Malaysia Will Continue to Deliver Robust Growth World Bank

Key View

• We at Fitch Solutions have revised down our 2022 growth forecast to 5.2%, from 5.6% previously, after official data showed that the economy grew by 5.0% y-o-y in Q122.
• The main driver for our revision is the weaker outlook for net exports due to weakening global growth prospects and tightening monetary policy around the world.
• We continue to expect robust domestic demand to drive growth, especially as Malaysian consumers are shielded from the inflationary impact of higher commodity prices, while the ongoing chips shortage will support investment in Malaysia.

We at Fitch Solutions have revised down our 2022 growth forecast to 5.2% from 5.6% previously, following the release of Q122 data showing that the economy expanded by 5.0% y-o-y. Our forecast is more bearish than Bloomberg consensus (6.1%) and the central bank's projection (5.3%-6.3%). While we still expect Malaysia to benefit from higher commodity prices due to the Russia-Ukraine War, that upside is now likely to be overcome by the poorer global economic outlook, especially in key trading partner China. Along with tightening monetary policy globally, we believe this will lead to weaker external demand, which will cause the trade balance to come in narrower than we previously expected.

Growth Weighed Down By Weaker Global Economy

Malaysia - Contribution To Real GDP Growth, pp

f = Fitch Solutions forecast. Source: DOSM, Fitch Solutions

Domestically, we continue to expect a robust economic recovery in 2022, buoyed by the population's improved resilience against Covid-19, while being relatively shielded from inflation by price controls and subsidies put in place by the government.

Q122 Momentum Unlikely To Be Sustained

Malaysia - Real GDP Y-o-Y Growth Contribution, pp

Source: DOSM, Fitch Solutions

The acceleration in growth to 5.0% y-o-y in Q122 was largely due to private consumption picking up, contributing 3.4 percentage points (pp) to headline growth, up from 2.1pp Q421. Inventory changes, government consumption and net exports contributed 2.3pp, 0.8pp and -1.5pp, respectively, while gross fixed capital formation was flat.

Exports To Be Weighed Down By Global Slowdown

Malaysia - Exports, % chg y-o-y

Source: Wind, Fitch Solutions

The main driver behind our downward revision is the poorer export outlook – we now expect the net exports component to contribute 0.5pp to overall growth in 2022, from 0.9pp previously. We have made downward revisions to our 2022 growth forecasts for Malaysia's key trading partners: Singapore (3.0% from 3.6%); China (4.5% from 5.2%); and the US (2.6% from 3.1%). These economies together account for close to 40% of Malaysia's exports. Furthermore, China's Covid-19 lockdowns has disrupted supply chains, with factories and port operations badly affected by restrictions that have increased in severity since March, weighing on the manufacturing sector there. This will lower Chinese import demand of production inputs. Furthermore, key central banks around the world, including the US Federal Reserve and the Bank of England have been tightening monetary policy, and are likely to tighten more over the remainder of 2022, weighing further on global demand. Total exports growth remained strong at 22.2% y-o-y in Q122, but that was nonetheless a moderation from the 29.0% growth recorded in Q421, the result of slowing exports growth to both China and the US in Q122.

On the flipside, we do not see much scope for import growth to slow to support the trade balance, as government subsidies and price controls are likely to sustain consumer demand. Import growth outpaced export growth in Q122 at 25.2% y-o-y and this trend is likely to be sustained throughout 2022.

The poorer external outlook notwithstanding, we expect Malaysia to still experience a relatively strong recovery in 2022 driven mainly by private consumption, which we still expect to grow by 5.0% in 2022. Malaysia has lifted most of its Covid-related restrictions, which has led to a continued uptrend in traffic around retail and recreational spaces as shown by Google mobility data.

Subdued Inflation To Support Consumption

Malaysia - Consumer Price Inflation , % chg y-o-y

Note: Fitch Solutions forecast. Source: Wind, Fitch Solutions

Moreover, Malaysian consumers are shielded from the impact of higher commodity prices, with inflation coming in at just 2.2% y-o-y in March. With the aid of government price controls and subsidies or essentials and fuel, we expect inflation to remain better contained in Malaysia than the region, and this is reflected in our recent revision of our 2022 average inflation forecast to 2.8% y-o-y from 3.3% previously. This compares well with our average 2022 EM Asia inflation forecast of 3.5% (5.3% excluding China, which is also likely to see better contained inflation due partly to base effects).

PMI Signalling Greater Business Optimism

Malaysia - PMI

Source: Wind, Fitch Solutions

We also still expect investment growth to accelerate as the ongoing global chip shortage presents a compelling case for building up capacity in Malaysia which is a key part of the global chip supply chain, specialising in lower end chips that run cars, smartphones and home devices. Indeed, on December 13 2021, the Malaysian Investment Development Authority announced that Intel plans to build new manufacturing and test facilities at the Bayan Lepas Free Industrial Zone in Penang, as well as at the Kulim Hi-Tech Park in Kedah state, with a proposed investment of USD7.0bn. Meanwhile, business confidence has picked up, with the PMI reading for April rising to 51.6 from 49.6 in March, as the impact of the serious floods that affected seven states in January continues to fade.

Risks To Outlook

The risks to our forecasts are still weighted to the downside. China's economy is under considerable downside pressure amid the intensifying Covid-19 lockdowns in key cities such as Shanghai, and if these measures remain in place beyond Q222 or expand dramatically in scope, the growth outlook there will worsen, weighing further on demand for Malaysia's exports. The recent weakness in the ringgit also presents downside risks as that could prompt Bank Negara Malaysia to tighten monetary policy further to shore up the currency.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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Source: https://www.fitchsolutions.com/country-risk/malaysia-2022-growth-outlook-dragged-weaker-global-economic-prospects-13-05-2022

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