Malaysia’s growth may slow to 4% in 2023 on high base, weak exports: Standard Chartered

[KUALA LUMPUR] Even with a boost from China’s reopening, Malaysia’s growth may slow to 4 per cent in 2023, down from a projected 8.8 per cent in 2022, due to unfavourable base effects and moderating exports, said Standard Chartered Global Research’s chief economist for Asean and South Asia Edward Lee.

At a press briefing on Thursday (Jan 12), Lee said 2022 was a strong year for Malaysia, noting that the economy expanded 9.3 per cent in the first three quarters. Growth reached 14.2 per cent in Q3, driven by strong domestic demand and improved labour market as well as a low base effect, according to Bank Negara.

The firm’s forecast for 2023 is in line with Bank Negara’s projection of 4 per cent to 5 per cent. For 2022, Malaysian prime minister Anwar Ibrahim has said that growth is likely to exceed the government’s projection of 6.5 per cent to 7 per cent.

The return of Chinese tourists is expected to boost Malaysia’s tourism and services industries, which will be the tailwind of the country’s economy. Tourist arrivals have returned to 70 per cent of the pre-pandemic level, noted Lee. This was after tourist receipt losses during the Covid-19 lockdown which amounted to about 2 to 3 per cent of gross domestic product (GDP).

But one downside risk for growth is a fall in consumer spending. Inflation may decrease slightly to 3.1 per cent, from 3.4 per cent in 2022 – but will remain a key issue for Malaysians, said Lee, noting that consumers’ spending power will be hit by higher debt servicing costs and changes to government subsidies.

Lee expects Bank Negara to have another two rounds of rate hikes in January and May, of 25 basis points each time, which will bring the country’s overnight policy rate (OPR) “back to the pre-pandemic level”. In 2022, Malaysia’s OPR was raised by 100 basis points to 2.75 per cent.

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The Malaysian government also intends to implement targeted rather than blanket subsidies for petrol, which Lee estimates will mainly affect the top 20 per cent high-income group. “If only 20 per cent of RON 95 (petrol) users are targeted, we estimate headline inflation will increase by only 0.9 per cent on an annual basis,” he said.

“Other downside risks include weaker external demand due to global economic slowdown and the electronic cycle has likely peaked,” he added.

On the ringgit’s movement, the firm maintains a neutral view on the currency as the US dollar is “unlikely to depreciate”.

Divya Davesh, head of Asean and South Asia forex research, said that because the high-yielding US dollar is deemed as a “safe haven” currency during recession times, it will not depreciate significantly even though the market widely expects US growth to be softer this year.

He forecasts that the ringgit will trade at around RM4.20 to RM4.40 to the US dollar this year.

Beyond Malaysia, the effect of China’s reopening is expected to kick in for Asia during the second quarter of 2023, said Kaushik Rudra, Standard Chartered’s global head for fixed income research and head of Asia research.

But before that, in the coming months, emerging markets in Asia will experience slowdowns due to external headwinds: Europe’s recession and the Fed’s rate hikes.

“We forecast modest global GDP growth of 2.5 per cent this year, slowing from the estimated growth of 3.4 per cent in 2022. The multitude of headwinds that have faced most economics last year are likely to persist in months ahead,” he added.

He noted that inflation has picked up across the Asian economies in 2022 amid the post-Covid reopening. Asian central banks were relatively slow to start hiking rates, but have caught up and are now close to the end of the cycle.

“Inflation appears to be peaking in the region and is expected to go lower this year. If the Fed pauses its rate-hiking cycle early this year, (other) central banks will take their foot off the pedal by the end of first half this year,” he said.