CGSCIMB estimates Malaysia’s 2024F GDP growth to be at 4.6% yoy (2023: 4.0%) owing to potential recovery in external demand in tandem with sustained domestic demand.
The research house’s Economics Focus released today (Dec 8) cited encouraging labour market as well as improvement in tourism-related sectors will continue to anchor the latter and they expect external demand to stabilise following improved supply chain and slow demand recovery. Challenges to growth are 1) policy shift to more targeted subsidies and 2) global economic headwinds affecting trade industries. For 2023F, with an average 3.9% yoy YTD growth plus an estimated growth of 4.4% in 4Q23F, CGSCIMB maintains their 2023F GDP growth rate forecast at 4.0% yoy for Malaysia.
Income growth and cash transfer to support consumption
CGSCIMB projects private consumption growth to expand to 6.5% yoy in 2024F, from 4.9% in 2023F, largely due to an increase in wage growth as well as improvements in tourism-related activities.
The Progressive Wage Model is expected to start its pilot run in June 24 as one of the government’s efforts to increase the national disposable income.
Meanwhile, as the employment environment is improving, the Mercer’s Total Remuneration Survey 2023 predicts that the average pay in Malaysia will rise by 5.1% yoy in 2024F (2023: 5.0%).
Further, one-off bonus to civil servants and pensioners together with cash transfers of extra RM2bn are expected to support consumption.
Nevertheless, the downside risk to consumption ahead is the subsidy rationalisation plan where the government intends to implement a targeted subsidy programme throughout 2024. On the flip side, the government proposed an offsetting measure in the form of cash handouts to shield the net income of those affected, especially towards the lower income groups.
They also anticipate further boost in tourism-related industries after the Tourism Ministry announced 26m tourist arrivals up until 15 Nov surpassing the 2023F targets of 18m. With the recent announcement of 30-day visa-free entry for citizens of China and India until Dec 2024, they project tourism arrivals to increase at a higher pace next year.
As the research house anticipates more flights to be available to accommodate higher international travel demand, this will improve Malaysia’s tourist receipts in 2024F.
Investments to rise, supported by government spending
CGSCIMB anticipates Malaysia’s gross fixed capital formation (GFCF) to grow by 6.1% yoy in 2024F compared to 4.3% in 2023F to incorporate measures outlined in the Ekonomi Madani, New Industrial Masterplan 2030, National Energy Transition Roadmap and the review of the 12th Malaysia Plan (12MP).
In fact, development expenditures in 2024 are higher at RM90bn than the historical average (2000- 2020: RM48.5bn). They expect investment growth to be supported by the construction sector, bolstered by infrastructure and utilities projects as well as construction of non-residential buildings, schools and upgrading of health facilities as outlined in Budget 2024.
Notable mentions include the construction of additional lanes for PLUS highway, upgrading of federal road networks, LRT and MRT construction, Pan Borneo highway, as well as ECRL.
They also saw an increase in loan growth application for manufacturing and construction as well as an increase in capital goods imports on a mom basis in 2H23, which they believe shows improving business confidence.
Meanwhile, the services sector will continue to be driven by vibrant tourism-related activities as well as resilient consumer activities. To note, their projection is hinged upon moderating input costs, improving supply chain performance and an increase in travel demand.
Exports to rebound amid better trade conditions
CGSCIMB projects real exports to rebound by 1.8% yoy in 2024F (2023F: -7.5%) (nominal exports at 6.7% in 2024F; 2023F: -8.0%) amid better international trade conditions and an improved manufacturing sector.
They believe that with global semiconductor sales recording a narrower contraction yoy in Sep 23, improved demand in the electric & electronic (E&E) sector could be on the cards. In fact, World Semiconductor Trade Statistics recently upgraded its 2024F growth forecast of 13.1% yoy from 11.8% previously (2023F: -9.4% yoy) which will support the demand for E&E products. The agriculture sector is expected to grow following improving labour conditions as well as expected minimal impact from El Niño on domestic plantations.
Malaysia is also committed to increasing palm oil exports to China (the second biggest exports market) in 2024 to 3.4m tonnes (2023F: 3.14m tonnes). Following this, they anticipate the positive terms of trade as well as improvements in tourist receipts in 2024F will support Malaysia’s current account surplus of 2.2% of GDP (2023F: 1.6%).
Continuing on the path of fiscal consolidation
They believe the government can consolidate its fiscal deficit from 5.0% of GDP in 2023F to 4.3% of GDP in 2024F as the expectations of subsidy rationalisation will ease the overall fiscal balance cushioned by nominal GDP growth.
The fiscal target is also somewhat a midpoint towards the 3.5% targeted for 2025F outlined in the 12MP midterm review.
Over the longer term, however, issues over low government revenue collection still need to be addressed. The most noticeable revenue-raising move is the increase in the service tax rate from the current 6% to 8%, with some exemptions, which strengthens the resolve to lower the fiscal deficit, in our view.
The capital gains tax (which is 10% for unlisted shares) and the luxury goods tax (which is between 5% and 10%) are two further tax accretion mechanisms to be implemented next year.
CPI inflation up and with significant upside risk
CGSCIMB projects higher CPI inflation of 3.2% yoy in 2024F (2023F: 2.8%) to incorporate potential subsidy rationalisation which includes the assumption of: Partial removal of electricity tariff rebate in Jan 24 to top 10% households and a hike in services tax in Mar 24.
They expect this to impact roughly around 7% of the total CPI items and lead to +10bp to the overall CPI growth
Fuel price adjustments with diesel Fleet Card implementation in 2Q24, and RON95 adjustment in 3Q24. Both are assumed to still be partially subsidised.
Limited impact from other measures such as luxury tax (expected in May 24), as well as other price control measures such as eggs and sugar.
Crucial to note is that our inflation projection is subject to further clarifications on the government’s plan to reevaluate price caps and subsidies in 2024F.
At the extreme, the research houses calculations show that 2024F CPI inflation could go as high as 5.5% yoy. However, they believe the government will be cautious in executing subsidy rationalisation as any drastic measures will impact the economy.
BNM to remain steadfast in stabilising market sentiment
They also expect BNM to maintain the Overnight Policy Rate (OPR) at 3.00% by end 2024F. Despite this, BNM may face greater challenges next year. Even if the external environment gradually recovers, adjustments to subsidy and fiscal spending will likely mar domestic developments.
They think BNM will need to balance the potential for weakening consumption if subsidy rationalisation is overextended, while taking heed of potential resurgence in inflation, driven by cost.
In terms of currency, BNM may utilise other approaches to handle currency volatility. Further, international reserves remain ample, sufficient to finance 5.3 months of imports of goods and services.
With that, CGSCIMB estimates an end-2023F RM/US$1 rate of 4.6 and 4.4 for end-2024F and think the ringgit depreciation is probably nearing its end as we may have already seen the peak of US interest rates.
Key downside risks include 1) prolonged US inflation and 2) businesses and exporters holding on to foreign currency for longer for hedging due to interest rate differentials.
