With Malaysia’s economy expected to improve further this year, the central bank made no changes to the country’s annual gross domestic product (GDP) growth projection of 5.3 to 6.3 percent announced in March.
Bank Negara Governor Nor Shamsiah Mohd Yunus said the projection was supported by stronger domestic demand, continued expansion in external demand and further improvement in the labor market.
“Growth would also benefit from the easing of restrictions, the reopening of international borders and the implementation of investment projects,” she says.
Nevertheless, the governor does not rule out risks to the country’s growth momentum.
“These include weaker-than-expected global growth, further escalation in geopolitical strife, worsening supply chain disruptions, adverse developments around Covid-19 and heightened financial market volatility,” adds- she.
Headline inflation is expected to average between 2.2 and 3.2 percent this year, unchanged from the bank’s previous estimate, while core inflation, as measured by core inflation underlying, should also increase to reach an average of 2 to 3%.
Deputy Governor Marzunisham Omar says there are price pressures, especially on food.
However, he says inflation in Malaysia remains subdued compared to other countries.
“Several key factors are expected to partially contain the upward pressure on prices, namely existing price controls and the continued spare capacity in the economy,” Bank Negara said in a statement.
Due to the rising cost of government subsidies, Marzunisham says longer-term solutions are needed to contain inflation.
Marzunisham says the government is seeking to broaden the country’s tax base to increase revenue, including the reintroduction of the goods and services tax (GST).
“Bank Negara supports the GST and of course we have to think about when the reintroduction will be considered by the government,” he says.
Malaysia’s economy experienced a growth spurt recording a 5% year-on-year improvement in its GDP in the first quarter of 2022. In comparison, the country’s GDP shrank by 0.5% year-on-year in the same quarter . of 2021.
On a quarterly basis, the country’s GDP grew by 3.9 percent compared to the fourth quarter of last year.
According to Bank Negara, the growth of this beginning of the year is mainly supported by the improvement of domestic demand, economic activity having continued to normalize with the easing of containment measures.
The recovery in the labor market is also playing a role in the stronger GDP growth, with the unemployment rate falling to 4.1% in the first quarter of this year from 4.3% in the previous quarter.
Other factors, such as continued political support and strong external demand, amid the continued global tech bull cycle, further boosted growth.
“On the supply side, the services and manufacturing sectors continued to drive economic growth, expanding by 6.5% and 6.6% respectively,” the central bank said in the statement.
For the services sector, the expansion was due to higher spending on leisure and business-related activities as the economy reopened.
Meanwhile, for the manufacturing sector, demand for semiconductors and consumer products such as motor vehicles has been a key driver of its growth.
However, the GDP of the agricultural sector recorded a stable growth of 0.2% year-on-year due to the disrupted production of palm oil caused by heavy rains at the beginning of the year.
Headline inflation moderated to 2.2% in the first quarter of this year from 3.2% in the previous quarter.
According to the central bank, headline inflation declined due to the lesser contribution from the dissipating base effect of lower retail fuel prices in the domestic market last year, and the absence of the base effect of electricity tariff discounts implemented in 2020.
Meanwhile, core inflation rose to 1.7% in the first quarter of this year from 0.8% in the previous quarter.
“This reflects price adjustments amid higher costs and improving demand conditions, with price increases more noticeable, particularly for food products due to supply-side factors such as rising global commodity prices,” Bank Negara said.
Speaking of exchange rates, the ringgit depreciated by 0.7% against the US dollar in the first quarter of this year, while year-to-date, the ringgit has fallen by 4.7%.
According to the central bank, this broadly corresponds to the development of regional currencies.
The weakening of the ringgit was due to the strengthening of the US dollar, driven by higher US interest rates, a global feeling of risk aversion given the conflict in Ukraine and modest growth expectations in China.
However, high commodity prices and Malaysia’s recovery prospects had dampened the downward pressure on the ringgit from these external factors.
“Going forward, as domestic financial markets are subject to periods of high volatility, the fallout on domestic financial intermediation should be contained,” the report said.
“Malaysia’s strong external position and resilient banking system enable the economy to withstand external shocks,” he added.
According to the governor, a flexible exchange rate is the most appropriate policy choice for the country.
“The flexible exchange rate protects the economy from negative effects resulting from economic shocks and it also preserves Malaysia’s competitiveness in difficult global conditions,” she said.
The governor also notes that pegging the ringgit will not be in Malaysia’s interest, as it will entail substantial risks and trade-offs. “For example, we will have to reflect the monetary policy of the country to which we are attached,” she says.
This will lead to a substantial loss of the country’s independence in monetary policy.
Speaking of the Overnight Policy Rate (OPR), the recent increase of 25 basis points to 2% would affect both depositors and borrowers, according to the Governor.
“The higher OPR may affect borrowers for higher loan repayments. However, they could also benefit savers via higher deposit yields,” she says.
“Higher yields on deposits could also encourage retail savings to rebuild their financial reserves after being hit by the Covid-19 crisis,” she adds. The governor also notes that the OPR needs to be recalibrated with conditions in the economy.
THE STAR (MALAYSIA) / ASIA NEWS NETWORK