Maybank Investment Bank (Maybank IB), on the BNM Monetary Policy decision on the Overnight Policy Rate (OPR) being maintained at 3.00%, said today that comparing the latest and previous rate decisions, BNM maintained its assessment of continued global growth amid resilient job market, global tech upcycle and trade recovery that cushion the impact of tight monetary policy and fiscal stimulus withdrawal, as well as the view that the risk to global growth outlook remained biased to the downside on factors like escalations in geopolitical tensions, higher-than-expected inflation and financial market volatility.
Domestically, BNM expect sustained economic growth momentum in 2Q 2024 driven by resilient domestic demand on continued employment and wage growth and as tourist arrivals and spending are poised to rise further to support private consumption, plus private and public investment growth from progress in the multi-year projects implementation of catalytic initiatives under master plans announced last year (e.g. National Energy Transition Roadmap; National Industrial Master Plan 2030) and the realisation of the robust approved investments past three years.
There is also better export performance as global tech upcycle gathers momentum as well as growth in non-E&E exports.
Risks to domestic economic outlook are balanced between the downsides to external demand and commodity output, and the upsides from greater spillover from the tech upcycle, more robust tourism activity and faster implementation of existing and new projects.
Inflation stays tame as per the "+2% YoY or less" monthly headline and core inflation since Sep 2023 and Nov 2023 respectively. However, the risk is tilted to the upside in the wake of the adjustments in consumption-related taxes – especially the Services Tax on 1 Mar 2024, and the implementation of targeted diesel subsidy on 10 June 2024.
Headline inflation rate in May 2024 picked up to +2% YoY after 3 straight months of +1.8% YoY print in Feb-Apr 2024, while core inflation picked up to +1.9% YoY in Apr-May 2024 from +1.7% YoY in Mar 2024.
BNM's Monetary Policy Statement (MPS) remarked that inflation will trend higher in 2H 2024 due to the diesel subsidy rationalisation, but will remain manageable given the mitigation measures to minimise the cost impact on businesses, and maintained that the upside risk to inflation would be dependent on the extent of spillover effects of further domestic policy measures on subsidies and price controls to broader price trends, as well as global commodity prices and financial market developments. BNM maintained 2024 headline and core inflation rates' forecast ranges of 2.0%-3.5% and 2.0%-3.0% respectively.
... and US Fed's hold for longer to keep OPR at 3.00%
Maybank IB expects the OPR to remain at 3.00% throughout 2024 given their forecasts of GDP growth pick up (2024E: +4.7%; 1Q 2024: +3.9% YoY; 2023: +3.6%) and upside risk to inflation rate (2024E: +2.4%; 5M 2024: +1.8% YoY; 2023: +2.5%), plus US Fed's "hold for longer" interest rate policy stance.
However, a stable OPR with the expected US interest rate cuts is positive for Ringgit's outlook amid recent stabilisation The latest Interest Rate Swap (IRS) rate implies market is pricing in a stable OPR next 12 months.
Ringgit stabilised, while strengthening requires US interest rate cuts and domestic reforms and restructuring
On the Ringgit, the latest MPS essentially maintained BNM's view that Ringgit current level does not reflect Malaysia's economic fundamentals and growth prospects i.e. being undervalued.
Maybank IB analysts believe the Ringgit has stabilised against the USD to trade in a 4.68-4.72 range since mid-May 2024, and closed at 4.6875 on 11 July 2024 (source: Bloomberg), improving from this year's low of 4.80 on 20 Feb 2024.
This follows FX market intervention by BNM as indicated by the -USD2.1b drop in external reserves during Feb-Apr 2024 plus coordinated communications and actions by BNM (e.g. Governor's, Financial Market Committee (FMC) and Monetary Policy statements on 20/27 Feb 2024, 1 Mar 2024 and 7 Mar 2024 respectively) and Ministry of Finance (e.g. Second Finance Minister's statement in the Parliament on 29 Feb 2024) that include Ringgit-supporting measures, including encouraging Government-linked companies (GLCs) and Government-linked investment companies (GLICs) repatriating AND converting their foreign exchange earnings and overseas investment incomes.
Maybank IB's FX Research sees Ringgit ending this year vs USD at 4.60. Ringgit-positive factors include improving domestic economic growth prospect, as per the pickup in the 1Q 2024 real GDP growth to +4.2% YoY (4Q 2023: +2.9% YoY) that was among others driven by exports rebound (5M 2024: +4.5% YoY; 2023: -8.0% YoY), in line with the bank's forecasts of faster 2024 real GDP growth of +4.7% (2023: +3.6%) and full-year rebound in exports of goods and services (2024E: +5.5%; 2023: – 8.1%).
At the same time, the outlook on US interest rate matters
To recap, Ringgit strengthened to close at 4.59 at end-2023 vs the low of 4.79 on 23 Oct 2023 as markets priced US Fed cutting interest rate as soon as Mar 2024 and by as much as -150bps cuts back then. The outlook has since changed to -50bps cuts in the Fed funds rate later this year as per the latest 30-day fed funds futures.
However, once the fog of uncertainty on US interest rate policy – in terms of timing and quantum – clears away, we expect Ringgit outlook to improve amid stable OPR and US fed funds rate cuts.
Nonetheless, over the longer term, economic reforms and restructuring – as well as strategic economic growth policies – are vital for Ringgit outlook.
The MPS reiterated that "over the medium term, ongoing structural reforms will provide more enduring support to the Ringgit".
Maybank IB views the execution/implementation of fiscal reforms as the "low-hanging fruit" for a sustained Ringgit-positive/supportive outcome, especially given the legally binding target of reducing budget deficit to -3.0% of GDP (2024E: -4.3% of GDP; 2023: -5.0% of GDP) and capping Government total debt at no more than 60% of GDP (end-2023: 64.3% of GDP) in 3-5 years as per the Public Finance and Fiscal Responsibility Act (FRA) i.e. by 2026 at the earliest and by 2028 latest.
To-date, Maybank IB said, the Government has rolled out revenue-enhancing broadening of the tax bases i.e. imposing Capital Gains Tax and 10% Low Value Goods Tax effective 1 Jan 2024; Services Tax base expansion and rate adjustment to 6%-8% range from 6% as well as "Sugar Tax" hike effective 1 Mar 2024. Further revenue-enhancement measures this year include strengthening tax compliance via the phasing in of "e-invoicing" starting 1 June 2024 for full implementation on 1 July 2025.
At the same time, the Government made further progress in subsidy rationalisation by rolling out the targeted diesel subsidy rationalization on 10 June 2024 after the implementation of targeted electricity subsidy and ending the subsidy for chicken production last year. We also expect the Government to complement FRA with the tabling of Government Procurement Act (GPA) in 4Q 2024.