This article first appeared in The Edge Malaysia Weekly on May 20, 2024 - May 26, 2024

MALAYSIA’s economy expanded 4.2% year on year in the first quarter of 2024 (1Q2024) — better than the advance estimate of 3.9% — propped up by private sector expenditure, higher tourist arrivals and a recovery in exports. The final print for 1Q2024 gross domestic product (GDP) growth was also an improvement from 4Q2023’s 2.9%.

When asked at the media briefing on the 1Q2024 GDP performance last Friday why public sentiment does not seem to reflect the robust economic growth registered but instead appears muted, Bank Negara Malaysia governor Datuk Abdul Rasheed Ghaffour said: “The data is showing good progress in terms of economic growth, we’ve got good numbers. We saw slower growth in 4Q2023 but it has improved in this quarter [1Q]. So perhaps, it’s a matter of time for the effect to trickle down to the public.”

Nevertheless, Abdul Rasheed acknowledged that the cost of living had certainly increased, which could be the reason why public perception of the economy differs from what the data is showing. For 2024, the official estimate puts GDP growth within the range of 4% to 5% and this has not changed, he said.

“What we have seen for the first quarter has been encouraging and we estimate that growth for the year will be between 4% and 5%. Of course there are both upside and downside risks to the economy,” said Abdul Rasheed.

“The upside risk to the economy includes greater spillover from the tech up cycle, more robust tourism activities and faster implementation of new and existing investment projects. That will get us to a higher level of growth, at the upper range of the 4% to 5%, and maybe even more than that.”

He also cautioned against the downside risks that could impact the Malaysian economy, which stem from the external front, such as weaker-than-expected external demand, further escalation of geopolitical conflicts and a larger decline in commodity production.

If growth falls within the forecast range, it will be noticeably higher than the 3.7% growth charted in 2023.

During the presentation on the 1Q2024 GDP, Abdul Rasheed pointed out that both external and domestic leading indicators suggest continued growth of the local economy in the near term.

“The pick-up in global orders and semiconductor sales as well as encouraging tourist arrivals to Malaysia are expected to provide support to Malaysia’s exports of goods and services. DOSM’s (Department of Statistics Malaysia) leading index points to further improvement of the overall economy. Consumer and business sentiments have broadly stabilised,” he said.

DOSM’s leading index rose 2% in February, continuing the positive trend for three consecutive months, reflecting an optimistic economic outlook in 2Q2024.

Meanwhile, the MIER Consumer Sentiment Index for 1Q2024 settled at 87.1 points, slightly lower than 4Q2023’s 89.4. However, its Business Conditions Index increased to 94.3 points for the quarter from 89 points in 4Q2023.

For 1Q2024, all five major economic sectors recorded positive growth momentum. The best performing was the construction sector, which saw an expansion of 11.9% y-o-y on the back of swifter progress of civil engineering projects and stronger support from special trade and residential activities.

This was followed by the mining sector’s growth of 5.7% y-o-y, supported by higher natural gas output, and the services sector’s expansion of 4.7%, thanks to higher retail trade activities and continued support from the transport and storage subsector. The agriculture and manufacturing sectors expanded 1.6% and 1.9% respectively during the period in review.

Meanwhile, the demand side saw higher growth in all the components when compared with 4Q2023. Private consumption grew 4.7% y-o-y while private investment increased 9.2% y-o-y. Public investment and consumption grew 11.5% and 7.3% y-o-y respectively.

Notably, UOB Global Economics & Markets Research says in a May 17 report that the anticipated RM20 billion to RM30 billion in withdrawals from the Employees Provident Fund Account 3 that recently began should provide a boost to consumption in 2H2024.

There has also been an announcement of a salary increment of more than 13% for civil servants starting in December this year that is projected to cost the government RM10 billion that would help private consumption growth.

The central bank governor took the view that both the Account 3 withdrawals and civil servant salary increments would not have a significant effect on inflation.

Meanwhile, the contraction in net exports shrank significantly to -24.5% from -52.9% in 4Q2023, on the back of a turnaround in exports, which recorded growth after three consecutive quarters of contraction. In 1Q2024, exports grew 5.2% y-o-y from a contraction of 7.9% in 4Q2023, which was attributed to the broad-based improvement for manufactured goods.

“Moving forward, exports are expected to improve further for the year, supported by sustained demand for Malaysia’s non-E&E (electrical and electronics) exports from our major trade partners, further recovery of E&E exports in tandem with global tech up cycle, improving commodity exports amid the resumption of oil and gas production, and continued increase in tourist arrivals,” said Abdul Rasheed.

UOB has maintained its full-year GDP growth forecast of 4.6%, given that the 1Q2024 GDP came close to its expectation and with several growth catalysts still in place.

CIMB Treasury and Markets Research has forecast growth for 2024 at 4.9%, which is at the upper end of its official forecast. “There is cause to expect stronger growth momentum as exports recover before peaking in 3Q2024 while domestic demand remains intact,” it says.

One of the wildcards in the Malaysian economy this year is undoubtedly the much anticipated fuel subsidy rationalisation programme. With the implementation date — sometime in 2H2024 — drawing closer, many are waiting to see whether the plan will be finally rolled out.

Just recently, Prime Minister Datuk Seri Anwar Ibrahim reiterated the need to cut “wasteful spending” in an international media interview but he also added that the cuts need to be done at the “right time”.

Abdul Rasheed opined that the current environment presents a good window of opportunity to undertake the rationalisation programme. “In terms of economic growth, at 4.5%, and a moderating trend in inflation, we believe this provides a good window of opportunity for us to undertake subsidy rationalisation,” he said when asked.

Bank Negara has forecast headline inflation to range from 2% to 3.5% this year, adding that the wide range has taken into account some of the impact from the planned fuel subsidy rationalisation programme.

The central bank governor also addressed the issue of the weak ringgit against the US dollar, saying that Bank Negara’s coordinated actions to encourage more consistent flows into the foreign exchange markets had led to positive outcomes.

Notably, the government, together with the central bank, has taken steps to manage the short-term pressure on the ringgit. These include encouraging the repatriation and conversion of foreign investment income by government-linked companies and government-linked investment companies, as well as stepping up discussions with corporate and exporters to convert their proceeds and overseas investment income in a more consistent and timely manner.

“These coordinated actions have helped cushion the pressure on the ringgit, despite the strength of the US dollar of late. We have seen improvements in the domestic foreign exchange market,” said Abdul Rasheed, highlighting that the ringgit had appreciated 1.6% against the greenback between Feb 26 (when its coordinated action began) and May 15.

The ringgit’s nominal effective exchange rate (NEER), which measures the local currency’s performance against that of its major trading partners, also saw an improvement, appreciating 2.5% over the same period.

The central bank governor pointed out that the ringgit had performed “relatively well” compared with currencies in the region. Year to date, the ringgit has depreciated 2.4% against the US dollar, which is far better than the baht’s 6.5% decline against the greenback.

Abdul Rasheed also revealed that the daily foreign exchange trading volume had increased alongside a narrower bid-ask spread, which is an indication of improved liquidity in the domestic foreign exchange market. “We expect that these flows can be sustained over time given that the investment income and export revenue are recurring in nature,” he said.

“Additionally, another initiative that we are working on is to pilot a fast-track pre-approval framework for corporates that bring back foreign currency funds and convert to ringgit, to enable them to reinvest abroad when the time comes. This aims to address frictions raised by corporates during our engagements with them.”

At the time of writing, the ringgit was trading at 4.68 against the US dollar. 

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