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Benefitting from the global supply chain disruption

Benefitting from the global supply chain disruption

12 Jan 2022

The strong foreign direct investment (FDI) into Malaysia, despite the Covid-19 pandemic, remains a key growth driver for the country’s economy.

Standard Chartered (StanChart) Asean and South Asia chief economist Edward Lee said Malaysia is one of the countries that will strongly benefit from the global supply chain disruption, hence leading to higher FDI inflows into the country as companies look for alternative suppliers and production sites.

In the first nine months of 2021, the domestic electrical and electronic sector was the biggest beneficiary, accounting for almost 70% of the inflows.

Speaking at the StanChart Global Research briefing yesterday, Lee said Malaysia’s investment activities would pick up further in 2022, with improved clarity on domestic economic reopening and higher construction activity.

“Disbursed loans (excluding household and financial institution loans) rose 32% year-on-year in the third quarter (Q3), with the bulk of loans disbursed to the manufacturing sector. Public investment should be supported by high budget allocation and ongoing projects such as Mass Rapid Transit and Light Rail Transit lines and digital infrastructure,” he said.

StanChart’s analysis showed that the country’s overall investments in Q3’21 was 22% below the Q4’19 level.

Apart from investments, other growth drivers for Malaysia in 2022 are sustained economic recovery, high vaccination rate, the recovery in the tourism sector and the implementation of Budget 2022 initiatives.

Lee forecast Malaysia’s gross domestic product growth to recover to 6.2% in 2022 from 3.5% in 2021.

Despite the potential impact of the recent floods in Malaysia, Lee said the country’s gross domestic product growth will be above the 3% level for 2021.

For comparison, the government expects a growth of 3% to 4% last year.

On price pressure, Lee expected the headline inflation to moderate in 2022 due to the technical high base effect, although there are upside risks emanating from supply-chain disruptions and high energy prices.

StanChart raised its headline inflation forecast for 2022 to 2% from the earlier projection of 1.6%, while the core inflation estimate is increased to 1.4% in 2022 from 0.7% in 2021.

On the supply side, Lee said cost pressures are evident, but the pass-through to consumers may be curtailed initially as the economy recovers. If the economic recovery is uninterrupted, Bank Negara could start hiking the overnight policy rate (OPR) in the second half of 2022.There is a possibility for the central bank to raise the OPR by 75 basis points (bps) in the second half of the year, up from the current record-low level of 1.75%, according to Lee.

Two rate hikes of 25 bps are expected in Q3’22 and another 25 bps in the fourth quarter.“The higher OPR forecast is because we expect Malaysia’s economy to recover quite fast this year,” he said. The central bank is expected to keep the policy rate unchanged in 2023, as growth plateaus.

Head of Asean and South Asia foreign exchange research Divya Devesh said the US dollar-ringgit outlook is “relatively neutral”.“By the end of June 2022, we forecast the exchange rate to go RM4.20 per US dollar, which is relatively close to where it is trading today. By December this year, we expect the exchange rate to go to RM4.15 per US dollar. This will be a modest ringgit appreciation in the second half of the year,” he said.

Divya said that in the past 18 months, commodity prices have had a very strong run and that has translated into an improved trade performance and current account balance for Malaysia. This, in turn, has lent a huge support for the ringgit.

“That is a driver that has not changed over the last one year and we think that carries on for 2022 as well,” he said.

Source: The Star

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