Bank Negara Malaysia Annual Release 2021: Reforms Beyond Pandemic

A year of recovery amid downside risks to the growth outlook. We concur with Bank Negara Malaysia’s assessment that Malaysia’s economic recovery remains on track in 2022, supported by continued global recovery, the full upliftment of containment measures and the reopening of international borders. 2022’s GDP growth estimate revised lower. Bank Negara Malaysia revises 2022’s GDP growth estimate lower to 5.3%-6.3% (mid-estimate at 5.8%) from the Treasury’s 5.5%-6.5% forecasted in October 2021. SERC’s estimate of 5.2% falls within the range.

Stronger revival in domestic demand. The projected higher economic growth (5.3-6.3%) in 2022 is largely anchored by stronger domestic demand (estimated 6.7% in 2022 vs. 1.8% in 2021), especially private consumption growth (estimated 9.0% in 2022 vs. 1.9% in 2021) amid slowing exports (3.2% vs. 9.8% in 2021).SERC expects private consumption to increase by 6.5% in 2022. While we reckon that pent-up demand will support consumer spending, but the repairing of impaired households’ balance sheet and rebuilding of depleted savings as well as the pick-up in inflation will mean prudent discretionary spending. Higher inflation and cost of living concerns will crimp the households’ disposable income (purchasing power) and dampen consumer sentiments. In addition, the expected gradual improvement in the labour market condition (estimated unemployment rate at 4.0% in 2022 vs. 4.5% in 2021) and moderate increases in income would restrict spending.

Headline and core inflation will move higher in 2022. Bank Negara Malaysia expects both headline inflation and core inflation to increase higher to 2.2%-3.2% and 2.0%-3.0% respectively in 2022 (+2.5% and 0.7% respectively in 2021).  Higher core inflation reflects the recovery in domestic demand.

Policy rate adjustments will be gradual and measured. Bank Negara Malaysia indicates that the interest rate policy will be data dependent, and any adjustment in policy rate will be gradual and measured so as not to disrupt the recovery pace.