Economy Is Expected To Grow 5.5% to 6.0% in 2022: Kenanga

Malaysia’s overall, the economy is projected to expand by 5.5%-6.0% (point forecast: 5.7%) in 2022 (2021F: 3.5%-4.0%), Kenanga Research said in a note.

It said that Malaysia’s GDP growth is expected to expand further to 6.6% in the 1Q22 (4Q21F: 4.0%-6.0%) on broad-based improvement led by the services and manufacturing sector coupled with sustained growth in private consumption.

On the labour market, the research house said that it is expected to improve with the unemployment rate projected to fall to 4.1% in 1Q22 and to settle at 3.9% for 2022 (2021F: 4.6%), hitting full employment level although not fully back to its pre-pandemic level (3.3%) yet.

Kenanga said that rising raw material prices, supply shortage and Malaysia’s further reopening measures will continue to boost consumer spending and keep inflation high. We project the inflation rate to slightly moderate to 2.4% in 2022 from an estimated 2.5% in 2021, mainly due to base effects.

On overnight policy rate (OPR), it said that BNM is expected to keep it unchanged at 1.75% until at least 3Q22 to secure growth recovery before raising the interest rate by a total of 50 bps to settle at 2.25% by the end of 2022 amid an improvement COVID-19 situation.

The Research house said that fiscal policy is expected to remain expansionary to secure a post-pandemic recovery. Fiscal deficit is projected to narrow to 6.1% (MoF: 6.0%; 2021F: 6.6%). Meanwhile, we project the federal government debt to GDP ratio to increase to 66.6% (2021F: 65.2%), with statutory debt well below the new 65.0% limit.

On the safe-haven dollar outlook in 2022, It expects the ringgit to modestly outpace the strong USD trend on the back of a more positive near-term growth outlook. By the end of 1Q22, USDMYR is projected to strengthen to around the 4.15 level and to average around 4.13 (end-2022F: 4.10) for the whole year.

The research house said that foreign fund inflows into the domestic bond market will likely soften in 2022, due to the global normalisation of monetary policy and particularly amid the Fed’s accelerated policy tightening. “We target the 10Y MGS yield to reach 3.90% by year- end versus a projected US 10Y Treasury yield of 2.05%,” it said.

On some of the risks for the economy, it said that there is a rising risk of renewed lockdown measures amid the current surge in COVID-19 cases globally that may change the global economic recovery narrative in 2022.

It said that Malaysia’s transition to the state of endemicity is expected to face a bumpy road due to the emergence of the Omicron variant and rising COVID-19 uncertainties. However, with high compliance to SOPs, regular self-testing and high vaccination rate, Malaysia may potentially enter the endemic stage as early as 2Q22.

On some of the potential risks for the economy, it said the lingering threat of COVID-19 and probable new variants, entrenched high inflation due to prolonged global supply chain disruptions, and the return of domestic political risk as a snap general election becomes increasingly likely.

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