BNM Report Highlights: 2024 Economic Growth with Higher Incomes and Trade Rebound

Last week, the 2023 Annual Report was published by Bank Negara Malaysia, providing insights into the country's economic and financial status, identifying existing and prospective challenges, and outlining the measures implemented to address these issues. Here are key takeaways from the report.

In 2024, Malaysia's economy is forecasted to experience a growth rate between 4% and 5%.

The escalation in income levels is primarily influenced by three factors: higher external demand, continued improvement in tourism, and higher productivity especially from digitalization and automation.

The unemployment rate is maintained at a level consistent with full employment. There are specific policies in place aimed at bolstering employment rates. These include programs for skill enhancement and training, incentives for hiring vulnerable groups, and tax benefits designed to encourage women to re-enter the workforce.

Capital expenditure continues to grow, with approved investments progressing smoothly, further bolstered by the implementation of multi-year investments, including projects in industries promoted by the national master plan.

In 2024, the service sector is anticipated to experience a growth of 5.5%, primarily driven by the resurgence of the tourism industry, a revival of trade supported by supply chain enhancements, and ongoing construction projects. The manufacturing sector is expected to see a 3.5% increase, largely influenced by electronic and electrical projects, and a rebound in raw material-related fields amidst improvements in upstream supply conditions. Conversely, agriculture is projected to decline slightly, mainly due to the impact of El Niño and insufficient fertilization affecting crude palm oil production.

Malaysia's export growth is set to be bolstered by a resurgence in global trade, a dynamic technology sector, and a revitalized tourism industry, with WSTS forecasting a 13.1% increase in global semiconductor sales for 2024, and MOTAC projecting tourist arrivals to surge by 27.3% in the same year.

To guarantee enduring economic expansion, it is essential to implement structural reforms that encompass four key aspects: implementation of master plans, labor market reforms, strengthening social protection, and commitment to fiscal reforms.

However, there are still some risks that could impact economic growth. For example, external demand may be lower than expected following a decline in global inflation, regional conflicts could worsen, and the supply of commodities might significantly decrease due to weather and natural environmental factors.

BNM projects that headline inflation will range from 2.0% to 3.5% for 2024. Meanwhile, core inflation is expected to average between 2.0% and 3.0%. The Overnight Policy Rate (OPR) was increased to 3.00%, signaling a complete rollback of the policy stimulus implemented during the COVID-19 pandemic by 2023. Looking ahead to 2024, the monetary policy is expected to promote steady economic growth while also managing potential risks associated with inflation.

Inflation staying within the projected range faces several risks, including the higher prices resulting from the potential review of fuel subsidies, elevated input costs due to fluctuations in exchange rates, and rising global commodity prices fueled by worsening geopolitical tensions and disruptions caused by adverse weather conditions.

Greater policy rate increases in other countries have affected the ringgit against other currencies in 2023.

In 2024, the ringgit is anticipated to experience a measured rebound, influenced by both international and local factors. Globally, a gradual easing of US monetary policy is expected to bolster regional currencies through a resurgence in trade. Domestically, enduring support from structural reforms and a positive outlook for domestic growth are key contributors to the ringgit's potential recovery. However, there is a possibility that weak commodity prices could exert downward pressure on the value of the ringgit.

Financial institutions hold a sturdy stance that underpins financial intermediation, withstanding even the most rigorous stress scenarios. Their solid capital and liquidity safeguards remain intact.

The Bank's stress testing exercises affirm these institutions' resilience, bolstering confidence in their ability to support economic activity. Under scenarios of Sharp and Milder GDP contraction, the Total Capital Ratio stands at 15.4% and 15.8%, respectively, well above the minimum requirement of 8%.