Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) at 3.00% for the fifth consecutive session of the Monetary Policy Committee (MPC) meeting at its second MPC meeting of this year on Mar 6-7, amid a green shoot of growth pick up, tame inflation as well as stabilisation and improvement of the Ringgit vs USD following recent “coordinated communications and actions” by BNM and MOF.
Maybank Investment Bank (Maybank IB) in its BNM Monetary Policy note today (Mac 7) maintain their view of OPR staying at 3.00% this year.
MPS maintains view on growth and inflation…
In comparing the latest and previous MPS, BNM kept the assessment of continued global growth albeit moderately, with improvement in regional economies on the back of stronger global as global tech upcycle gains momentum, despite modest China growth.
However, risk to global growth outlook remained biased to the downside reflecting the inter-connected risk of escalations in geopolitical tensions, higher-than-expected inflation and financial market volatility.
Going forward, Maybank IB said, BNM also retained its expectation of firmer Malaysia’s economic growth in 2024 – as per current official real GDP growth forecast of between +4.0% and +5.0% (2023: +3.7%) on export recovery and resilient domestic demand – mainly as employment and wage growth plus higher tourist arrivals and spending underpins consumer spending, as well as progress in the multi-year existing and new infrastructure projects plus implementation of catalytic initiatives under master plans announced in 3Q 2023 (e.g. National Energy Transition Roadmap; National Industrial Master Plan 2030) and realisation of the robust approved investments over the past three years which will support investment activities.
Domestic economic outlook is balanced between the downsides to external demand and commodity output, and the upsides from greater spillovers from E&E/tech recovery, stronger than expected tourism activity, and faster implementation of masterplans’ projects and initiatives.
Meanwhile, inflation stays tame as per the sub-2% YoY monthly headline and core inflation since Sep 2023 and Dec 2023 respectively, and latest data are for Jan 2024 at +1.5% YoY (Dec 2023: +1.5% YoY) and +1.8% YoY (Dec 2023: +1.9% YoY) respectively
BNM’s MPS maintains the view of inflation rate remaining moderate in 2024, but this outlook is highly dependent on the implementation of domestic policy on subsidies and price controls, as well as global commodity prices and financial market developments, hence the official 2024 inflation rate’s wide forecast range of 2.1%-3.6%.
OPR to remain at 3.00% in 2024
BNM sees continued tight monetary policy globally in the near-term. Notwithstanding this, Maybank IB expects OPR to remain at 3.00% throughout 2024 given their current forecasts of GDP growth pick up (2024E: +4.4%; 2023: +3.7%) and upside risk to inflation rate (2024E: +3.0%; 2023: +2.5%) that is largely due to fiscal measures to widen the tax base and enhance revenues – especially the consumption-related taxes – as well as rationalise subsidies.
The latest Interest Rate Swap (IRS) rate implies market is pricing in a stable OPR this year.
Ringgit stabilized in recent days…
In relation to the Ringgit, BNM – in the latest MPS – “upped the ante” so to speak, by shifting the narrative from “Ringgit weakness vs US Dollar being due to external factors rather than current domestic economic performance and outlook ”, to stating outright that “Ringgit is undervalued vs economic fundamentals and growth prospects”, in line with Maybank IB’s FX Research’s estimate of between 7% to 8% undervaluation vs the greenback .
The Ringgit has stabilised in recent days, improving to 4.7 0 intraday 7 Mar 2024, versus the recent low of 4.80 on 20 Feb 2024.
This follows what Maybank IB sees as a “coordinated communications and actions” by BNM (e.g. Governor’s, Financial Market Committee (FMC) and Monetary Policy statements on 20/27 Feb 2024 , 1 Mar 2024 and 7 Mar 2024 respectively) and Ministry of Finance (e.g. Second Finance Minister’s statement in the Parliament on 29 Feb 2024) that include Ringgit – supporting measure of Government -linked companies (GLCs) and Government – linked investment companies (GLICs) repatriating and converting their foreign exchange earnings and overseas investment incomes .
Maybank IB’s FX Research maintains the house view of the Ringgit ending this year firmer vs USD at 4.40.
Within the next 6 -9 months, the Ringgit is expected to encounter positive factors which include the signs of improving economic growth prospect, as per the exports rebound in Jan 2024 of +8.2% YoY after 10 straight months of decline (Dec 2023: -10.1%).
Maybank IB expects a full – year rebound in gross exports (2024E: +4.7%; 2023: -8.0%), thus exports of goods and services (2024E: +3.2%; 2023: -7.9%), to support real GDP growth pick up to +4.4% (2023: +3.7%).
At the same time, the outlook on U.S. interest rates matters.
To recap, the Ringgit strengthened to close at 4.59 at end -2023 vs the low of 4.79 on 23 Oct 2023 as markets priced US Fed cutting interest rate as soon as Mar 2024 and by as much as -150bps cuts.
Granted the outlook has since been revised to the Fed funds rate being cut by between -75bps to -100bps starting mid -year currently, which has renewed the pressures on RInggit vs USD recently.
However, once the fog of uncertainty on US interest rate policy – in terms of timing and quantum – clears away, the Ringgit outlook should be better.
On a longer term, economic reforms and restructuring – as well as strategic economic growth policies – are vital for the Ringgit’s outlook.
The MPS stated that “over the medium term, ongoing structural reforms will provide more enduring support to the Ringgit”.
Over the next couple of years, Maybank IB sees an execution/implementation of fiscal reforms as the “low -hanging fruit” for a sustained Ringgit -positive/supportive outcome, especially given the legally-binding target of reducing the budget deficit to – 3.0% of GDP (2024E: -4. 3% of GDP; 2023: – 5.0% of GDP).
There may also be a capping of the Government total debt at no more than 60% of GDP (end -2023: 64.3% of GDP) in 3 -5 years as per the Fiscal Responsibility Act (FRA) i.e. by 2026 at the earliest and by 2028 latest.
Currently, the Government is in the process of rolling out revenue – enhancing broadening of the tax base i.e. imposing Capital Gains Tax and 10% Low Value Goods Tax effective 1 Jan 2024; Services Tax rate adjustment to 6% -8% range from 6% and “Sugar Tax” hike effective 1 Mar 2024; the upcoming High Value Goods Tax (“Luxury Tax”) on 1 May 2024.
Further revenue-enhancement measures this year include strengthening tax compliance via “e -invoicing” starting 1 Aug 2024.
At the same time, Maybank IB expects to see the Government rolling out the targeted fuel subsidy rationalisation by end -2Q 2024 at the earliest in view of the on -going Subsidised Diesel Control System 2.0 pilot programme (Feb -Apr 2024), plus complementing FRA with the tabling of Government Procurement Act (GPA) next quarter as well.
From the perspective of strategic economic growth policies, some “early wins” from the National Industrial Master Plan (NIMP) and National Energy Transition Roadmap (NETR) which actually span the next 1 -3 decades will be “added bonus ” for the Ringgit.
Maybank IB also looks forward to the finalisation and details of Johor -Singapore Special Economic Zones (JSSEZ) agreement before end -2024 after the inking of the MoU on 11 Jan 2024.
To note, Maybank IB has seen the Ringgit -positive outcome – supported by net inflows of foreign funds into both the local equity and bond markets – following US Fed’s interest rate cuts and domestic economic reforms and restructuring before i.e. the post -GFC years of 2010 -2023 (Figure 11 – 1 2).
