KUALA LUMPUR (Jan 9): Malaysia's economy is set to go through a “slow and normalisation” growth of 4.1% this year, down from an estimated 8.5% last year, reflecting largely the normalisation of technical high-base effects and a weakening external environment, according to Socio-Economic Research Centre (SERC).
The research house’s executive director Lee Heng Guie said moderating exports, normalisation of domestic demand, inflation and high cost of living, and the lagged effects of interest rate hikes will weigh on domestic economic growth.
“The interplay of a weakening external environment, the new Government’s macro-narratives, domestic inflation, and interest rates will ultimately shape Malaysia’s economic growth outlook for 2023,” he told reporters at a briefing on the SERC Quarterly Economic Tracker report.
Globally, Lee foresees a “mild and shallow” recession in advanced economies like the US and Europe, but this is likely to be mitigated by China’s reopening, after the world's second largest economy ditched its zero-Covid-19 policy.
“China is a wild card to watch. We forecast a 4-5% growth for China in 2023, and a cautious start in the first quarter as infection cases surge exponentially, before going up slowly after that. What the [Asean] region lacks now is an influx of Chinese tourists,” he said.
Although global central banks are expected to slow down their pace in raising interest rates, Lee does not foresee any of them pivoting back to rate cuts this year, as inflation is still far from central bankers’ targets.
“Global inflation rates likely will cool throughout the year of 2023, but the cooldown period will be long and slow. We don’t think any central bank will cut interest rates this year,” he said.
SERC forecasts that Bank Negara Malaysia would raise its overnight policy rate by an additional 50 basis points this year, bringing the benchmark interest rate to its pre-pandemic level of 3.25% to safeguard macroeconomic stability.
The research house expects headline inflation to range between 2.8% and 3.3% this year, easing from an estimated 3.5% last year.
As inflation and high interest rates eat into consumer purchasing power, Lee said private consumption is expected to moderate to 5.9% this year from the estimated 11.0% last year, which was driven by post-pandemic pent-up demand, coupled with various government cash flow assistance measures like Employees Provident Fund (EPF) withdrawals and loan repayment moratoriums.
With such assistance coming to an end, Lee said consumer spending growth is likely to migrate to a more sustainable level.
“The good news is that labour market conditions improved to 3.6% at end-October 2022, with an increasing labour participation rate nearing pre-pandemic levels,” he said.
On inflation, Lee noted that the consumer price index seemed to have peaked in the third quarter last year, and is likely to moderate further in 2023, following stable commodity prices and a gradual move towards a targeted subsidy mechanism in Malaysia.
“With the Government focusing on tackling the impact of inflation and higher cost of living on low- and middle-income households, we expect targeted subsidy rationalisation to be implemented at a measured pace,” he said.
As the bloated subsidies raise concern about the Federal Government’s fiscal sustainability, Lee foresees that the upcoming retabling of Budget 2023 on Feb 24 to continue to focus on fiscal consolidation.
He expects the Government to aim for a smaller fiscal deficit of 4.5%-5.0% of gross domestic product (GDP) this year by cutting development expenditure, versus the 5.8% budgeted in the original Budget 2023 tabled in October last year.
Lee cautioned that it is important for Malaysia to address fiscal sustainability issues, as the country is facing a shrinking surplus for federal government operating expenditure.
“Persistent high deficits and growing debt can trigger investors’ concern towards fiscal solvency. If there are twin deficits in both [the] operating and overall [federal government budgets, it] could undermine investors’ confidence in the Government’s financial discipline management,” he said.
Malaysia's debt service charges to revenue ratio stood at 16.3% in 2021, before falling to 15.1% last year, but it is expected to surge to 16.9% in 2023, exceeding the 15% threshold of international best practices, said Lee.
Lee noted that the Federal Government’s direct debt stood at RM1.07 trillion or 62.8% of GDP as at end-September last year, a record-high level.
“By end-2023, it is projected to be around 65% of GDP, with statutory debt at 63% at end-2023. To ensure a smooth implementation of the 12th Malaysia Plan, the Government may extend the statutory debt limit of GDP in the medium term,” he said.