KUALA LUMPUR (Dec 9): India and Asean are seen to lead the global economic recovery in the second half of 2023 (2H2023), said Nomura, but Malaysia could face hiccups due to weak external demand and fiscal reform challenges amid the current political landscape.
Nomura Asean chief economist Euben Paracuelles said the research house is cautious on Singapore and Malaysia, with the boost from economic reopening seen fading and taken over by weaker external demand in early 2023.
Paracuelles anticipated Malaysia's upcoming Budget 2023 to reflect a fiscal deficit of 5.8% to gross domestic product (GDP), unchanged from 2022, as opposed to the initial official estimate of 5.5%.
"The main risk that we're seeing here is actually an increase in fiscal risk after the recent election," he said at the Nomura 2023 Asia Economic, Currencies & Equities Outlook.
"In the environment where the economy is already slowing down, we think the slowdown from the external backdrop will get exacerbated, because in Malaysia what happens to the export sector tends to get translated into domestic demand very quickly," he said, citing the close correlation between exports growth and wage growth.
The weak exports seen in 1H are on the back of recession forecast in the Group of Seven economies, including in the US (-0.8% GDP growth forecast in 2023), eurozone (-1.4%) and the UK (-1.5%).
"Weak wage growth due to the weak export sector would lead to issues in consumption spending.
"Plus the fact that the recent election showed a more fragmented political landscape, we think it will be very difficult for the government to implement very quickly some fiscal reform measures including subsidy rationalisations and even the more difficult ones to broaden the tax base," he said.
However, Paracuelles does not see Malaysia being able to postpone the fiscal reforms much longer, as credit ratings pressure could resume otherwise.
"Given the global downturn next year, there might be an understandable rationale to delay, but by 2024, if economic conditions improve, implementing a credible fiscal consolidation medium-term agenda needs to begin," he opined.
On the wider Asean, Nomura head of global macro research Rob Subbaraman said the region, alongside India, is seen as the rising star of Asia in 2023.
"We think they've got everything to play with to lift their potential growth rates compared to other EM (emerging-market) regions — relatively healthy fundamentals, young population, rapid digitalisation is happening in these economies. And China-plus-one investment flow could unlock a little bit of growth potential as well," he said.
Malaysian equities downgraded to underweight
The fading pandemic recovery boost also has the research house downgrading Malaysian equities to underweight from neutral in its 2023 outlook anchor report for Asia, ex-Japan.
While Asian stocks have valuation support and light investor positioning, Nomura sees a rotation of funds into North Asia such as China unlikely to help Malaysia's foreign fund flow picture.
That said, it sees some value in the commodities sector. Another bright spot is tech stocks, amid record net balances and improved valuations following the recent sell-off — although the first quarter of 2023 remains volatile due to US slowdown concerns, the report said.
Nomura's core Asia ex-Japan long only barbell strategy includes Press Metal Aluminium Holdings Bhd as a potential beneficiary of China's reopening, and reviving demand in infrastructure-related activities.
It also includes Inari Amertron Bhd, in anticipation of the bottoming out of the smartphone industry down cycle, coupled with its ongoing strategic initiatives in China, Malaysia and the Philippines.