KUALA LUMPUR (Jan 11): Malaysia is expected to experience a 6.2% gross domestic development (GDP) growth in 2022 from 3.5% in 2021 as the vaccination programme has been successful in facilitating the economy to return to a growth trend, said Standard Chartered Bank Malaysia Bhd (StanChart).

At StanChart’s 2022 market outlook media briefing on Tuesday (Jan 11), the group’s Asean Chief Economist, Edward Lee Wee Kok said Malaysia’s GDP growth remains at 6% below the 2019 fourth quarter GDP growth of 3.6%.

Lee also expected Bank Negara Malaysia (BNM) to begin tightening its monetary policy in the third quarter of 2022 (3Q22) by increasing the benchmark overnight policy rate (OPR), currently at 1.75%.

Lee predicted that two 25 basis points (bps) increases will take place in 3Q22 followed by another 25 bps increase in 4Q22, bringing the OPR to 2.5% by the end of 2022.

He said that BNM will refrain from tightening in the first half of the year (1H22) as the economic recovery continues, despite the consumer price index (CPI) rising close to 3% year-on-year in 4Q21.

Lee also said that the ongoing supply-chain disruptions and higher energy prices pose an upside risk to inflation but forecasts the CPI to be lower at 2% at the end of 2022.

Outlook on the Malaysian ringgit remains relatively “neutral” despite growing demand for foreign currencies and equities

StanChart’s Asia Foreign Exchange (FX) Strategist, Divya Devesh said the bank holds a relatively “neutral” outlook on the ringgit.

“In terms of the forecast, for mid-2022 (1H22) [end-June], we have the dollar to ringgit at RM4.20, which is relatively close to where the ringgit is trading today. We expect it to be relatively flat in the first half of the year.

“In the second half of the year (2H22) [end-December], we have the dollar to ringgit going to RM4.15, a modest ringgit appreciation in 2H22 but 1H22 is as flat as it can be,” added Devesh.

Devesh highlighted that commodities prices — which had a strong run in the last 18-months — had been the primary factor contributing positively to Malaysia’s export performance, notably in the trade balance that improved significantly to around RM25 billion as at end-September 2021, as well as the current account balance, which is expected to have a surplus of 3.2% in end-2022.

“Essentially, it is a commodities-driven improvement in both trade and current account balance, which lends a huge amount of support to the Malaysian ringgit,” Devesh said.

Besides commodities, the uptick in foreign direct investments (FDI) flowing into Malaysia, and the travel sector, which Devesh expects to recover in the 2H22 depending on the Covid-19 situation, will support Malaysia’s economy and the ringgit.

However, Devesh cautioned that Malaysian residents’ increased appetite for foreign currency assets, which stood at approximately US$40 billion as at end-July 2021, could offset some of the improvements made in Malaysia’s current accounts.

“What we are seeing in terms of the balance of payments data, there is a pick-up in demand for things like foreign currency deposits and foreign equities.

“Now this is not specific to Malaysia, we are seeing this increased appetite for foreign assets in a number of other countries as well.

“It can be a by-product of Covid-19 and the uncertainty that it had brought into our lives, maybe as a precaution, residents are looking to hold foreign currencies,” said Devesh

Lee said while StanChart’s forecasts were made in late November 2021, the impact of the flood disaster which hit several states including the Greater Klang Valley is estimated to be roughly around 0.3% to 0.5% for the country’s GDP, but he still expected growth in 2021 to stay above 3%.

“For 2022, certainly I think the Omicron is in focus. Now the floods [in December 2021] would see reinvestment going into 2022, assuming that the floods do not reoccur in 2022, they actually provide some upside to 2022’s growth.

“The major downside risk for Malaysia’s economy in 2022, more so, comes from the Omicron variant, as the primary assumption is for the Covid-19 situation to be much smoother this year.

“I think it is hard to extrapolate what will happen this year, [but] what has been shown is that many governments are being a lot more tolerant in more and more countries in the world, especially in this region,” Lee adds.

Lee also pointed out that the focus should be getting more people back into employment and growing employment so that they are able to service their debt in relation to how Malaysia’s household debt is affecting the fiscal situation.