Malaysia Commentary: A Thriving Economy Where Everyone Can Prosper

By NurulJannah Kamaruddin & Norsyafawati Ab Wahab

Malaysia's economic credentials, particularly its superlative expansion in second-quarter growth that exceeded expectations, not only reflect its economic resilience but also demonstrate that policies previously criticised are now yielding dividends.

Even more encouraging is that an appreciating ringgit, fiscal prudence via the government's tight rein on inflation and debt, along increased domestic and foreign direct investments, have garnered approval from rating agencies, thereby reinforcing business sentiment in Malaysia's markets.

This positive sentiment has led analysts to project the ringgit to strengthen to RM4.25 against the greenback by the end of 2024, and to range between RM4.00 and RM3.94 by the end of 2025.

For many nations, economic policies clearly take time to bear fruit, especially given the geopolitical risks that disrupt growth.

However, for Malaysia, it could be turning the corner towards expanded growth and new prosperity.

This success can be attributed to forward-looking, comprehensive policies on clean and renewable energy, incentives to attract semiconductor investments and a healthy dose of continued domestic consumption and investment.

Combined, they augur well for the rakyat in terms of increased job opportunities and income.

Investor sentiment is on the upbeat through greater foreign inflows into the equities and bonds markets.

Analysts opine that Malaysia's economy has long been synonymous with dynamism, diversity, and adaptability, traits that are evident in the current climate.

To further strengthen this momentum, the government has introduced a series of bold measures and reforms that have significantly spurred growth, accompanied by improvements in domestic direct investment (DDI) and foreign direct investment (FDI).

This economic vitality is mirrored in investor optimism over the ringgit, in tandem with the robust performance of the stock markets.

UOB Kay Hian Wealth Advisors head of investment research Mohd Sedek Jantan lauds the government's financial prudence initiatives.

He says the government's commitment to fiscal responsibility, as demonstrated through the Financial Responsibility Act and the 60% limit on total government debt, has undoubtedly strengthened the legal framework for public finance.

Undeniably, this has been crucial in instilling confidence among foreign businesses and rating agencies.

Moreover, the government's comprehensive approach to economic development under the Madani Economy, such as the National Energy Transition Roadmap (NETR), the National Investment Policy (NIMP) 2023 and the Progressive Wage Policy, has had a synergistic effect on the economy.

“The Financial Responsibility Act ensures financial sustainability, while fiscal measures drive overall growth.

“By successfully implementing measures to achieve its existing targets, including reducing the poverty rate to below 0.75% by 2025, attracting RM300 billion in FDI by 2025 and increasing the digital economy's contribution to GDP to 22.4% by 2025, Malaysia will naturally position itself for future economic advancement,” he told Bernama.

He added that this confidence has led UOB Kay Hian Wealth Advisors to revise Malaysia's growth forecast for 2024 upwards from 4.2% to 5.2%, compared with 3.6% in 2023.

Prominent economist Dr Yeah Kim Leng concurs with the prognosis that the economy is on an upward trajectory.

Dr Yeah, who is also president of the Malaysian Economic Association, said GDP growth is expected to continue in the coming quarters, boosted by domestic consumption and investment, helping to offset weaker external demand.

In addition to the economy expanding by 5.9% in the second quarter of 2024, driven by a 6.0% increase in household spending, other strong indicators included an export recovery of 5.8%, higher tourist arrivals of 6.0 million, and stronger investments, particularly in high-construction activities.

There was also an expansion in the electronics and electrical industries and data centres nationwide of 17.3%.

Moreover, the higher Leading Index, a tool used to predict economic trends four to six months ahead, points to the nation's near-term economic sustainability and growth.    

FOREIGN DIRECT INVESTMENTS ON THE RISE

Malaysia offers a favourable investment climate, with several significant investments by global technology leaders such as NVIDIA, Google, Microsoft, and Infineon announced since December 2023, clearly demonstrating foreign investor preference.

The most recent is Amazon Web Services (AWS), a subsidiary of Amazon.com Inc, which announced the launch of the AWS Asia Pacific (Malaysia) Region, with plans to invest about US$6.2 billion (approximately RM29.2 billion) in Malaysia through 2038—a positive development for the country.

These investments and figures are not plucked out of thin air but committed to by the foreign investors themselves.

This is undoubtedly a ringing endorsement of the proactive policies of the Madani government in creating and fostering an attractive, open and transparent investment environment in Malaysia.

This has been further reinforced by the Malaysian Investment Development Authority (MIDA), which recorded an impressive RM83.7 billion in approved investments across various sectors between January and March 2024 (1Q 2024), a 13% increase from RM74.1 billion in the same period last year.

Foreign investments accounted for 56.2%, or RM47 billion, of total investments, while domestic investments made up the remaining 43.8%, or RM36.7 billion—a healthy balance between FDI and DDI.

Looking ahead, Malaysia is championing green technologies and renewable energy to build a resilient economy that will thrive not only today but for future generations.

RINGGIT NEARING OPTIMUM LEVEL, FOREIGN INFLOWS RETURN TO BURSA MALAYSIA

In addition to the positive tone among central banks globally, several key domestic factors are supporting the ringgit's strengthening and the rise in Bursa Malaysia, said Mohd Sedek.

He highlighted that Malaysia's persistent current account surplus, driven by a strong goods trade balance and tourism recovery, continues to bolster the local currency.

During the January-July 2024 period, Malaysia's trade grew by 9.8% year-on-year (y-o-y) to reach RM1.652 trillion, the highest value recorded for the period.

Exports increased by 5.1% to RM862.23 billion, while imports rose by 15.5% to RM789.71 billion during the seven months, resulting in a trade surplus of RM72.52 billion.

Based on market dynamics, he believes the ringgit is trading close to its optimum level of RM4.35 to the greenback.

“The econometric analysis using a vector error correction model (VECM), incorporating control variables and isolating the impact of China's economy, provides a robust foundation for understanding the relationship between the ringgit and the US Federal Reserve's interest rate."

“Should the Fed implement consistent cuts at each meeting, the US dollar may weaken, providing further tailwinds for the ringgit,” he said.

He added that assuming a base case scenario of a 25 basis point rate cut this year, followed by three cuts totalling 75 basis points in 2025, the ringgit may strengthen to RM4.25 against the greenback by the end of 2024 and to a range of RM4.00 to RM3.94 by the end of 2025.

Meanwhile, Dr Yeah said the ringgit has recorded an impressive increase since July 2024, with the local unit trading at a 14-month high and outperforming all other regional currencies against the US dollar.

As of Aug 20, 2024, the ringgit was up 4.85% compared to smaller gains for the Singapore dollar (+1.16%) and declines in other regional currencies (Chinese yuan: -0.41%, Thai baht: -0.19%, Indonesian rupiah: -0.70%, Korean won: -3.20%).

“The ringgit's outperformance reflects some degree of recovery against external factors and weak sentiments that weighed on the local note earlier in the year.

“The ringgit's appreciation can also be attributed to greater clarity on policy rate directions in advanced economies, some of which have begun to cut their interest rates,” Dr Yeah said.

The Bank of England cut its rate by 25 basis points from 5.25% to 5.00% in August 2024, and the European Central Bank similarly lowered its rate by 25 basis points from 4.00% to 3.75% in June 2024.

As a result, the interest rate differentials have narrowed against Malaysia's Overnight Policy Rate (OPR), which stood at 3.00% as of July 2024.

INCREASED INFLOWS INTO EQUITY AND BOND MARKETS

Foreign inflows into Malaysia's domestic equity and bond markets totalled RM50.9 million in 1H24.

Recent data indicate a reversal of previous outflows from the equity market, with a net foreign inflow of RM1.3 billion in July 2024.

“The domestic bond market recorded an inflow of RM874.6 million in the first six months of the year, indicating a trend of further inflows,” Mohd Sedek said.

Earlier this week, the FTSE Bursa Malaysia KLCI hit its highest level in over three and a half years, closing at 1,652.49, a level last seen on Dec 18, 2020, indicating an improved appetite for domestic shares.

Year-to-date, the barometer index had risen by 12.45%, ending on Friday at 1,635.74.

MALAYSIA MUST MAINTAIN ECONOMIC MOMENTUM

To sustain this economic momentum, Malaysia should not let this opportunity slip through its fingers but should focus on enhancing digital transformation and innovation, particularly in high-growth sectors such as technology and green energy, analysts said.

Furthermore, they believe that investing in workforce development through education and training programmes will ensure a skilled labour force that meets industry demand. 

Malaysia must also expand green economy initiatives and offer incentives for renewable energy projects that can attract environmentally-conscious investors.

Additionally, analysts argue that diversifying trade and investment partnerships will reduce economic dependency on single markets, while closely monitoring global economic trends and adapting monetary policies will help maintain the ringgit's strength and ensure stable capital flows, which ultimately paves the way for everyone to prosper from a growing economy.