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Malaysia economic outlook 2022 – firmer recovery despite headwinds

Malaysia economic outlook 2022 – firmer recovery despite headwinds

04 Apr 2022

When the 2022 Budget was presented by the finance minister, a gross domestic product (GDP) growth expectation of between 5.5% and 6.5% for this year was pencilled in. Based on estimates from 17 economists covering the Malaysian economy, the consensus estimate of between 4.8% and 6.5% appears to be in line with the government’s projections.

Although the economy expanded by only 3.1% in 2021 and remained below the 2019 GDP value in real terms, the economy returned to pre-pandemic figures as nominal GDP expanded by 9% to reach RM1.54 trillion, exceeding the 2019 output level of RM1.51 trillion. More astonishing was the fact that the economy in the fourth quarter (Q4) of 2021 rose by 12.1% year-on-year (y-o-y) to reach RM424.3 billion – the highest ever quarterly GDP value in nominal terms.

Economic data is showing increasing strength, not only from the external front, but on the domestic front as well. Total exports for the first two months of 2022 hit RM213.3 billion, up 20.4% y-o-y. Growth in imports was respectable as total imports for the same period were higher by 22.6% y-o-y to RM175.0 billion. As a result, total trade surged 21.4% y-o-y to hit RM388.3 billion, and the trade surplus improved by 11.2% y-o-y to reach RM38.3 billion.

Higher minimum wage of RM1,500 a month seen positively

The prime minister announced that the minimum wage for employees will be raised from RM1,200 to RM1,500 a month with effect from May 1, 2022. A higher wage structure will not only result in an increase in disposable income for the B50 group, but also help to boost the economy as well, as typically, the increase in wages will result in higher consumer spending.

With total Compensation to Employees (CE) in the region of RM526.7 billion based on the 2020 full-year statistics, a 5% increase in the overall wage bill for employees will help the government to achieve the CE-to-GDP ratio from the 37.2% that was recorded in 2020 to 39%, ceteris paribus, and closer to the target of 40% that the government intends to achieve by 2025 under the 12th Malaysia Plan.

In addition, the higher disposable income of RM26.3 billion, which is equivalent to about 1.7% of last year’s nominal GDP, can accelerate the pace of economic growth via higher consumer demand.

Malaysia’s economic data shows positive trend

Domestically, indicators are also strong for other industries as rising commodity prices, which have helped both the oil and gas sector and the plantation sector, are propelling consumption and domestic demand. The February 2022 IHS Markit Purchasing Managers’ Index (PMI) rose to 50.9, which suggests that Malaysia’s engine of growth, the manufacturing sector, is back on its feet. Based on IHS Markit’s formula in studying the correlation between PMI prints and GDP growth, the February PMI print translates into a GDP growth of 5.6%.

Rising core inflation

Similar to the global inflationary pressure, Malaysia is also facing a similar headwind, mainly due to the low base effect as well as supply disruptions. Worse, the rise in headline Consumer Price Index (CPI) has also resulted in higher core inflation, while the Producer Price Index (PPI) has been on a tear, despite some easing passed three months after hitting 13.2% y-o-y growth in September 2021. While this has not manifested itself into higher-end product prices on a broad basis, a sustained increase in PPI could pressure CPI to rise in the months to come.

Foreign direct investment (FDI) at all-time high

Based on statistics provided by the Malaysian Investment Development Authority, Malaysia recorded a total approved FDI valued at RM208.6 billion for 2021, more than triple the previous year’s total of RM64.2 billion. The manufacturing sector took in the lion’s share of approved FDI, with RM179.6 billion or 86.1% of the total while the services and the mining industries saw approved investments amounting to RM24.9 billion and RM4.1 billion respectively. Meanwhile, data from Bank Negara shows FDI inflow of RM194.5 billion, up 39.5% y-o-y while FDI outflow expanded at a slower pace, rising by 11.9% y-o-y to reach RM139.6 billion, thus resulting in net FDI of RM54.9 billion in 2021, the highest ever recorded.

Ringgit – a relatively stable currency

As the dollar has been riding on strong momentum, on the back of expectations that the US Federal Reserve will raise interest rates aggressively this year and into 2023, the ringgit has performed relatively well despite the challenges. The Dollar Index, which measures the strength of the greenback against major currencies is up 3.2% year-to-date, after rising 6.4% in 2021.

Despite weakening against the US dollar by 4.1% in 2021, the ringgit was stronger against the euro and the yen by 4.2% and 6.7% respectively. For this year, the ringgit continues to show strength against the euro and the yen, appreciating by 1.8% and 4.2% respectively but remained weaker against the greenback with a decline of 1.3%.

Against regional currencies, except with a 6.7% gain on the Thai baht in 2021, the ringgit has been weaker against most Asian units last year and this year.

Overall, in 2022, it will be a firmer recovery in Malaysia’s GDP. This is supported by external and domestic factors amid a challenging environment. Major contributors to growth include continued expansion in external demand, the reopening of international borders coupled with high vaccination rates, and improvement in employment and income prospects.

This article is contributed by the Technical Department of The Malaysian Institute of Certified Public Accountants (Micpa) and is an extract of a report with the same title. The views expressed in this article are those of the author and do not necessarily represent the views of the council.

Source: The Sun Daily

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