Writing in OCBC Bank’s Economic Outlook for 2023, chief economist Selena Ling said upside surprises in Malaysia’s 2022 gross domestic product (GDP) print suggested that the bank had been too bearish in its 2022 growth outlook, compelling an upward revision from 5.7% to 6.9%.
However, moving forward, Malaysia’s consumption support may not be as robust due to the relatively high household debt level and depletion of EPF statutory retirement funds.
The bank is thus striking a more cautious note on the 2023 export outlook, given the continued downdraft in the semiconductor sector.
“While Malaysia’s role in the testing and packaging part of the value chain, rather than the initial production side, may shelter it somewhat and with a time lag, the effect might come forth more strongly in 2023, especially if the down-cycle is prolonged,” Ling said.
The bank’s “cautiousness” on how the 2023 consumption and export cycles are going to pan out underpins its view that the overall GDP growth is going to shift to a lower gear, coming in at 4.6% against a likely 6.9% in 2022, she said.
Ling added that slower growth will present “a more challenging landscape” for the new unity government.
“Given the need to bolster popular support, the government may have little choice but to pursue a relatively loose fiscal policy,” she said.
On the expenditure front, cash handouts and budget measures to reduce the cost of living are likely, she said, adding that the prospect of a cut in fuel and food subsidies looks “dim” at least in the near term.
On the revenue side, the return of the Good and Services Tax (GST) will also be an issue as there is a need to reduce dependence on oil-related revenues.
Various Pakatan Harapan officials have been adamant about not adopting GST before but the fiscal reality has to be grappled with, she surmised.
Inflation concerns to persist
Meanwhile, on the monetary policy side, Ling said inflation concerns are likely to persist in 2023 and Bank Negara Malaysia is likely to hike the overnight policy rate (OPR) by 25 basis points (bps) each in January and March, followed by a pause after that.
Ling added that although the near-term growth looks rosy, Malaysia may be affected by a sharp global slowdown.
Globally, she said the 2023 outlook “looks and feels” like a recession with major economies possibly facing “a synchronised downturn” despite global growth forecast of about 2% year-on-year.
Despite China’s reopening, the near-term outlook is “murky”, she added.