expects improvements in business resilience in 2H24, in line with the projected sustained expansion in economic activity.
PETALING JAYA: Malaysia’s economic landscape and financial markets may face some uncertainty which analysts say may offer promising growth prospects but also looming challenges.
After posting strong real gross domestic product (GDP) of 5.05% in the first half of 2024 (1H24), Bank Negara expects improvements in business resilience in 2H24, in line with the projected sustained expansion in economic activity.
SPI Asset Management managing director Stephen Innes however warned external factors could cloud the domestic stability.
“As always, the real story will be external factors, likely overshadowing any domestic wins,” he said, pointing to rising geopolitical tensions in the Middle East, ongoing labour disputes in the United States and economic headwinds faced by global industrial powerhouses.
“The final quarter of 2024 (4Q24) is shaping up to be much rougher than the relatively calm seas of the first three,” he told StarBiz.
Innes emphasised the potential implications of the upcoming US elections on Nov 5, noting that a Donald Trump victory could be a “game-changer”.
“His (Trump’s) plan to slap a 60% tariff on all Chinese imports would hit like a sledgehammer,” Innes noted.
Currently, the average tariff on Chinese goods is around 19%, and Innes said “tripling that would wreak havoc on China’s export sector.”
“Trump’s broader trade plan, which also features a 20% tariff on all US imports, would send shockwaves through Asian foreign exchange markets,” he added. Innes said the initial reaction would be akin to a ‘brace for impact’.
However, he noted that not all of Asia would be in the “firing line.”
“Some countries, like Malaysia, could end up being unexpected winners,” he said.
As China bears the brunt of the hit, he said manufacturing could shift to other Asian nations.
“Malaysia, in particular, could emerge as a key beneficiary in this trade reshuffle,” Innes added.
Despite these potential advantages, Innes cautioned that the overall landscape is one of uncertainty and volatility.
“Investors will need to weigh Trump’s aggressive trade stance against the potential benefits of trade diversion within Asia. While consumer sentiment would likely take an initial hit, a recovery could be on the cards by early 2025 as supply chains realign, possibly in Malaysia’s favour,” he added.
Meanwhile, Bank Negara yesterday reported that domestic financial markets remained resilient in 1H24, despite facing heightened global market volatility.
The central bank attributed this resilience to positive investor sentiment, deep capital markets and strong participation from institutional investors.
“Market stress eased after a temporary global equity sell-off in August,” Bank Negara said, adding orderly conditions were maintained with uninterrupted two-way flows in both bond and equity markets.
The central bank said that funding conditions remained favourable, supported by healthy liquidity in the government bond market and stable corporate bond credit spreads.
“Funding and liquidity positions also remained sound as evidenced by the healthy liquidity coverage ratio of 155.1% and net stable funding ratio of 115.5%,” it noted.
Bank Negara also highlighted Malaysia maintained manageable foreign exchange risks, underpinned by adequate foreign exchange buffers.
It said the ringgit appreciated by 11.4% against the US dollar since the beginning of the year till Sept 30, largely driven by external developments.
“Positive economic prospects and structural reforms, along with initiatives to encourage foreign exchange flows, will continue to support the ringgit,” the central bank said.
On the business front, Bank Negara said activities improved during the 1H24, bolstered by both global and domestic economic recoveries.
However, it said some sectors still face challenges, including rising cost pressures and slower recovery in consumer demand for certain products.
“Businesses have remained generally resilient against these challenges. Measures of overall debt-servicing capacity of businesses remained healthy while the overall share of firms-at-risk has continued to decline to 23.4% from 28.4% at the end of 2023,” Bank Negara explained.
The central bank added business loan quality remained sound, with a low impairment ratio of 2.6%.
Banks also maintained prudent buffers against potential losses, and the share of small and medium enterprises with delinquent loans continued to decrease.
Bank Negara noted household resilience also remained strong, supported by favourable economic and labour market conditions.
Household debt-to-GDP ratio stood at 83.8% while banks’ prudent lending standards were crucial in keeping household debt accumulation aligned with debt-servicing capacity.
“Household borrowings that may be at higher risk of default decreased to 4.4% of total household loans from 4.8% at the end of 2023,” Bank Negara noted, adding the median debt-to-income ratio remained stable at 1.4 times.
The central bank said the banking system remained “well-capitalised”.
“As at end-June 2024, the banking system’s aggregate total capital ratio stood at 18.4%, with capital buffers of RM136.1bil in excess of the regulatory minimum,” it noted.
Bank Negara said banks’ profitability continued to be supported by sustained interest income amid stronger loan growth and higher trading and investment income.
In terms of insurance and takaful, the central bank noted the sector remained resilient with an aggregate capital adequacy ratio of 227% and excess capital buffers of RM37.4bil.
The central bank stated financial institutions continue to prioritise technology and cyber resilience, given the growing challenges posed by cyber-related risks.
“Bank Negara continues to raise standards expected of financial institutions, including enhanced expectations on managing third-party risks, fraud countermeasures, and information technology (IT) stress testing,” it said.
Much like Bank Negara, economist Geoffrey Williams pointed out that domestic macroeconomic conditions are stable with low inflation and the overnight policy rate set to hold at 3% for the rest of the year.
“While Employees Provident Fund’s Account 3 withdrawals have reached about half of the expected RM25bil, this is helping growth, it will not significantly boost growth nor lead to inflation,” economist Geoffrey Williams noted in a reply to StarBiz.
Looking ahead, Williams noted that Malaysia “might see growth moderating in 2H24, but overall growth will be inline with official forecast range of between 4% and 5%.”
Meanwhile, high-net-worth investor and former investment banker Ian Yoong Kah Yin highlighted the GDP’s advanced estimates for 3Q24, which is expected to be announced alongside Budget 2025 on Oct 18, could surprise on the upside.
Commenting on the stock market, Yoong said many small mid-cap stocks are currently under selling pressure, with a lack of interest from retail investors.
“The daily traded value by domestic nominees and retail investors declined by 29% and 23% month-on-month respectively in September,” he said, noting this as a “golden opportunity for investors looking for alpha.” For now all eyes will be on the upcoming budget, he added.
