Economic momentum loses pace after exceptional growth in 2022
Economic momentum has slowed in 2023 after having posted one of the world’s fastest GDP growths in 2022. The trend chiefly reflects external headwinds. The export-dependent economy (exports of goods and services represented 74% of GDP in 2022) experienced declining merchandise exports in the first half of the year amid weak global demand, particularly for electronics, and lower energy prices, Malaysia being a net exporter of oil and gas. While some improvement may transpire in 2024, notably with the gradual recovery of China, which is Malaysia’s second goods export market, the prevailing gloomy global environment could result in a poor performance in goods exports, thereby denting growth again. Conversely, the upswing in tourism is likely to support services exports. In 2022, the number of international tourists which mainly come from Singapore (52% of the total) and Indonesia (15%) accounted for less than 40% of the number recorded in 2019, before the pandemic. Furthermore, the government is targeting the ratio to rise above 60% in 2023.
After having been boosted by the country’s reopening in 2022, growth in private consumption (60% of GDP) will be slower in 2023-2024. Nevertheless, it should prove robust and be supported by an improved labour market, government aid for lower-income households and moderating inflation. Private consumption is therefore expected to remain the main driver of growth. However, there are downside risks to household spending, notably relating to Malaysia’s very high level of indebtedness, especially in the context of higher interest rates. In step with other major central banks, Bank Negara hiked its policy rate from 1.75% in May 2022 to 3% a year later in response to global tightening and inflationary pressures, although the latter were alleviated by public subsidies. While the central bank is unlikely to raise the interest rate further, no rate cuts are expected until at least 2024. Despite the risk of such high indebtedness, the country’s banking sector appears healthy with adequate capital and loss coverage ratios. In addition, the share of household debt under repayment assistance dropped significantly (from 18.8% of banking and development financial institutions’ loans in December 2021 to 1.9% in December 2022). Higher rates is expected to affect private investment in 2023 and at least the first part of 2024. That said, the government’s willingness to facilitate doing business and its support for automation and digitalisation will continue to drive investment. In the first quarter of 2023, approved private investment (in value) surged by around 60% year on year.
Fiscal consolidation is under way
The fiscal deficit will narrow in 2023-2024, albeit remaining higher than during the years preceding the pandemic. Despite a sharp increase in development expenditure aimed at addressing long-term economic development headwinds, the end of Covid-related spending and lower subsidies – mainly due to lower oil prices – helped reduce public expenditure in the 2023 budget. Meanwhile, the budget introduced several progressive revenue measures (i.e., a capital gains tax and a luxury goods tax). However, tax cuts for SMEs and lower- and middle-income households kept public revenue virtually unchanged. The 2024 budget should continue to respect its fiscal consolidation precepts with the expected transition toward targeted fuel subsidies, which will further limit public expenditure. Continued public deficits will fuel public debt, which will remain manageable, as residents hold most of it in local currency.
The current account is set to remain in surplus. After a rise in the balance of income deficit in 2023, following profit repatriation linked to good business performance in the previous year, this deficit is set to narrow in 2024. However, the services deficit – mainly led by transport – should widen amid robust private demand that will boost imports. Declining external debt remains high (63.8% of GDP in 2022), but is manageable since a third of it is denominated in local currency. International reserves, fed by the current account surplus and foreign investment, remain adequate and cover 5.0 months of imports and the totality of the country’s short-term external debt (at June 2023).
Political risk prevails after the 2022 elections
In office just over one year after the resignation of the former Prime Minister (PM), Ismail Sabri Yaakob and his cabinet, which held a tiny majority, lost power after the fifteen General Elections (GE15) held in May 2023. The polls resulted in a divisive political landscape, with none of the three main coalitions – Pakatan Harapan (PH), Perikatan Nasional (PN), and Barisan Nasional (BN) – securing a simple majority. Due to the King’s intervention, PH (81 out 222 parliamentary seats) and BN (30) agreed to form a coaltion government, and PH’s leader and long-time leader of the opposition, Anwar Ibrahim, was appointed as the tenth Prime Minister. The alliance was backed by other smaller coalitions and parties (GPS, Warisan, MUDA, and PBM), as well as independent members of Parliament, which enabled Anwar to win a vote of confidence in December 2022. Nevertheless, political risk subsists in such a fragmented political scene in which the government rules without a simple majority, which questions its capacity to remain in office during the entire five-year term. The elections in 6 states on 13 August 2023, which were seen as a crucial test for Anwar, resulted in a status quo, with both ruling and opposition parties retaining the states they governed before the polls.