• The Malaysian economy has performed strongly in 2024, with low and stable inflation
   
• GDP growth to moderate slightly in 2025
   
• Domestic consumption will remain a key driver of Malaysia’s economic growth

• Private consumption will continue to be buoyed by resilient labor market conditions

• Investment growth will be supported by the realisation of private sector projects

• Most major economic sectors are projected to sustain growth

• Malaysia’s trade sector will be able to sustain growth amid intensified concerns over another trade war between China and the US

• Inflation hinged on domestic policy shifts

• Bank Negara Malaysia to maintain its OPR at 3.00% in 2025

• Risks to growth are tilted to the downside, amid an uncertain global outlook, while risks to inflation are to the upside

Stronger Economic Performance in 2024

Malaysia’s economy grew by 5.3% YoY in 3Q24 (2Q24: 5.9%), fuelled by robust investment activity and ongoing growth in exports. On a seasonally adjusted, quarter-on-quarter basis, the growth momentum slowed to 1.8% (down from 2.9% in 2Q24). In total, the Malaysian economy grew by 5.2% in the first three quarters of 2024. Private consumption remains as the principal engine of growth, accounting for 61.7% of GDP in 3Q2024, expanded by 4.8% in 3Q24 (2Q24: 6.0%), bolstered by favorable labor market conditions and policy initiatives. In addition, government expenditure edged up by 4.9% in 3Q24 (2Q24: 3.6%). Gross fixed capital formation or investment in fixed assets saw double-digit growth of 15.3% in 3Q24 (2Q24: 11.5%) buoyed by increased investment in infrastructure and spending on machinery and equipment. The performance on the supply side was mainly supported by the services, manufacturing and construction sectors. For 2024, we envisage that the full-year growth will be at 5.0%.

GDP Growth to Moderate in 2025

Supported by strong domestic and external demand, the economic performance has significantly improved in 2024. Growth is however projected to moderate from 5.0% in 2024 to 4.7% in 2025. Malaysia’s economic performance in 2025 will remain anchored by favourable labor market conditions, continued demand for electrical and electronics (E&E) exports and faster implementation of investment projects. Private consumption, one of the key growth pillars, will also be uplifted by the upcoming minimum wage hike to RM1,700 a month (previously RM1,500 a month) effective February 2025. Risks to growth are tilted to the downside, mainly due to the uncertain global outlook, including external risks from deeper geoeconomic fragmentation. Meanwhile, upside risks could arise from the faster-than-envisaged implementation of large investment projects in Malaysia.

Domestic Consumption Will Remain a Key Driver of Malaysia’s Economic Growth

In October, Malaysia's distributive trade sales surged by 5.5%, relative to 3.8% in September, driven by robust consumer spending during the festive season. The growth rate in retail trade also displayed laudable expansion of 7.1% in October from 5.5% in the previous month. Thus, the consumer demand in Malaysia continues to point towards resilience alongside the positive trends in the job market and stable inflation. Tourism arrivals saw a strong boost, with 20.61 million foreign tourists visiting in 10M2024 (10M2023: 16.11 million), marking nearly a 27.9% y-o-y increase and achieving over 75% of the 27.3 million annual target. For 2025, we envisage that growth will be sustained by government cash transfers, Phase 1 of civil servant salary revision effective December 2024 and the increase in minimum wage to RM1,700 from RM1,500 per month. The services sector remained resilient, with tourism and consumer-related industries benefiting from the return of tourists and favorable labor market conditions. The retail sector is projected to keep thriving under these positive conditions, which will enhance its performance in the months ahead.

Most Major Sectors Expected to Maintain their Upward Trajectory

The services sector is set to thrive on robust household spending and a surge in tourist expenditure. Manufacturing is poised to benefit from rising overseas demand and a continued recovery in exports, alongside strong domestic market consumption. Meanwhile, the construction sector is riding high, with activity reaching a two-year peak. This dynamic growth is fueled by swift progress on key infrastructure projects and the unveiling of new initiatives. In 3Q2024, construction work surged 22.9% year-on-year, building on the 20.2% growth in the previous quarter. Landmark projects like the Rapid Transit System Link (RTS Link) between Johor Bahru and Singapore, the East Coast Rail Link (ECRL), the Pan-Borneo Highway, and the Kuching Autonomous Rail Transit are driving this momentum. Adding to the pipeline are transformative projects such as the Johor-Singapore Special Economic Zone, the Miri Airport expansion, and the Penang LRT and MRT Circle Line. This acceleration is backed by substantial public and private investments, anchored by the government’s PublicPrivate Partnership Master Plan 2030 (PIKAS 2030). With 37 ongoing and 41 proposed projects, PIKAS 2030 aims to enhance governance, strengthen partnerships, and boost economic dynamism, especially when aligned with other Madani policies. The mining sector is also set for a rebound, powered by increased natural gas extraction and a potential recovery in crude petroleum output. However, relatively lower crude oil prices could temper growth in this sector. Overall, these developments signal a robust and diversified economic expansion.

Export to Navigate Trade Challenges

In 2024, Malaysia’s trade recovery has been propelled by robust demand for exportoriented goods, particularly in high-value sectors. Looking ahead to a potential Trump 2.0 presidency, Malaysia’s trade outlook remains uncertain. While direct impacts may be minimal, the indirect effects via China-centric supply chains could be significant. Given Malaysia's greater trade exposure to China and its role as a key supplier in China-centric global supply chains, a potential escalation of US-China trade tensions could lead to significant negative repercussions for Malaysia's exports, especially in the E&E sector. On the other hand, Global Semiconductor Shipments (GSS) have experienced double-digit growth every month in 2024, reaching 22.0% in October (Sep: 23.2%), which is expected to provide a significant boost to Malaysia's E&E exports. For export-driven industries, the E&E sector is projected to continue improving, driven by growing global demand for electronics, spurred by ongoing innovations and expansion in the consumer electronics market. Additionally, the rising demand for AI chips, data centers, and next-generation computing applications will further strengthen Malaysia's semiconductor industry.

Malaysia’s trade outlook remains cautiously optimistic, driven by potential shifts in trade and tariff policies under a possible Trump 2.0 administration. As a result, we anticipate a moderation in trade dynamics, with export growth projected at 4.8% and import growth at 5.3% driven by resilience in export-oriented industries and opportunities emerging from global supply chain realignment.

With the resurgence of export expansion, we forecast a 4.1% IPI growth rate in 2025. This projection reflects our expectation of improved demand conditions and our optimism regarding the sustained performance of domestic-oriented businesses, supported by robust domestic spending. We believe this will enhance confidence in future production prospects.

Inflation Hinged on Domestic Policy Shifts

The year-to-date (YTD) inflation at 1.9% aligns with our 2024 forecast of 2.0%, highlighting muted impact from policy changes on overall price pressures. Looking ahead to 2025, we expect inflation to edge up modestly to 2.7% (MoF estimate: 2.0%-3.5%), driven largely by supply-side factors. Policy adjustments, including broader SST coverage and an increased minimum wage, are likely to raise operating costs, which may be passed on to consumers. Transportation costs are also expected to rise, with higher retail petrol prices stemming from the anticipated introduction of a targeted RON95 subsidy.

Amid these uncertainties, Bank Negara Malaysia (BNM) is expected to keep the Overnight Policy Rate (OPR) at 3.00% through 2025. While inflation is anticipated to rise, this increase is primarily due to supply-side factors, as core inflation remains stable, indicating contained demand-side pressures. Given these conditions of manageable inflation and steady economic growth, BNM is expected to adopt a cautious stance, closely watching global developments to strike a balance between supporting economic growth and mitigating potential inflationary risks in this volatile global environment.

Healthy Job Market

Malaysia's labour market is experiencing significant growth, driven by strong economic progress and a stable labour force participation rate. Unemployment reached a low of 3.2% in October, the lowest since January 2020, while participation hit a record high of 70.5%, reflecting a thriving job market. Looking ahead to 2025, continued domestic demand, a recovering tourism sector, and steady export growth are expected to sustain job creation. We foresee the unemployment rate to remain at 3.3% for both 2024 and 2025. 

USD/MYR: The MYR has been on a ride this year, appreciating to the highest level since 2021 during end-September (RM4.1075) before slumping in the wake of Trump’s win in the US presidential election. The main drag tipping the scale against the local note thus far is the external factor. When markets are rallying behind dovish Fed bets, Ringgit stood to gain from the greenback’s weakness and vice versa. With the expectations of a looser fiscal policy under Trump alongside his rhetoric of higher tariffs on several trade partners, markets are now anticipating delays in the Fed’s monetary easing cycle. Moving forward, the resilience of the US economy, backed by solid labour market conditions and Trump’s domestic revitalization policies, will cast a shadow over the Ringgit’s shine. In addition, trade frictions and the trade war with China will reignite price pressures, possibly necessitating the need for monetary policy to stay restrictive for longer.

Ringgit will strengthen due to the narrowing interest rate differentials following Fed’s rate cut cycle, albeit more gradual than initially anticipated, and BNM holding the OPR steady at 3.00%. Based on historical trend,Ringgit has a strong inverse correlation with MGS/UST yield differentials. As the Fed continues to slash interest rates, the narrowing yield differentials will also provide support to the local note. Delving into the mainstays of support, we believe the strong economic fundamentals will continue to provide tailwinds to Ringgit’s appreciation. The Ringgit will also strengthen on the back of BNM’s initiatives with the government to encourage repatriation of foreign currency funds into the local market. One such measure is the pilot Qualified Resident Investor (QRI) programme with a deadline extension to June 2025. Taking all that into consideration, we expect USD/MYR to average at 4.53 and reach RM4.25 by year-end 2025. 

Fiscal consolidation to cap bond issuances: Bank Negara Malaysia concluded the issuances of Malaysian Government Securities (MGS) and Government Investment Issues (GII) in 2024 with the final issuance of 10y reopening of MGS on December 9. Overall, the total issuances of MGS and GII amounted to RM175.0 billion (MGS: RM87.5 billion, GII: RM87.5 billion), in line with our forecast of within RM175.0 billion to RM180.0 billion. Local government bond offerings persisted in attracting significant investor interest in 2024. All issues were oversubscribed, the average bid-to-cover ratio for local government bonds in 2024 stood at 2.4x, surpassing the 2.1x ratio recorded in the prior year. Breaking it down, the average BTC ratio of 2.2x for MGS, a notable increase from the 2.0x observed in the preceding year. Likewise, GII witnessed robust demand with a BTC ratio of 2.7x in 2024, up from 2.2x in 2023. For 2025, we posit that the gross MGS/GII issuance will amount in the range of RM160.0 to RM165.0 billion (2024: RM175.0 billion) based on the upcoming MGS/GII maturities of RM83.5 billion (MGS: RM46.5 billion, GII: RM37.0 billion) in 2025, and the government's projected fiscal deficit of RM80.0 billion in Budget 2025 (2024: -RM84.3 billion) in tandem with the government’s commitment to fiscal consolidation.

Yields movement to be dependent on US development: From the period of January to November 2024, MGS yields remained elevated despite lower government bond issuances in 2024. 5-year and 10-year MGS yields ticked slightly higher in the range of 2bps and 7bps. Meanwhile, 3-year MGS only edged down marginally by 1bp. The Fed has started on its monetary policy easing cycle in 2024. President-elect Trump’s policy thrust of immigration controls, tariffs and personal and corporate tax cuts likely to mean the Fed signals a shallower, slower path of easing through 2025, along with escalation of trade tensions under Trump’s second term of presidency could spark uncertainty into the bond market.

Significant decline in net inflows in 2024: In 3Q2024, pension funds became the largest holders of local government bonds, accounting for 29.7% of the total outstanding, closely followed by the banking institutions with a share of 29.2% of total outstanding. Other domestic institutional investors, including Development Financial Institutions, BNM, and insurance companies, also played a significant role in driving demand in the local government bond market. For the first eleven months of 2024, the local bond market saw cumulative net foreign inflows of RM6.2 billion, a significant decline compared to the RM25.8 billion inflows logged in the same period in 2023. Furthermore, the foreign shareholdings in MGS and GII dipped to 21.4% as of November 2024, down from 22.7% in December 2023. Of note, the total foreign shareholdings in the local bond market remained subdued at 13.2% of total outstanding in November 2024. Looking into 2025, capital flows into emerging markets, including Malaysia, will be significantly influenced by a number of key factors. These include the implications of US foreign policy, particularly in the areas of diplomacy and trade, China's economic growth prospects, global monetary policy settings, and geopolitical factors.

Risks to Outlook

There are significant downside risks to the outlook. The only certainty is uncertainty and we foresee heightened external challenges which could undermine Malaysia’s external trade performance and export-oriented sectors. One key risk is the potential tightening of trade policies by the new US administration, including higher import tariffs, which may dampen US demand. The exact impact remains unclear, as it depends on the timing and extent of such measures. Geopolitical tensions in key regions like the Middle East and Europe pose a risk of escalating into broader conflicts, further disrupting global trade. Moreover, supply chain disruptions, triggered by trade tensions or commodity price volatility, could lead to renewed inflationary pressures, forcing central banks to reconsider their accommodative monetary policies. A stronger US dollar, driven by safe-haven demand amid geopolitical tensions and growth concerns, could further complicate the outlook for the ringgit. On the domestic front, a sharper rise in inflation poses a destabilizing threat, potentially eroding consumer sentiment and purchasing power. Other risks include a deepening slowdown in China, a hawkish pivot by the Fed, and escalating geopolitical conflicts - all of which could weigh heavily on Malaysia’s economic trajectory.

Source: BIMB Securities Research - 2 Jan 2025