KUALA LUMPUR (Jan 15): HSBC Global Research does not see a need to revise its projection for the Malaysian economy to grow by 4.5% this year, despite the potential drag to its nascent trade recovery amid escalation in Red Sea tensions that resulted in major detours by shipping companies.

“The question is of course whether the Red Sea crisis derails [Malaysia’s] export recovery. Now, that really depends on how long the Red Sea crisis lasts. If it’s only a few weeks, then that’s manageable,” chief Asia economist Frederic Neumann said in a virtual briefing on HSBC’s 2024 Asia outlook.

“If this were to escalate further, if this [causes] a prolonged disruption to shipments, it would of course weigh on trade. But I don’t think it’s going to be material enough for a large shift in our growth forecast, in part because shipping can be redirected around Africa.

“Now, that raises the prices, particularly for European importers, but it would ultimately be that the market adjusts to that just at a slightly higher cost and therefore, we don’t necessarily see that yet as a material impact to the Malaysian economy,” he added.

Neumann expects Malaysia’s gross domestic product (GDP) to accelerate to 4.5% in 2024 from 4.1% last year, partly driven by stabilisation of trade performances, along with other drivers like continued inflow of foreign direct investment.

Although the trading nation’s GDP is forecasted to accelerate, coupled with potential rate cuts by the US Federal Reserves, HSBC’s head of Asia FX research Joey Chew foresees a “modest” recovery to the Malaysian ringgit (MYR) against the greenback.

“[The US Fed rate cuts is] one of the key reasons we have the ringgit improving. But, you know, we just need to bear in mind that the recovery could be quite modest still, on the back of two things.

“One is that Malaysia is also still quite plugged into China’s growth cycle, which we see remaining quite sluggish. The second is that the dollar is remaining quite resilient. And so, basically, we have bouts of risk aversion,” she said.

Chew also noted that the FOMC’s “dot-plot” of individual members’ expectations indicates a 75 basis points cut to its current Fed Fund Rate of 5.25%-5.50% in 2024.

This, she said, would narrow the interest rate differentials with Bank Negara Malaysia’s overnight policy rate (OPR) of 3.0%, which may ease the pressure for capital outflow from Malaysia.

“If you look at Malaysia’s interest rate, 3%, it’s actually not low from a historical perspective. But I think the differential against the US is at record [hgh] because US rates are just too high,” said Chew.

“To that extent, since we have US rates falling, you know, as long as Malaysia doesn’t do anything on the rates front, it will actually help [to] mitigate some of that outflow pressure happening in the last year,” she added.

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