Bank Negara Malaysia (BNM) projects the domestic economy to grow between 4% and 5% in 2024 (2023: 3.7%), aligning with the government’s estimate while highlighting a potential rebound in the manufacturing sector and a newly forecast contraction in the agricultural sector. Domestic demand remains the anchor of the projection, supported by a lower unemployment rate, higher wage growth, continued government surplus, higher target for tourist arrivals and increased private investment growth.
After a challenging year for external demand in 2023, BNM projects exports to grow by 4.0% in 2024 (2023: -7.9%) in line with global trade recovery. Year-to-date exports grew by 3.9% in February, with an 11.0% increase in exports to the US counterbalancing a 4.0% decline in exports to China, indicative of the uneven recovery across trading partners. Relatedly, exports from Korea and Taiwan, the leading countries in the semiconductor industry, grew by 4.8% and 1.3% in February (Jan: 18.0%, 18.1%), affirming improving momentum, particularly in electrical and electronic products.
The ringgit experienced a minor appreciation of 0.38% against the greenback in March (Feb: -0.21%), in line with the broad dollar weakness of 0.32% (Feb: 0.85%). BNM evaluated the current level of the ringgit as undervalued, given underlying economic fundamentals and increased engagement measures to encourage foreign exchange conversions into ringgit by corporations and other institutions. Concurrently, cumulative net foreign outflows stood at RM9.0 billion in February on a year-to-date basis, tracking the weakness of the ringgit and reversing 2023’s gain of RM5.6 billion.
In March, the Malaysian Government Securities (MGS) market rallied in the first half of the month before retreating due to higher-than-expected inflation prints. After the US Federal Reserve (Fed) held the policy rate steady in its March meeting, MGS yields moved in tandem with the drop in US Treasury yields, reflecting market expectations of fewer rate cuts to commence upon clearer signs of disinflation. Despite this, MGS yields remained relatively flat over the month as the market was initially spooked by higher US inflation. Meanwhile, German Bund yields declined sharply following decelerating eurozone inflation despite the delay in anticipated rate cuts. Positive sentiment led the local corporate bond market to sustain its multi-month rally with compressed credit spreads.
The Fed raised its projections for core inflation and economic growth for 2024 to 2.6% and 2.1% (Dec 2023 projections: 2.4%, 1.4%), and lowered its unemployment projection to 4.0% (Dec 2023 projection: 4.1%). The Fed’s dot plot median remained at three cuts, similar to the December 2023 projection. Concurrently, the market consensus in March aligns with the Fed’s projections, anticipating three cuts in 2024 as opposed to the previously anticipated five to six cuts after the December and January meetings. However, a robust US economy and sticky inflation remain key risks to the interest rate outlook.
Going forward, inflation is expected to be between 2.5% and 3.0% in 2024 (2023: 2.5%) with upward pressures due to spillovers from new tax measures and the execution of targeted subsidies which will be phased in throughout 2024. In view of the present level of growth and inflation, BNM maintained the policy rate at 3.00% in its March meeting.