This article first appeared in The Edge Malaysia Weekly on August 19, 2024 - August 25, 2024

MALAYSIA’s economy appears to be on a good trajectory, with the second-quarter gross domestic product (GDP) expanding 5.9%, higher than the estimate of economists and official advance estimate of 5.8%.

GDP growth for the first half (1H) of 2024 registered 5.1% following 1Q2024’s 4.2% expansion.

Bank Negara Malaysia governor Datuk Seri Abdul Rasheed Ghaffour said the central bank is “comfortable” that growth this year would come in closer to the upper end of the 4% to 5% range forecast.

“So far, what we’ve got is data for the first half and it looks pretty good. Of course, I think we need to look further in terms of what happens in the third quarter (3Q). Any revision will be done when we come up with the Budget 2025 in October this year,” he said at a press conference last week when asked if Bank Negara would revise its GDP forecast, given the robust 1H expansion.

Second-quarter growth was driven by private consumption and investment activity, aided by a recovery in exports.

Economic growth in 2H2024 is expected to be driven by domestic spending with continued strong support from external demand, says the governor.

Household spending will be underpinned by continued employment and wage growth as well as policy measures while investment activities will be driven by progress in multi-year projects across private and public sectors, he added. As at 1H2024, construction projects awarded amounted to RM101.2 billion.

Exports are expected to continue to improve in the second half of the year as higher global demand for semiconductors will further lift Malaysia’s electrical and electronics exports in 2024. Abdul Rasheed pointed out that half of the country’s semiconductor exports are from the logic segment, which according to World Semiconductor Trade Statistics, is forecast to grow 10.7% this year.

At the same time, tourist receipts have also increased substantially this year, amounting to RM22.4 billion in 2Q2024 from RM21.4 billion in 1Q2024. In 1Q2023, tourist receipts only amounted to RM12.6 billion. The improvement in travel receipts is expected to continue in 2H2024 amid expanding flight capacity and visa exemptions.

““In 2Q2024, tourists from China improved to more than 690,000 arrivals, or around 96% of 2019 levels while arrivals from India were close to 325,000 or about 165% of 2019 levels,” said Abdul Rasheed.

While the governor described the country’s growth outlook for 2024 as “firm”, he acknowledged that Bank Negara is also mindful of specific one-off factors and risks that could affect economic growth in the second half of the year.

He pointed out how the lag impact of the drier weather in the first quarter of the year could impact oil palm yields and dampen production over the next three to six months while scheduled maintenance activities in the oil and gas sector in the third quarter could lead to lower than expected production.

Externally, there are the risks of worsening geopolitical conflict in the Middle East, targeted protectionism, supply chain disruptions and more volatile financial markets.

Following the better-than-expected 2Q GDP growth, some economists have revised their full-year growth forecasts while others said they are likely to adjust their forecasts upwards.

“Recognising this (1H2024 GDP growth of 5.1% has surpassed our 2024 full-year target of 4.6%) and that positive growth catalysts remain in place to underpin the momentum in 2H2024, we revise our 2024 GDP growth forecast higher to 5.4% but maintain a 4.7% growth projection for 2025,” UOB Global Economics and Market Research said in an Aug 16 note. “We think it is possible the official GDP growth target of 4% to 5% for 2024 may be revised higher when the government tables Budget 2025 on Oct 18, with a probable GDP growth target of 4.5% to 5.5% for 2025.”

MIDF Research said in an Aug 16 report that it is reviewing its full-year GDP forecast, and is likely to adjust it upwards from the existing 4.7% growth.

Meanwhile, CGS International economist Ahmad Nazmi Idrus said he has kept his 2024 GDP forecast at 5.2% year on year (y-o-y). “We have been quite bullish on the economy from the start and the outcome of 2Q2024 is a reflection of the momentum that we saw since late last year. We think there’s more leg to growth in 2H2024 amid the strength in investments as well as consumption,” he said.

In the second quarter, private consumption expanded 6% y-o-y from 4.7% y-o-y in 1Q2024 on the back of positive labour market conditions and larger policy support.

Private investment grew faster at 12% y-o-y compared with 9.2% y-o-y in 1Q2024, on account of robust capacity expansion by businesses, especially in the manufacturing and services sector.

Net exports also recovered, expanding 3.4% y-o-y amid higher external demand and the global technology upward cycle, having contracted 24.5% y-o-y in 1Q2024.

Public consumption and investment grew at a slower pace compared with the quarter before, expanding 3.6% and 9.1% respectively. In 1Q2024, public consumption expanded 7.3% while public investment grew 11.5%.

The ringgit has appreciated 3.1% against the US dollar since the start of the year to Aug 13. A large part of the gain has been attributed to growing expectations of US Federal Reserve rate cuts, which has alleviated some of the pressure on regional currencies, the ringgit included. At the time of writing, the ringgit stood at 4.43 against the greenback.

Abdul Rasheed said the ringgit’s appreciation marks a recovery from its past performance and that it is moving in the right direction, being more reflective of the country’s fundamentals as well as strong economic prospects.

“We have seen interest from investors in terms of economic growth, acknowledging the fundamentals of the Malaysian economy and its prospects. This will also provide support to the ringgit,” he said, adding that coordinated actions have also helped to support the local unit.

According to the governor, the coordinated actions by the government and Bank Negara have resulted in greater and more consistent flows into the foreign exchange market. Daily average foreign exchange trading volume has risen to US$18 billion during the period of Feb 26 to Aug 13 compared with US$15 billion during the period of Jan 2 and Feb 23.

Furthermore, Bank Negara also announced that it is expanding its pilot programme for the Qualified Resident Investor to more eligible resident companies who have outstanding direct investments abroad amounting to RM1 billion in assets and above.

The aim of the programme is to reduce problems for corporates that repatriate and convert foreign currency funds from overseas investments and seeking to reinvest abroad when the time comes, highlights the governor.

The pilot programme first started in April with five companies and the central bank is now looking to extend the programme to 30 companies, from now till Dec 31.

The results from the pilot programme have been encouraging, with over US$1 billion additional inflows coming into the domestic foreign exchange market.

“We started this programme based on the input that we obtained from our engagement with exporters and investors. What was indicated to us is that they are okay to bring back the funds and convert it but they wanted some flexibility in terms of the ability for them to reinvest abroad when the time comes.

“In the past, we have put in restrictions in terms of having Bank Negara’s approvals. Upon hearing those comments, we reacted to that and provided flexibility to some of the identified exporters and importers. We see this is working very well and that is why we are now expanding this to a number of corporates,” he explained.

In 2H2024, inflation is expected to edge upwards, from current levels, largely due to the rationalisation of diesel subsidies. Year-to-date, inflation stood at 1.8%.

Headline inflation in 2Q2024 came in higher at 1.9% from 1.7% in 1Q.

Inflation for the rest of the year will depend on the extent of the spillover effects from further domestic policy measures on subsidies and price controls to broader price trends, as well as global commodity prices and financial market developments, said the governor.

While headline inflation for the year is projected in the 2% to 3.5% range, Abdul Rasheed said the central bank believes that the rate will not exceed 3% this year even if RON95 rationalisation takes place.

“The range of 2% to 3.5% has incorporated both diesel and RON95, to a certain extent, so it should be within the range. But at the moment, our view is that it should be around 3%. It may not even be approaching 3% inflation, given what we have seen [from diesel rationalisation]. It has been behaving quite well, playing to script. Of course it is dependent on the details of the policy when it comes out,” he added.

The governor emphasised that structural reforms are critical, enabling Malaysia to enhance the competitiveness of its economy.

“The initial reforms we have undertaken in terms of electricity, water tariffs and diesel have resulted in some interest coming from investors and also in the economic growth of the country.

“We want this to continue and given the good economic growth numbers that we’re having and also given the moderated inflation we are seeing, this provides us with a very good opportunity to push further this reform which is beneficial for the economy as we move forward in the future,” he said. 

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