Inflation, rate hikes may impede economic growth in 2023

 

The reopening of China’s economy and pent-up consumer demand will boost the Malaysian economy in 2023.

PETALING JAYA: The lingering effects of inflation and rising interest rates in 2023 are key factors affecting Malaysia’s economic growth outlook, according to Maybank Investment Bank (Maybank IB).

Chief economist Suhaimi Ilyas said economic growth will moderate to 4% in 2023 from 8% last year. He cautioned the nexus between inflation and interest rates can no longer simply be viewed in the context of localised demand and supply factors.

“Instead, wider geopolitical and structural drivers, such as the protracted Russia-Ukraine conflict and further fragmentation of US-China relations were salient events affecting inflation, interest rates and ultimately economic growth,” he said during the Maybank IB 2023 Market Outlook media briefing today.

He added the impact from deglobalisation rising from geopolitical tensions and the cost of transitioning towards more green economies were further prolonging inflationary trends.

The Manufacturing Purchasing Managers Index (PMI) corroborates the predicted slow-down in growth, he noted.

“The PMI, which has continued to drift lower since November 2022, has been impacted by the stagnation in manufacturing growth currently afflicting developed economies in the West,” he said.

However, Suhaimi said there were still grounds for optimism. This was centred on the reopening of China’s economy that provides a tailwind for the tourism sector complemented by the continued pent-up consumer demand from 2022.

Additionally, capital expenditure and approved private sector investment will provide strong support to the Malaysian economy, following from record highs in 2021.

Petronas windfall

One positive for the economy and government is the windfall expected from Petroliam Nasional Bhd’s stellar performance last year.

Maybank IB forecasts Petronas to deliver net profit of RM100 billion for 2022, and their special dividend to the government is also expected to rise in tandem.

“This will provide the government extra breathing room in decision-making around operating expenditure,” said Suhaimi.

The state energy company’s net profit for the third quarter ended Sept 30 (Q3 FY2022) surged 88% to RM30.8 billion from RM16.3 billion a year earlier. Strong crude oil prices and the weak ringgit helped push revenue up 60.5% to RM99.2 billion, from RM61.8 billion a year ago.

As Petronas’ sole shareholder, the government can expect more than the RM25 billion dividend it received in 2021.

Inflation still an issue

Maybank IB expects one more overnight policy rate (OPR) hike of 25 basis points to 3% by Bank Negara Malaysia (BNM) before a recalibration towards a less restrictive policy approach is pursued.

Suhaimi suggested this move from an “accommodative” to “neutral” monetary policy was evidence that BNM was trying to strike a balance between curbing inflation and ensuring that rising cost of living struggles on Malaysians were assuaged as best as possible.

On the foreign exchange front, Maybank IB regional head of FX Saktiandi Supaat said the ringgit would benefit from the reopening of trade with China.

Noting that the local currency was highly sensitive to China’s economic activities, he said that multiple industries would reap the benefits as a result.

The ringgit is expected to continue gaining on the US dollar, with Maybank IB expecting it to reach 4.25 to the US dollar by mid-2023.

However, he warned that China was still a wildcard for the global economy in 2023. While China’s growth is expected to hit 4% in 2022, this is still below the predicted 5%.

The uncertainty surrounding China’s real estate sector is further cause for caution. Widely reported cases of defaults on loans and bond coupons by major real-estate players are having ripple effects on the banking sector and the wider global economy, he said. - FMT