2023 turned out to be a year of many surprises, starting with the failure of the Silicon Valley Bank which did not lead to any contagion in the US financial markets due to swift action on the part of policymakers. In addition, the persistence of the Russia-Ukraine war, as well as the Israel-Hamas conflict more recently added to the geopolitical dark clouds. After an aggressive hiking cycle, the Fed has finally paused in its monetary policy tightening cycle. Fed chair Powell is still keeping some optionality on the table as the labour market remains robust and inflation while declining is nowhere near its 2% target level. That said, US real rates are already restrictive, hence financial markets are still eyeing Fed rate cuts this year, although the exact timing and magnitude of the cuts remains uncertain. The other point of debate revolves around when the Fed may taper or terminate Quantitative Tightening (QT).

Global inflation has mostly trended lower in recent months, even though it is still elevated above target levels for many major central banks. As policymakers are cognizant about the risks of overtightening monetary policy in the face of a global growth soft patch and potential financial stresses arising from the property market and/or geopolitical tensions, inflation may take longer to return to target levels and could likely require periods of sub-par growth to achieve the target. Consequently, the balance between taming inflation while avoiding recession remains on a fine knife edge.

At this juncture, a global growth slowdown is anticipated for 2024, but the recession risks have ebbed from early 2023. The closer we stand to a potential monetary policy pivot to an easing cycle at some stage in 2024, the lower the probability of stumbling into a recession due to policy errors. The test of the pudding remains in the scale and depth of the slowdown that may emerge in the US and European economies over the next 12 months – whether it is simply a technical recession with two consecutive quarters of sequential growth moderation or a deeper and more protracted full-year contraction. 

Deflationary pressures emanating from China’s tepid growth trajectory is a double-edge sword. On one hand, foreign direct investments continue to undertake a China+1 strategy. In turn, wealth and portfolio flows are likely to mimic this pattern. On the other hand, China is also increasingly diversifying its outbound investments and portfolio/wealth transfers away from the usual suspects to this part of the globe in search of soft power and more friendly alliances. China’s demographics, deleveraging and de-risking pressures will continue to structurally weigh on its medium-term growth prospects but find policy offsets to mitigate downside risks. 

Geopolitics remains a risk. Although US-China tensions seem to have taken a breather since November, underlying stresses persist, and periodic tensions cannot be ruled out as we head into the US presidential elections. Meanwhile, the Russia-Ukraine war drags on, and the US administration’s financial assistance to Ukraine may be running into potential speedbumps. The Israel-Hamas war has taken a grave humanitarian toll on the region with potential global consequences. Contagion to the rest of the Middle East region remains a risk potentially disrupting global oil markets and supply chains.

Rising tensions in the Red Sea and Suez Canal are being closely monitored for any potential inflationary impact as more shippers are avoiding the troubled areas. For example, the potential risk of rising energy prices is there given that this is an additional geopolitical hotspot, but so far crude oil prices have been well-behaved so far, mainly because market players are largely focusing on soft demand conditions from major economies like China, and there hasn’t been an actual supply loss at this juncture. Ditto for food prices, albeit the impact of protectionist policies by some exporters and the El Nino phenomenon remains. A prolonged and pronounced crisis in the Middle East could potentially play out differently for inflation down the road, but this also assumes that suppliers can pass on the higher costs and risk premiums to end-consumers. If inflation is adversely impacted, then this could in turn complicate the picture for central banks which were positioning for a pivot to potential monetary policy easing later this year.

The political calendar year in 2024 will be busy, with more than 70 elections scheduled and includes Indonesia, India, and the US holding elections just to name a few. While it would be prudent to attach some election risk premiums, especially if drama and uncertainties emerge – the Indonesian presidential election for instance may drag till June 2024 if there is no outright winner in the first round. Increasingly, our clients have also started to ponder if we will see a Trump redux come November 2024 since some key swing states appear to be swinging his way. This in turn could have policy implications for US-China trade, investment, and industrial strategies.

Market sentiment will remain understandably cautious in the near-term. We see two key risks factors to our fairly benign soft-landing scenario for 2024. First, that the Fed is done and will embark on rate cuts come mid-2024, but what if inflation proves more entrenched and there is no material easing in the US labour market conditions? The second key assumption is that the Chinese economy is past the bottom and that the way forward is for a gradual stabilization and improvement, but what if this proves misguided. This implies that while our baseline scenario is for a relatively soft growth landing of sorts in 2024, the market headwinds are formidable with so many moving parts which could still go wrong.

The Developed Market (DM)- Emerging Market (EM) divide remains clear, but disparate narratives for many EM economies may mean that capital outflows and limited recovery prospects may continue to hinder going into 2024. Their growth trajectories have diverged in recent quarters and there may not be a single driver or engine of growth going forward into 2024. That said, the ASEAN economies appear to be more resilient in a world of ‘unknown unknowns’ given their steady anchor of rising middle class, growing digitalisation and e-commerce potential and sustainability journeys. The improving tide of returning international visitors may put a floor to downside risks to growth but is not a sufficient condition to boost growth back to trend for many ASEAN economies, given that the current manufacturing, especially electronics, recovery remains tentative. The drag from the aggressive DM monetary policy tightening cycle looks to be subsiding, while the manufacturing slump due mainly to the global electronics destocking cycle also appears to be seeing light at the end of the tunnel.

For Malaysia, 2023 was a challenging year dragged by external pressures and domestic uncertainties. Export growth experienced a broad-based decline in the second half of 2023, resulting in narrower trade and current account surpluses. Import growth, mirroring weaker domestic demand conditions, also eased last year. Capital outflows were volatile with the financial account deficit persisting for five consecutive quarters to 2Q23 and the currency (MYR) depreciating over 4% in 2023 versus the US dollar.

As we head into 2024, we are cautiously optimistic about Malaysia’s growth outlook. Export demand will be buffeted by numerous factors including slower global growth, fading commodity tailwinds, and persistent geopolitical tensions. The bottoming of the electronics export downcycle may provide much-needed support to export growth and to that end, we forecast goods export growth to remain negative at -1.0% YoY in 2024, although this is still better than in 2023. Resilient tourism inflows in 2024 will also provide some support for overall services. 

Despite the weak external backdrop, we forecast 2024 GDP growth to be resilient at 4.2% YoY versus the advance estimates of 3.8% in 2023 for Malaysia. The support to growth will come mainly from domestic demand factors, namely a stabilisation in private consumption growth and higher investment spending supported by a strong medium-term reform agenda. 

Private consumption growth has been volatile since the onset of the pandemic after period of relatively stable growth of 7% (2010-19). Anecdotal evidence suggests that household balance sheets were significantly impacted by the pandemic and that savings were drawn out. As the scars of the pandemic fade into 2024, we expect private consumption growth to normalise, albeit settling at a lower rate versus pre-pandemic levels.

Reform momentum has started to gain traction since 2H23 and this, we expect, will be supportive of investment spending. PM Anwar and his administration have launched numerous medium-term plans since July 2023 including the introduction of the ‘Madani Economy’, the National Energy Transition Roadmap (Part I and II), the New Industrial Masterplan 2030, the mid-term review of the 12 Malaysia Plan (MP), the Fiscal Responsibility Act and Government Procurement Act and Budget 2024.

While many of these plans are medium-term in nature, the immediate impact will be continued fiscal consolidation and reallocation of resources towards much investment spending and infrastructure projects. The government introduced the PADU database in January 2024 as a precursor to a more targeted fuel subsidy mechanism. Importantly, we expect Brent prices to remain broadly stable at USD80/barrel in 2024 versus USD82/barrel in 2023 allowing for commodity related revenue collections to remain supported to some extent. The government forecasts the 2024 fiscal deficit to narrow to 4.3% of GDP from 5.0% of GDP in 2023. We think this is achievable at the juncture. More fundamentally, PM Anwar’s government is keen to attract FDI and position Malaysia’s as a leader within the region. These measures will build greater economic resilience and boost investor sentiment. 

We forecast 2024 CPO prices to average 3,650/MT versus MYR3,813/MT in 2023. The modest ~4.3% reduction estimated in CPO prices underscores a picture of broader stable supply from key producers such as Malaysia and Indonesia, while global demand weakens consistent with slower global growth. That said, production risks remain on account of the ongoing El Nino phenomenon.

This, combined with a less restrictive US rate environment will make it more conducive for BNM to keep rates on hold, under our baseline. Although the inflation outlook will be impacted by the fuel subsidy rationalisation timeline, our baseline is for the inflation outlook to remain manageable. We expect the US Federal Reserve to deliver at least a 100bp in rate cuts in 2024, allowing for more attractive interest rate differentials relative to the US. That said, it remains to be seen if this can manifest in higher portfolio inflows into Malaysia, especially given our view of slower global growth in 2024.

Notwithstanding, we expect MYR to recover some lost ground in 2024 versus USD. This is based on expectations of a softer dollar (USD) and UST yields as the US Fed embarks on a rate cutting cycle in 2024. Moreover, stabilisation in China’s economy should also benefit Malaysia’s economy even as inbound tourism remains strong. Finally, improving domestic fundamentals, we expect, will remain supportive of the currency.