Malaysia: Muted outlook for second half

PETALING JAYA: Prime Minister Datuk Seri Anwar Ibrahim, whose popularity is about to be tested in the upcoming elections in six states, faces increased challenges as the Malaysian economy is likely to slow down in the second half of 2023 (2H23).

The softer economic outlook, amid worries about another round of interest rate hikes, adds to the list of issues that Anwar must address, which includes the impact of a weak ringgit.

Just a day earlier, S&P Global Market Intelligence reported that Malaysia’s purchasing managers’ index (PMI) dipped to 47.7 in June, marking a contraction in manufacturing activities for the 10th straight month.

Bank Islam Malaysia Bhd chief economist Firdaos Rosli warned that Malaysia’s growth would decelerate to below pre-pandemic levels if the government failed to provide the “right fiscal push”.

Amid mounting challenges, Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid told StarBiz that the economy could grow by about 3.8% in 2H23.

In comparison, the economy may have grown by over 5% in the January-June 2023 period, Mohd Afzanizam predicted.

The anticipated slower growth in the second half is likely because the external sector will continue to be a drag to growth, while consumers and businesses will be cautious in their spending.

Major economies such as the United States, Europe and China are also affected by slower growth, as weaker global demand and previous aggressive interest rate hikes weigh down on business activities and household consumption.

China, the world’s largest exporter of goods, saw its exports shrink for the first time since the start of the year by 7.5% in May 2023.

On Monday, Reuters reported that the closely-watched spread between the two-year and 10-year US Treasury note yields hit the deepest inversion since 1981, as financial markets became concerned that an extended Federal Reserve rate hiking cycle would tip the United States into a recession.

Fortunately in Malaysia, the easing inflationary pressures have provided a reprieve for the government which is trying to bring the national fiscal position under better control, including via changes in subsidy distribution.

“My full-year forecast for gross domestic product (GDP) growth is at 4.5% as the first half of this year is expected to remain above 5%,” according to Mohd Afzanizam.

Bank Negara’s official GDP guidance was in the range of 4% to 5% for 2023.

“We have seen the recent US-ISM Index for the manufacturing sector fall to 46 points in June and it has remained below the 50-point demarcation line for eight months in a row.

“So the onus is on Malaysia’s domestic demand to keep the economy growing within the 4% to 5% range this year,” Mohd Afzanizam said.

Economist Manokaran Mottain also expects slower growth in 2H23, although he said the possibility of a recession was “unlikely”.

“The weaker ringgit and softer export demand will surely affect Malaysia’s growth in the second half.

“In addition, political tension in the country would make investors wait and see until the state-level elections are over before they proceed with their investments. This would put pressure on GDP growth as well.

“The high cost of doing business, especially after the implementation of the RM1,500 minimum wage went full swing recently, may also have an impact on growth if businesses don’t manage to raise productivity in tandem,” he added.

However, Manokaran said domestic consumption will continue to support GDP to an extent, amid pressures from other areas of the economy.

When asked whether Bank Negara’s GDP projection for 2023 was attainable, Manokaran said it was “possible but around the lower range”, hinting at a growth of slightly above 4%.

“Given the current economic conditions, there is no need for a hike in the overnight policy rate in 2H23.

“It is not the right time,” he said.

Meanwhile, Bank Islam’s Firdaos said the government’s biggest challenge was to sustain Malaysia’s growth rates seen in the pre-pandemic era.

“And of course, it has to start with growth in 2023.

“We’re looking at a growth of 4.5%, yet we think actual growth should come in at one or two percentage points higher with the right fiscal push.

“The government seems to adopt the business-as-usual economic model, so naturally Malaysia’s growth momentum will decelerate to a level lower than in pre-pandemic levels,” he said.

Firdaos also said that the economy cannot wait for the state elections.

“Things are moving rather quickly and decisions must be taken yesterday, not tomorrow,” according to him.

In a report issued last week, Bank Islam opined the country’s consumer price index would decelerate in 2H23, amid base effects.

The bank projects the headline inflation in 2023 to average at 3% as compared to 3.4% in 2022.

“However, considering the government’s fluid stance on price controls and subsidies, risks are biased to the upside, with inflation likely to edge up should subsidy rationalisation be implemented or any changes in the indirect tax system in 2H23,” said the report.

Bank Islam also added that the declining external demand remains the primary risk of a slowdown of Malaysia’s export growth and economic outlook for 2H23.

“The pessimism surrounding the global economy will lead to cautious steps across the globe.

“However, there is time for our trade to recover if the global economy picks up and lifts sentiments, following the stabilising conditions of global financial markets and an early recovery of the eurozone recession,” it said.

On the ringgit, Bank Islam believes the local note could end the year at RM4.28 against the US dollar, following its resilient domestic outlook.

The ringgit closed at RM4.65 yesterday.

“Our projection is further supported by optimism about China’s reopening based on the positive outlook from the multilateral development banks’ latest stance and the unveiling of a new economic narrative in the third quarter of 2023.

“That said, our current projection may change should the evolving conditions of the global economy become more rapid in 2H23,” it said.

Bank Muamalat’s Mohd Afzanizam foresees the ringgit to settle at RM4.30 against the greenback by end-2023.

“This will greatly depend on the US’ Federal Reserve. If they decide to be more dovish, I think it will reverse the ringgit’s weakness.

“Based on the latest projection by the Federal Reserve, they are looking at the federal funds rate to be at 4.6% and 3.4% in 2024 and 2025 respectively.

“So that would mean monetary easing is likely to occur next year onwards,” he said.