Bank Negara Malaysia (BNM) organised a series of engagements with various stakeholders since 20 March 2024 in conjunction with the release of its Annual Report 2023 (AR 2023), Economic and Monetary Review 2023 (EMR 2023), and Financial Stability Review for the Second Half 2023 (FSR 2H 2023).

The engagements sought to share BNM’s assessment of Malaysia’s economy and financial sector, as well as gain feedback from our stakeholders. These engagements involved Government ministries and agencies, the diplomatic corps, the banking, insurance and takaful, and payment industries, economists, banking analysts and fund managers, businesses including small and medium enterprises (SMEs), and the media.

Some of the key issues discussed are as follows:

Growth and inflation

Key stakeholders discussed the growth and inflation outlook for Malaysia this year and the likely action of the Monetary Policy Committee (MPC).

• BNM highlighted that Malaysia’s economy is expected to grow between 4% and 5% in 2024, supported by increased domestic spending and a recovery in exports. The growth outlook is in line with analysts’ expectations, as reflected in their respective growth forecasts and assessments.

• BNM expects headline inflation to average between 2% and 3.5% in 2024. The wider forecast range accounts for some upside impact on inflation from the implementation of subsidy rationalisation. The overall impact on inflation would be dependent on the magnitude and timing of fuel price adjustments, as well as mitigating measures such as targeted cash transfers. BNM shared that in the short run, subsidy rationalisation could impact private consumption. However, this would be mitigated partly by targeted assistance from the Government.

• Monetary policy will continue to be forward-looking and informed by the MPC’s assessment of the prospects of domestic inflation and growth.

• The positive growth trajectory and moderate inflation this year present a window of opportunity for the implementation of structural reforms. A more targeted approach towards fuel subsidies is critical to help mitigate the impact on the cost of living on the rakyat. Not only will it ensure that assistance is preserved for those who need it, but cost savings from the fuel subsidy rationalisation will create much-needed fiscal room for critical investments into health, education, and public infrastructure initiatives.

Ringgit

Discussions surrounding the ringgit focused on BNM’s assessment of the ringgit performance and the tools that could be deployed to provide support, including whether BNM would consider raising the Overnight Policy Rate (OPR).

• On the ringgit performance, BNM maintains that the ringgit is currently undervalued. Greater policy rate increases in other countries relative to Malaysia is one of the main factors causing the depreciation of the ringgit. In the long term, exchange rates are anchored by domestic fundamentals. In this respect, Malaysia’s economic fundamentals are sound. This is evident from key economic indicators in 2023 and the projections for 2024. The effective implementation of the national plans and other structural reforms will strengthen Malaysia’s competitiveness and production capacity, thus providing enduring support to the ringgit. Looking ahead, expect the ringgit to appreciate as the effects from global factors subside.

• BNM reiterated that the OPR is not a tool to manage the ringgit exchange rate. Instead, BNM has and will continue to take concerted measures to manage short-term pressure on the ringgit. This includes intensified efforts to encourage repatriation and conversion of realised foreign investment income by government-linked corporations (GLCs) and government-linked investment corporations (GLICs), stepping up its engagements with corporates and investors, and continued monitoring of domestic exporters’ and importers’ behaviours and engaging them on any unusual trends observed. BNM also made it clear that GLCs and GLICs are not expected to liquidate their foreign investments to repatriate foreign currency proceeds to Malaysia. Rather, BNM encourages them to repatriate realised foreign currency investment income on a more regular basis. BNM welcomes the acknowledgement and support of the Federation of Malaysian Manufacturers (FMM) and the Small and Medium Enterprises Association of Malaysia (SAMENTA) to be part of the whole-of-nation approach needed to ensure the stability of the ringgit. BNM would encourage others to do the same.

• BNM also clarified that Malaysia’s international reserves are adequate and sufficient to finance 5.4 months of imports of goods and services and is 1.0 times the total short-term external debt as of 15 March 2024. International reserves are meant to be drawn on when necessary. However, BNM continues to do this judiciously. In addition, Malaysia’s long-standing decentralisation of international reserves has led to the accumulation of sizeable non-reserve external assets. Resident banks and corporates hold more than three-quarters of Malaysia’s external assets. These assets can be drawn upon to meet their short-term external debt obligations without creating a claim on international reserves.

Structural reforms

Most key stakeholders were keen to understand the mechanics, sequence and timing of the Government’s implementation of structural reforms.

• BNM highlighted that the Government has been clear on their reform agenda. This includes strategic reforms outlined in key policy documents, such as the National Investment Aspirations (NIA), New Industry Master Plan 2030 (NIMP), and National Energy Transition Roadmap (NETR). Several reform measures have already been implemented or are underway. This includes electricity tariff adjustment and price ceiling removals on items such as chicken.

• Beyond this, BNM strongly advocates the development of a future-ready workforce through labour market reforms, as well as strengthening social protection programmes are key structural reforms needed in Malaysia. The execution of these reforms will raise our competitiveness, ensure more sustainable growth and improve our standard of living. Key stakeholders also echoed the importance of effective implementation of structural reforms and the subsequent impact on economic growth and the ringgit.

Bank Negara Malaysia
3 April 2024