Higher Spending, Robust Tourism, Strong Labour Market Heightens Malaysia’s GDP Performance

CGS International (CGS) has lifted their 2024F growth projection for Malaysia’s GDP to 5.2% yoy (from 4.6% previously) to reflect robust 1Q24 GDP as well as projected resilient domestic demand ahead.

In its Economics Note today (June 7), CGS said they expect the economy to be driven by higher spending capacity, robust tourism-related sectors, strong labour market and healthy momentum in investment activities.

With the strong 1Q24 growth numbers, they anticipate 1H24F growth to be higher at 5.8% yoy (previous estimate – 4.8%) and to trail softer in 2H24F.

Key downside risks to their GDP forecasts are 1) greater-than- expected negative reaction from consumers amid the subsidy rationalisation, 2) a slowdown in China’s economic activity, as well as 3) escalation of trade war between the US and China, which could dampen external demand. Higher spending capacity to boost consumption.

CGS expects private consumption to rise 6.9% yoy in 2024F (2023: 4.7%) along side domestic spending which should be robust in the near term following the government’s efforts to increase disposable income.

Some of the measures include:

Launching of EPF Flexible Account which allows partial withdrawal of the pension fund. As at 28 May 2024 a total of 3.04m withdrawal applications amounting to RM5.5bn have been approved. EPF expects the applications to rise until 31 Aug 2024.

Higher expected income growth through revisions in wage policy, such as 13% increase in civil servants’ wage starting Dec 24 and progressive wage policy pilot project scheduled to commence in Jun 24.

Cash assistance to those eligible upon the rationalisation of fuel subsidies, on top of the 2024 Bantuan Sara Hidup and Sumbangan Asas Rahmah cash handouts.

Robust labour market and stronger tourism-related activity should support consumption.

CGS saw an increase in retail trade index in 1Q24 in tandem with an increase in imports of consumption goods which they attribute to higher spending capacity in the domestic market.

CGS thinks think that the ongoing price pressures for tourism-related components, particularly hotel accommodation reflect the rising number of tourists which can be substantiated with expansion in number of domestic and international inbound flights from Dec 2023 until Apr 2024.

Supported by the visa liberalisation plan, the Ministry of Tourism aims to achieve 27.3m foreign tourist arrivals in 2024F (2023: 20.1m).

CGS expects fiscal reforms to remain on track

The government’s target of a narrower fiscal deficit of 4.3% of GDP in 2024F (vs. 5.0% in 2023) is achievable following the government’s commitment to fiscal reforms.

For expenditure, CGS expects revisions in targeted subsidy to provide the government with savings that can be channelled back to the economy.

They anticipate that some of the savings will be allocated towards cash handouts while the rest could be invested in work upskilling programme and the progressive wage programme.

In terms of revenue, the implementation of service tax, capital gains tax, low value goods tax and potential luxury tax should provide some buffer in the country’s finances, albeit marginal.

CGS said the improvement in 2024F fiscal deficit depends on a material reduction in the overall fiscal balance and growth in nominal GDP.

Robust investment environment

CGS expects Malaysia’s investments (gross fixed capital formation (GFCF)) to rise by 9.5% yoy in 2024F (vs. 5.5% in 2023).

They think that the strong interest in Malaysia as an alternative for the global supply chain realignment, as well as the ongoing advancement of multi-year infrastructure projects in accordance with the national masterplans should support investment activity.

Investment in the construction sector is seen to rise 10.1% yoy in 2024 (2023: 6.1%), bolstered by infrastructure and utilities projects such as East Coast Railway Link (ECRL), Rapid Transit System (RTS) and Pan Borneo highway as well as construction of non-residential buildings.

They expect manufacturing sector to rise 4.7% yoy supported by New Industrial Masterplan 2030, National Energy Transition Roadmap and 12th Malaysia Plan.

CGS believes increase in imports in manufacturing sector in tandem with higher assets investment in machineries and structures in the 1Q24 vs. previous quarters could indicate stronger momentum in investment activities.

Exports to keep its positive growth trajectory

CGS revised Malaysia’s nominal exports growth higher to 9.0% yoy for 2024F (previously: 6.0%; 2023: -8.0%) following an improvement in trade conditions and growing manufacturing sector. So far, the electrical & electronics (E&E) exports – which account for 38.8% of total shipments in Apr 24, turned positive after 8 months of contraction.

They believe that the 1Q24 global semiconductor sales expansion (+15.2% yoy) may suggest stronger E&E exports in the months ahead.

Meanwhile, China has shown some gradual economic recovery which could translate into slightly better global trade demand for Malaysia. Exports to China accounted for 13.5% of Malaysia’s total exports in 2023.

However, the risk of trade disruption could materialise due to potential trade disputes, such as the US-China war.

Given Malaysia’s reliance on international trade, any disruption to trade flows would likely have a negative impact on the country’s exports growth.

Price pressures to escalate in 2H24

CGS has cut their CPI growth forecast to 2.6% yoy in 2024F (from 3.2% previously) to account for a milder impact of policies launched earlier in 2024 (i.e. water and electricity tariff revision, higher service tax charges).

That said, price growth may have bottomed out this year and is likely to rise from 2H24F onwards amid price reforms.

The government has announced a plan to remove diesel subsidy for the land transport group in Peninsular Malaysia

RON95 subsidy removal is following suit although no further details have been discussed to date. Depending on the mechanism of price adjustment, CGS estimates that a modification to the diesel reform might boost CPI growth by merely 10bp in both 2024 and 2025.

However, CGS think companies involved might hike prices where profiteering could increase pressure on inflation. On the flipside, the government has also announced its intention to give cash assistance to owners of private diesel vehicles that are eligible, including smallholders, traders and farmers.

Ringgit has potential to strengthen against the US dollar

CGS maintains their 2024F OPR target at 3.00% as they think Bank Negara Malaysia (BNM) will adopt a cautious stance following the upcoming policy reforms starting with fuel price adjustments.

CGS think the price adjustments may impact spending patterns and lead to potential price pressures. Even so, the macroeconomic data looks favourable YTD, i.e. improvement in loan growth, retail sales and trade figures.

CGS believes the central bank should keep rate movements on hold until there are indications of rising demand-pull pricing pressures (BNM to turn dovish) or faltering consumer spending (BNM to shift hawkish), especially once the reforms have been implemented.

CGS still expects a rate cut by the Fed by the end of 2024, and in return, the ringgit could appreciate against the greenback. They maintain their previous revision to the ringgit in May 24 at US$/RM rate of 4.60 at end-2024F and year average at 4.70 (previously 4.40 and 4.50, respectively).

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