Malaysia registered a slower gross domestic product (GDP) growth of 3.0% in 4Q2023 (advanced estimate: 3.4%; 3Q2023: 3.3%), as growth in the services sector moderated to 4.2% (3Q2023: 5.0%) while that in the manufacturing sector remained tepid at -0.3% (3Q2023: -0.1%). Consequently, the full-year 2023 GDP growth stood at 3.7% (2022: 8.7%). Looking ahead, we forecast a firmer GDP growth of 4.2% in 2024, reiterating our view of an anticipated recovery in the tourism and external sectors, which will provide a much-needed boost for the services and manufacturing sectors. Furthermore, the investment outlook is expected to remain positive in 2024.

The ringgit continued to weaken against the greenback in February, partly attributable to the broad dollar strength amid the prospects of a higher-for-longer interest rate environment. Nevertheless, the ringgit has generally underperformed its regional counterparts against the dollar. Thus, the ringgit’s weakness highlights the need for robust structural reforms to enhance Malaysia’s capabilities in foreign currency accumulation.

The Malaysian Government Securities (MGS) market moved in tandem with the rise in US Treasury yields following the market’s pushback against the earlier expectations of more aggressive Fed rate cuts amid positive US economic data. Going forward, the shifting interest rate trajectory in advanced economies and the ringgit’s weakness may lead to extended periods of volatility in the local bond market.

The local corporate bond market rallied in February, with yields of the high-rated bonds declining across all categories. The rally in the local corporate bond market and the fund inflows observed in the equity market suggest broadly positive investor sentiment. Along with the decline in corporate bond yields and increase in the MGS yields, the yield spread between these high-rated corporate bonds and MGS compressed for the month.

Headline inflation remained steady at 1.5% in January (Dec 2023: 1.5%). We expect inflation to rise to 3.0% in 2024 (2023: 2.5%), given the gradual rollout of subsidy rationalisation and other new tax measures, anticipated volatilities in commodity prices as well as pressures from firmer domestic demand. In view of the upside risks to inflation, uncertain Fed interest rate trajectory, volatilities in the ringgit and ongoing geopolitical tensions, Bank Negara Malaysia will likely adopt a data-dependent approach and hold the Overnight Policy Rate unchanged in its next Monetary Policy Committee meeting on March 7.