Domestic GDP growth is expected to moderate in 2023 with official government forecast of 4.5% (2022: 8.7%), underpinned by diversified economic profile, private consumption and investment, strong labour participation, and still accommodative fiscal and monetary policy.
The balance of risks is seen to be fairly even, with downside from global rates tightening and banking sector turmoil but potential upside from China reopening and easing of supply chain pressures. On potential US recession risk, the domestic economy has reasonable diversification across the sectors, trading partners and products.
Local banking system is seen to be robust and supportive of a healthy credit expansion.
Domestic inflation last year experienced upward pressures arising from a combination of supply side issue, commodity price shock and demand recovery, but headline CPI had peaked in August and started to moderate, said Maybank Research on the findings presented at the recent Financial Market Association Malaysia (FMAM).
The 7th Investor Engagement Series “Malaysia: Resilience in an Uncertain World” held in collaboration with Bank Negara Malaysia and the Ministry of Finance on 21 March, surmised that going into 2023, the official CPI forecast ranged by 2.8% – 3.8% as the abovementioned drivers ease.
Subsidies and administrative price controls helped contain price pressures from becoming unhinged, and any future adjustments are expected to be gradual. Inflation expectations remain well anchored. Productivity improved and collective wage bargaining is not broad-based in Malaysia.
Monetary Policy
BNM started rate normalisation early at a gradual and measured pace. The current monetary policy remains accommodative. The conditional pause in January allows policy makers to assess the effect of monetary transmission.
Unlike many developed economies, Malaysia doesn’t face a high inflation problem, allowing BNM to take intermittent pause on OPR at a level that is not far from restrictive zone should inflation surprise to the upside while being able to respond to potential external shocks. Monetary policy is recalibrated based on domestic macroeconomic factors.
There isn’t a particular target level for terminal OPR, and it is not determined by historical OPR levels nor the interest rates in other countries.
The long-run real rate for Malaysia is about 1%: considering long-term average OPR of about 3% and inflation of about 2%. Policy makers do estimate neutral rate to complement policy making in assessing the theoretical tightness or looseness, but this is not the primary factor.
Instead, other practical considerations such as the impact of current rate on borrowing and risk-taking behaviour provide a better gauge.
Impact of Weaker Ringgit on Inflation
Past experiences suggest a 0.1-0.3ppt impact on core inflation from a 5% depreciation in the Ringgit.
However, actual implications vary depending on the prevailing conditions such as the persistency of FX weakness, state of domestic demand and supply configuration of particular goods. Overall, the impact is not significant.
Financial Market and Banking System
The Ringgit weakened against the USD last year due to challenging market conditions, narrower rate differentials vs. developed markets and portfolio outflows, but domestic FX and bond markets continued to function in an orderly manner.
Also, the Ringgit move was largely in line with regional currencies. BNM stepped up surveillance and maintained effective communications to maintain public confidence.
The Ringgit is a flexible currency and adjusts in sync with fundamentals. Subject to market conditions, BNM conducts open market operations and provides liquidity as needed.
Maybank Research cite the Silicon Valley Bank (SVB) collapse has no major impact given very little direct exposure of the Malaysian financial market and a similar situation is unlikely to occur in Malaysia.
The domestic banking system remains well capitalised with strong liquidity buffers. A gradual normalisation by BNM reduces the risk of large MTM losses in bond portfolios unlike some US banks which put pressure on their positions.
BNM liabilities largely arise from financial market operations. Regarding the pre-determined short-term outflows which include USD16.3 billion in FX loans, securities & deposits, as well as USD26.5b net short in the FX forward book, these potential net drains can be sufficiently met by foreign reserves of about USD114 billion.
These liabilities arise from financial market operations where BNM takes FX deposit from financial institutions and injects liquidity via FX swaps which form part of the BNM toolkits in managing domestic liquidity.
This also reflects the depth of FX liquidity in the onshore market. These tools are neither new nor unique to BNM and will continue to be deployed depending on the prevailing condition.
On the financial market development and liberalisation, the regulator will continue to develop the onshore market by deepening market liquidity, broadening the instruments and widening participations as well as having more transparency for foreign investors, although the pace and extent of market liberalisation will need to be balanced against the financial stability and macro-prudential goals.
Fiscal Position, Taxes and Subsidies
The government remains committed to fiscal consolidation, targeting a reduction in deficit ratio to 5% in 2023 (2022: 5.6%), around 4% in 2024 then to 3.2% by 2025.
Achieving the 4% target in 2024 looks realistic as one-off item like the USD3b 1MDB debt repayment under Budget 2023 will not repeat, but achieving 3.2% in 2025 likely requires some revenue measures.
Cukai Makmur was reiterated as being one-off. Subsidy rationalisation forms a key part to consolidation but any adjustment will likely be gradual.
On the electricity subsidy, high-usage consumers and large corporations account for a significant portion of the subsidies and may be subject to review but the interest of lower-income households will be guarded.
In a way, this encourages high-usage users to invest in energy efficiency and renewables. Leakages in diesel due to a wide gap between the subsidised and non-subsidised prices need to be addressed.
As part of the reforms agenda, the government will table Fiscal Responsibility Act and Government Procurement Act. · The re-tabled Budget is seen as realistic.
The projected MYR164b direct tax revenue for 2023 is on track YTD with about MYR30b collection in 2M23. On a positive note, the IPIC USD1.8b settlement could provide some revenue upside.
A higher amount of subsidy under the re-tabled budget is largely due to MYR7 billion of electricity subsidy which wasn’t yet incorporated in the Budget tabled back in October.
Malaysia’s tax base needs to be broadened given the low tax revenue/GDP ratio of about 12%.
Measures include reducing leakages and a study on how to evolve the SST, focusing on consumption such as luxury tax. It is not the right time to reintroduce GST as the economy has just recovered from the pandemic and to avoid impacting the low-income group, it said.
