PETALING JAYA: Malaysia’s economy may enter a state of “withdrawal syndrome after sugar rush” as the increase in Bank Negara Malaysia’s Overnight Policy Rate, and the end of the Employees Provident Fund (EPF) stimulus and the Sales & Services Tax exemption for cars will lead to a slowdown, rising inflation, and tightening job market in the second half of this year.
Maybank Investment Bank (Maybank IB) chief economist Suhaimi Ilias said the group is still keeping its 6% gross domestic product (GDP) growth forecast for Malaysia for this year. However, it has revised its forecast on public consumption, higher to 4.1% from 3% previously, due to increased spending by the government, particularly on subsidies.
Suhaimi said the government has indicated a target to keep the budget deficit-to-GDP ratio at 6%, down from last year’s 6.3-6.4%. The implication is that development expenditure relating to investment will take a hit.
“We have trimmed the forecast for investment, particularly public investment with the government having to incur larger operating expenditure,” he said at Maybank IB’s virtual briefing on Malaysia’s second-half 2022 (H2’22) market outlook today.
“The main changes will come next year. With rising interest rate, rising inflation among the sectors, the economy will be taking a hit together with global growth slowdown in services, manufacturing and construction. We are looking at growth down to 4% from 4.7% previously,” he said.
Meanwhile, on the demand side, the group has trimmed growth forecasts for private consumption to 5% from 5.8% and adjusted downwards growth forecast for investment, with private investment at 4% from 5% previously and public investment at 5.5% from 6%.
“For investment growth outlook, especially next year, a lot will be in relation to the realisation of a surge in approved investments in 2021. Up to first quarter of this year, we are talking about RM350 billion worth of private sector investments being approved by Mida (Malaysian Investment Development Authority), much larger than in 2020.”
Suhaimi said real private investment is improving despite the downtrend in corporate earnings following the increase in capital expenditure (capex) in technology, automation and digitalisation.
“It seems that businesses are responding to the issues of foreign worker shortage by increasing capex on machinery and equipment,” he said.
However, Maybank IB predicted a recovery in corporate earnings. It said the drop in the first quarter of this year was due to the impact of Cukai Makmur (Prosperity Tax), expected to be one-off, which means the impact would only be for this year and next.
With the reopening of international borders, the group predicted revival in the tourism industry together with related industries such as food and beverage, accommodation, and transport, which account for 50% of GDP.
“Our estimate for tourism revenue, especially from foreign tourist spending in the economy, is about 6% of GDP and about 10% of private consumption in the economy,” Suhaimi said.
Additionally, he said, there are large amounts of excess savings in the economy at the moment as individual savings and demand deposits in the banking system have gone up by a lot, reflecting the impact of cash handouts and financial assistance given in 2020-2021 as well as the EPF withdrawals.
The drawdown in excess savings is similar to that in the US, the UK and the eurozone, providing support for consumer spending to still grow, albeit at a slower pace,” he added.
Based on a sensitivity analysis, Suhaimi said, for each 1% drop in global real GDP growth, Malaysia’s economic growth can be cut by as much as -0.9%, indicating the high sensitivity of the country to the global economic environment and temperature.
Additionally, Budget 2023 will be the key macro policy lookout for H2’22 amid fiscal sustainability subsidies.
Suhaimi underscored sentiment, labour and raw material shortages, political uncertainties and interest rate increases as factors that will have significant impact on the local economy.
Meanwhile, Maybank IB equity research regional head Anand Pathmakanthan warned investors of a storm in the equity market due to macro challenges relating to surging inflation, sharply rising interest rates and growing recession risks that have weighed on developed markets that are now catching up with this region.
“We are six to eight months behind developed markets in terms of all the issues they are facing. It’s been delayed in Asean because of a lot of subsidies but as the fiscal situation gets worse, the subsidies will have to be dismantled, and that’s going to cause inflation to rise.”
