(Updated)

World Bank ups 2022 GDP growth forecast for Malaysia

Jalan Tuanku Abdul Rahman, Kuala Lumpur. On the domestic front, speculation over the next general election in Malaysia could raise investors’ uncertainty in the near term, according to the World Bank. (Photo by Zahid Izzani Mohd Said/The Edge)

Jalan Tuanku Abdul Rahman, Kuala Lumpur. On the domestic front, speculation over the next general election in Malaysia could raise investors’ uncertainty in the near term, according to the World Bank. (Photo by Zahid Izzani Mohd Said/The Edge)

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KUALA LUMPUR (Sept 27): The World Bank said on Tuesday (Sept 27) it had raised its 2022 economic growth forecast for Malaysia, as measured by gross domestic product (GDP), to 6.4% from 5.5% previously.

In the latest World Bank East Asia and the Pacific Economic Update report, it also said it expects Malaysia's GDP to grow 4.2% in 2023.

In a separate Malaysia Macro Poverty Outlook brief issued to reporters covering the virtual press conference on Tuesday, the World Bank said Malaysia's 2022 GDP growth is projected at 6.4%, supported by strong domestic demand, which is underpinned by continued improvements in labour market conditions.

Tourism-related activities by domestic and international travellers are expected to see an uptake, it added.

In addition, the continuation of multi-year investment projects will likely provide additional support for economic growth, according to the World Bank.

"Nonetheless, downside risks, particularly on the external front, continue to prevail. This includes a slowdown in growth in advanced economies and China, unfavorable financial conditions, and continued supply chain disruptions.

"Disruption to Russia’s energy exports, particularly natural gas, could be more severe than expected. On the domestic front, speculation over the next general election [in Malaysia] could also raise investors’ uncertainty in the near term," the World Bank said. 

At the press conference, World Bank East Asia and Pacific chief economist Aaditya Mattoo said Malaysia's economic concerns include cost-push inflation and depreciation of the ringgit.

“There are concerns. Inflation is increasing because of cost-push pressures, [coupled with] higher prices of feedstocks. The central bank (Bank Negara Malaysia or BNM) has begun raising interest rates to try and deal with the depreciation of the ringgit, and the Government has relied a lot on subsidies to cushion the shock,” Matoo said.

He said there are two main challenges for the country in the aspects of inclusiveness of the economy and the overall economic growth moving forward.

“There are signs that Malaysia’s economic recovery is uneven. Not all the poor receive adequate support, and many poor households are in deep financial difficulties. Geographically, the East Malaysia (Sabah and Sarawak) and Northern Peninsular [Malaysia regions] have experience slower economic growth,” he said.

“The growth challenge is at a somewhat more advanced level, not different from Vietnam. Here again is a country (Malaysia) that is on the verge of becoming a high-income country, but instead of raising to that status, it is walking slowly towards it,” he said.

Matoo said Malaysia is lagging when it comes to the transition from its participation in the global manufacturing value chain to more innovative economic activities.

Malaysia is seen as a country with a very complex policy environment, according to him.

“It has a very complex policy environment, which has inhibited reform and services, and has also inhibited industrial production and retention of human capital," he said.

Human capital is a key priority because the World Bank's research shows that foreign direct investment is "super sensitive to the availability of local skills”, according to him.

“You can get investments which do basic manufacturing activities, but I think Malaysia should aspire to pursue innovation, which leads it up towards more sophisticated economic activities, and that requires investments with skills, and deeper reforms of the whole regulatory and policy environment,” he said.

Apurva Sanghi, who is the World Bank's lead economist for Malaysia, also fielded reporters' questions during the press conference.

He said Malaysia's economic fundamentals remain strong.

“Malaysia’s fundamentals remain strong, but there are significant headwinds from the uncertain nature of the global economy.

“On the domestic front, rising inflation, particularly food inflation which is now at over 7%, sluggish labour market recovery, and the shortage of workers are affecting Malaysia in achieving its potential,” he said.

Apurva also touched on other topics, including BNM's move to normalise the overnight policy rate (OPR).

He said the ongoing OPR normalisation is deemed a right move, as it helps address inflationary pressures, and creates monetary policy space ahead of a challenging year in 2023.

“A higher OPR means we are preventing expectations [of inflation] from spiralling up or becoming entrenched. That is one advantage of a more normalised OPR. Another [advantage] is it creates [monetary] policy space, [as] 2023 is going to be a rocky year with a lot of uncertainties,” he said.

BNM has so far in 2022 raised the OPR thrice to 2.5% from a record low of 1.75%.

On Sept 8, the central bank said in a statement that its Monetary Policy Committee had decided to increase the OPR by 25 basis points to 2.5%.

This followed a 25-basis-point rise on July 6, and the same on May 11 previously.

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Chong Jin Hun