There was a myriad of incidences across the year 2023, both positive and challenging, which has impacted the economy and the livelihoods of all Malaysians at a time of challenging and volatile global headwinds.
Malaysia met with a gradual falling inflation rate of 1.5% in Nov and a corresponding consumer price index (CPI) which edged lower to 1.8% in Oct, and this was followed by a lower unemployment rate of 3.4% with the number of employed persons rising year-on-year.
Another light at the end of the tunnel was when Bank Negara Malaysia Governor Datuk Abdul Rasheed Ghaffour said recently, “Despite the challenging global environment, the Malaysian economy is projected to expand by around 4% in 2023 and 4% – 5% in 2024.”
Economy
The Malaysian economy continues to expand (from 3.3% in the third quarter of 2023 (2Q 2023: 2.9%) with growth anchoring on resilient domestic demand. Household spending remained supported by continued growth in employment and wages.
Meanwhile, investment activity was underpinned by the progress of multi-year projects and capacity expansion by firms. Exports remained soft amid prolonged weakness in external demand. This, however, was partially offset by the recovery in inbound tourism.
The services, construction and agriculture sectors remained supportive of growth on the supply side. This was partly offset by the decline in production in the manufacturing sector given the weakness in demand for electrical and electronic (E&E) products and lower production of refined petroleum products.
Inflation
Headline inflation continued to moderate seen in both non-core inflation and core inflation. For non-core inflation, fresh food and fuel contributed to the decline. Core inflation declined further to 2.5% (2Q 2023: 3.4%) but remained above its long-term average (2011-2019 average: 2%).
The moderation in core inflation was largely contributed by selected services, including food away from home, expenditure in restaurants and cafés, and personal transport repair and maintenance.
Exchange Rates and The Ringgit
Domestic financial conditions were driven mainly by evolving expectations over the global monetary policy path. In particular, the strength of the US job markets has prompted expectations for a tighter-for-longer policy stance by the US Federal Reserve and subsequently higher US and global interest rates.
In contrast, the People’s Bank of China undertook further monetary policy easing to address weaker-than-expected growth in China, which dampened investor sentiments towards the region.
Against this backdrop, the US dollar appreciation extended, and the Malaysian ringgit ended up depreciating by alongside other regional currencies. However, the ringgit appreciated by 1.4% against a basket of major trading partner currencies, as indicated by the ringgit nominal effective exchange rate (NEER).
MIDF Research expects emerging markets’ (EM) currencies, including the ringgit, to benefit from reversing fund flows into riskier markets once the appeal for the safety of the US dollar subsides.
The ringgit weakened with minor spikes over the year against the US dollar, presently rising to 4.6275/6330 against the greenback on Dec 27 due to a lack of major data in the US.
It was reported that the ringgit has fallen to its lowest level in 25 years against the US dollar, the weakest since the Asian financial crisis in 1998.
Financing Situations
The growth in credit to the private non-financial sector improved to 4.2% (2Q 2023: 3.7%), supported by higher growth in business loans (1.6%; 2Q 2023: 0.5%) while outstanding corporate bonds growth was sustained at 5% (2Q 2023: 4.9%). The higher business loan growth was driven mainly by improving growth in working capital loans to non-SMEs. Of note, SME loan growth remained forthcoming (6.7%; 2Q 2023: 6.4%). For households, outstanding loans expanded by 5.4% (2Q 2023: 5.1%), reflecting steady growth across key purposes.
Going forward, growth will remain resilient despite external headwinds on account of firm domestic demand.
BNM Governor Datuk Abdul Rasheed Ghaffour said:” Growth will continue to be driven by the expansion in domestic demand amid steady employment and income prospects, particularly in domestic-oriented sectors. This growth performance along with other favourable economic developments would provide support to the ringgit.”
Improvements in tourist arrivals and spending are expected to continue. Investment will be supported by further progress of multi-year infrastructure projects and the implementation of catalytic initiatives. Measures under Budget 2024 will also provide additional impetus to economic activity.
The growth outlook remains subject to downside risks stemming primarily from weaker- than-expected external demand as well as larger and more protracted declines in commodity production. However, there are upside risk factors such as stronger-than-expected tourism activity, a stronger recovery from the E&E downcycle, and faster implementation of existing and new investment projects.
OPR Rate
Bank Negara Malaysia (BNM), on Nov 2, 2023 maintained the overnight policy rate (OPR) at 3% despite the ringgit plunging to a 25-year low against the US dollar.
BMI, a Fitch Solutions company, expects Bank Negara Malaysia (BNM) to hold its overnight policy rate (OPR) at 3.0 per cent through the end of 2024.
It noted that the central bank had on Nov 2 for the third consecutive meeting, left the OPR unchanged, which was in line with its consensus and expectations.
Trade
For the period of January to November 2023, trade declined by 7.5% to RM2.413 trillion compared to the same period last year. Exports decreased by 7.8% to RM1.308 trillion, imports were lower by 7.1% to RM1.105 trillion and trade surplus edged down by 11.3% to RM202.49 billion, respectively.
It was a different scenario in the few two months of the year where trade performance continued its upward trajectory in February 2023. Trade registered double-digit year-on-year (y-o-y) growth, increasing by 11% to RM204.99 billion compared to February 2022. Exports grew by 9.8% to RM112.28 billion and imports expanded by 12.4% to RM92.71 billion. Trade surplus was recorded for 34 consecutive months since May 2020, valued at RM19.56 billion. Trade, exports and imports registered the highest monthly value for February.
Nonetheless, On Dec 6, Minister of Investment, Trade and Industry (MITI) Tengku Zafrul Tengku Abdul Aziz said Malaysia’s investment facilitation efforts have helped attract RM225.0 billion in approved investments across the services, manufacturing, and primary sectors for the period from January to September 2023. This 6.6% increase in value, backed by 3,949 investment projects, is set to unlock 89,495 new job opportunities, showcasing Malaysia’s resilience on the back of prevailing global operational uncertainties across various industries.
Foreign Direct Investment (FDI) constituted 55.9% of the total approved investments at RM125.7 billion. The Netherlands emerged as the leading source of FDI, contributing RM35.0 billion. Notably, Malaysia also attracted substantial investments from Singapore (RM20.4 billion), the United States (RM18.9 billion), the People’s Republic of China (PRC) (RM11.6 billion), and Japan (RM11.2 billion).
This diversity in the investors’ base highlights Malaysia’s universal appeal as a strategic hub, particularly for the ASEAN region.
Domestic Direct Investment (DDI), on the other hand, contributed RM99.3 billion, or 44.1% of the total approved investments. This represents an impressive increase of 45.2% year-on-year, a testament to local players’ confidence in the country’s prospects.
Commodities
Malaysia’s major commodities suffered a setback in 2023 despite a weaker ringgit as it was overshadowed by demand deficits due to global economic uncertainties arising from the ongoing geopolitical tensions. It was further hampered by extreme weather conditions and the issue of labour shortages, which resulted in lower production in all the four major commodities such as palm oil, rubber, cocoa and pepper.
Budget 2024
Budget 2024 themed “Economic Reforms, Empowering the Rakyat” was tabled by Prime Minister Datuk Seri Anwar Ibrahim in Parliament on Oct 13 involving an allocation of RM393.8 billion which was the highest budget ever tabled in the history of Malaysia. From the total, an allocation of RM303.8 billion was for operating expenditure, RM90 billion as development expenditure while RM2 billion was provided as contingency savings.
In his speech, Anwar stressed that only by reducing the country’s deficit and liabilities that the government is able to restore its sustainable fiscal position.
Anwar also took aim at Malaysia’s broad subsidies, saying that such subsidies have benefited the rich. “Economic policy should be directed towards economic growth and equality. However, what has happened is that the amount of subsidies (given out) has benefited the rich.
“It is hoped that by improving and plugging the leakages in the subsidy system, that the proceeds could be passed on to the public, including wage increments for the working class,” said Anwar.
He added that the targeted approach to the subsidies will begin next year.
Progressive Wage Policy
On 30th November 2023, Economic Minister, Rafizi Ramli tabled the much-anticipated White Paper on the progressive wage policy to Dewan Rakyat. The policy was set to raise the salary of Malaysian employees earning less than RM5,000 monthly. The program was proposed to be on voluntary participation from Malaysian companies focusing on micro, small and medium enterprises. Employers that opted in will receive monetary incentives (between RM200 – 300 for each employee per month for 12 months). The program was earmarked to cost RM2.0 billion, which may slightly lift Malaysia’s overall balance deficit from the Budget 2024’s estimated GDP of 4.3%.
12th Malaysia Plan Mid Term Review
On Sept 11, 2023, the government announced the 12MP-MTR to focus on enlarging the domestic demand share in the economy.
Among the key points of the review was the tough road for compensation of employees (COE) where as the expansion rate of COE was slower at +4.6% per annum in post-pandemic period against +8.9% 12MP target rate. For the COE to reach 40% by the next two years, the labour income will have to expand by +14.3% per annum and GOS growth rate to be suppressed to low a +1.5% while Net Taxes to jump by +54.1%.
On the fiscal front, the government indicated plans to spend at least RM90b per year in 2023-2025 to support the country’s economic development. As such the ceiling has been raised by RM15b to a total of RM415b for the 5-year period. We view this as the government’s intention to play an active role to directly support the economy and to ensure the country’s GDP growth would be no less than 5%.
The government is developed the Capital Gains Tax (CGT) as a new tax to be implemented in 2024, with a possibility of the re-introduction of GST being considered as part of the measures to boost fiscal revenue.
12MP MTR supports government efforts to plan and implement a sustainable national development agenda in line with the aspirations of Malaysia Madani, Ekonomi Madani: Memperkasa Rakyat framework and Sustainable Development Agenda 2030. 12MP will be realigned with the Ekonomi Madani vision, which aims to empower and rejuvenate the national economy over a 10-year period.
National Energy Transition Roadmap (NETR)
Malaysia is committed to low-carbon development aimed at restructuring the economic landscape to a more sustainable one. In this context, the National Energy Transition Roadmap (NETR) sets the goal to accelerate energy transition and change the way energy is generated to improve climate resilience.
NETR has developed the Responsible Transition (RT) Pathway 2050 to shift Malaysia’s energy systems from fossil fuel-based to greener and low-carbon systems. The Total Primary Energy Source (TPES) modelling indicated that the nation’s energy demand will increase marginally at 0.2% annually from 95 Mtoe in 2023 to 102 Mtoe in 2050. The RT Pathway 2050 has also shown promising decarbonisation results as evidenced by the phasing out of coal and the reduction of fossil-fuel reliance from 96% in 2023 to 77% in 2050.
Natural gas is set to be not only a transitional fuel, but also the primary contributor of TPES at 57 Mtoe (56%) followed by renewables that include solar, hydro and bioenergy, which collectively contribute 23% of TPES in 2050 from a mere 4% in 2023. NETR outlines 50 initiatives under the six energy transition levers and five enablers, in addition to the 10 flagship projects and initiatives announced in July 2023.
The energy transition financing will be undertaken through a combination of grants, loans, rebates, incentives, and other investments to support the whole-of-nation approach. NETR aims to power Malaysia’s future by unlocking potentials in new growth areas and delivering progress and prosperity to households and businesses
Cabinet Reshuffle
Malaysian Prime Minister Anwar Ibrahim made major changes to his cabinet on Tuesday, appointing the chief of the country’s largest state pension fund as second finance minister in an effort to rebuild trust after a year in office.
Anwar, who suffered a dip in public opinion polls in recent months amid concerns over the economy, inflation and the slow pace of promised reforms, said the economy, health and education were his government’s top priority.
“The ministry of finance, other than being headed by me, must have a strong professional team to ensure we are on the right track and focus on the economy,” Anwar, who is also finance minister, told a televised press conference.
He brought back the position of second finance minister, appointing to the job Amir Hamzah Azizan, the chief executive of the Employees’ Provident Fund (EPF).
