Malaysia’s economic recovery on track but risks abound – SERC 

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According to Socio Economic Research Centre Malaysia (SERC) executive director Lee Heng Guie, Malaysia’s economic recovery remains on track with a 5.2% growth forecast, but it could be dampened by prolonged supply chain disruption, persistent high inflation, and sharp slowdown in China with global stagflation pressures now a serious risk. The supply chain disruption is worsened by Russia’s invasion of Ukraine, which has induced massive negative supply and price shocks. Persistent high inflation and high oil price shock represent a double blow to the world economy that could impact growth momentum. The sharp slowdown in China and the lockdown in its major cities could have further impact on the regional supply chain and hence on Malaysia. He was speaking during SERC’s first-quarter 2022 (Q1’22) economy tracker briefing. The country’s economic recovery rides on the back of a stronger revival in domestic demand and a rebound in the services and the construction sectors. Services such as tourism, retail, transport, and aviation will see faster growth (6.1%) on border reopening and pent-up demand amid increased operating costs and other risks including climate change, stagflation and geopolitical tension. The construction sector is estimated to see 6.5% growth due to ongoing large infrastructure projects and small-scale projects. Private consumption is estimated to see a 6.5% growth due to Employee Provident Fund withdrawals as well as a recovery in income and employment, but inflation and living cost concerns will dampen consumer sentiment. The labour market is gradually recovering with the unemployment rate in February 2022 at 4.2% compared with 5.3% in May 2020. Private investment (5.0% growth) continues to remain in cautious mode while public investment is forecast to see 9.4% growth. Exports are estimated to grow moderately (4.4%) on continued external demand from key trade partners, strong global demand for electrical and electronic products and improvement in commodity production. However, external demand will slow if the global economy tanks, with higher freight and container rate and logistic costs, supply chain disruptions, as well as workers’ shortage and higher cost of doing business. Imports are estimated to expand at a 4.9% rate on the continued expansion of manufactured exports and improved domestic demand. Although trade with Russia is only at 0.4% (Ukraine at 0.1%) of Malaysia’s total trade, the war has caused prices of wheat, corn and chemical fertiliser to rise, which means costlier feed, fertiliser, pesticides and other raw materials. But the European Union may purchase more palm oil as a result of shortages in rapeseed and sunflower oil supply from Ukraine. Besides, Malaysia benefits from higher crude oil-related revenue, although it would be offset by bloated fuel subsidies and other subsidies. The financial market can expect volatility due to the war and the situation in the commodity market. There will be a flight to quality as investors lighten their portfolios. To reform the economy beyond the pandemic, the country must be prepared to withstand any future shocks, whether financial, economic, or non-economic. Now there’s a reserve coming from oil and from commodity prices, the surplus of which should be saved for future shocks. The ringgit is also expected to remain weak for the rest of the year. 

Banks expected to see higher earnings this year – Moody’s 

According to Moody’s Investors Service, the pre-tax profitability of banks is expected to see an improvement this year on bigger net interest margins (NIMs) and lower loan-loss provisions. This is supported by an anticipated increase in interest rates in the later part of the year and quicker loan growth, which will then lend support to an increase in NIMs. Banks may continue to take precaution against potential credit losses from loans that are under the repayment assistance programme. This would see loan-loss provision declining but remaining higher than pre-pandemic levels. It expects impaired loans to increase in 2022, but only moderately because the economic recovery and continued aid from the government will support borrowers’ repayment capacity. Regulatory measures such as the targeted repayment assistance programme for vulnerable borrowers affected by the pandemic helped banks maintain stable asset quality. The asset-weighted average of the six largest Malaysian banks’ impaired loan ratios decreased modestly to 1.8% as of Sept 30, 2021 from 2% a year earlier, although about 28% of total loans at the banks were under the repayment assistance scheme, some of which can become impaired. Meanwhile, an earlier announced one-off prosperity tax will see some impact to sector-wide net profitability of the banks, but its impact will be partially offset by the strong pre-tax earnings growth. It expects banks’ capital ratios to be broadly stable at high levels in 2022 because internal capital generation will keep pace with increases in capital consumption due to faster loan growth. Prudent dividend policies and dividend reinvestment plans will help banks preserve capital to fund an acceleration of credit growth. The industry’s common equity tier 1 ratio was at a strong level and stood at 14.6% at the end of last year. The research house is also expecting industry-wide loan growth to strengthen to 6%-7% in 2022 from 4.5% last year, supported by recovering credit demand from the retail and corporate segments. Loan growth will be supported by the country’s real gross domestic product (GDP) growth, which would accelerate to around 6% in 2022 from 3.1% in 2021. It would be driven by increases in domestic consumption amid an improving labour market and export growth. The government has set its expansionary budget to RM332bil for this year from the previous year, and this will further support economic recovery. On another matter, the debt servicing capacity of corporates and households will remain strong and support banks’ asset quality. 

Foreign inflows positive – MIDF 

According to MIDF Research data, the foreign inflow to Bursa Malaysia continued last week, with net buying of RM312.4mil. The positive trend was in line with Asean markets, which has continued to see net inflows albeit at a slower pace. Cumulatively for the week, Indonesia, Malaysia and Thailand registered a total net inflow of US$421.3mil (RM1.7bil), which was slightly more than half the net inflow recorded in the previous week. On the Malaysian market, foreign investors have been net buyers for 12 of the first 14 weeks of 2022, recording a net purchase of RM6.97bil of local equity so far this year. The most favoured sectors by foreign investors last week continued to be financial services, industrial product and services, and plantation. These saw net inflows of RM329.9mil, RM57.3mil and RM45.1mil respectively. Meanwhile, local institutions remained net sellers on Bursa Malaysia with RM303.19mil in net equities sold over the past week. Retailers also adopted a net selling position with RM9.21mil net of equities sold over the last five trading sessions. Year-to-date, local institutions are net sellers to the tune of RM7.38bil while local retailers are net buyers with a RM410mil surplus in equities. In terms of market participation, foreign investors saw a 10.39% decline in average daily traded value over the past week while local institutions and retailers saw an increase of 13.5% and 13.66% respectively. 

Malaysia records highest IPO proceeds among Asean members in Q1 2022 – EY 

According to Ernst & Young (EY), Malaysia led other Asean countries in initial public offering (IPO) proceeds during the first quarter (Q1) of 2022 as exchanges in the bloc recorded a year-on-year      (y-o-y) decline of 57 per cent in total proceeds for the period. Asean’s exchanges saw a higher number of IPOs ― 29 IPOs in Q1 2022 versus 22 a year earlier ― but proceeds fell to US$1 billion (RM4.23 billion) from US$2.4 billion previously. During this quarter, the Indonesia Stock Exchange (IDX) was most active by deal numbers (12 IPOs raising US$219 million), while Malaysia’s exchanges led by proceeds (US$362 million via five IPOs). ET attributed the marked decline in Asean’s IPO proceeds to the lack of a mega IPO being posted in Q1 2022, compared to one mega IPO a year ago.  

According to Max Loh, Ernst & Young LLP’s Singapore and Brunei managing partner and EY Asean IPO leader, geopolitical tensions, the ongoing Covid-19 situation, supply chain woes, tightening of monetary policy and escalating costs were a few factors weighing down economic and IPO activity in Asean. The IPO market remains receptive to quality high-growth companies, but volatility, uncertainty and valuation expectations will need to be tempered before a resurgence in IPO activity can happen. Meanwhile, the global IPO market also witnessed a weaker performance in Q1 2022, with 321 deals raising US$54.4 billion in proceeds ― a decrease of 37 per cent and 51 per cent y-o-y, respectively. In contrast, the Asia-Pacific region surpassed its Q1 2021 IPO proceeds performance ― when it raised the highest Q1 proceeds in 21 years ― by recording 188 IPOs raising US$42.7 billion (19 per cent higher proceeds) in the quarter under review. The region accounted for 78 per cent of global IPO proceeds due to the listing of four mega IPOs.  

According to EY global IPO leader Paul Go, a decrease in IPO activity was not unexpected when compared with Q1 2021 as the latter was the most active quarter in the last 21 years. However, the market shock from geopolitical tensions and other economic concerns in the second half of the quarter created volatility and impacted the capital markets. The global IPO market would remain volatile in Q2 2022 amid many uncertainties, with a backlog of IPO candidates, and pipelines would continue to build up. With the prevailing headwinds arising from geopolitical tensions and conflicts, inflation and interest rate hikes, it will be imperative for IPO-bound companies to take a fresh look at how these challenges will affect their markets, customers and suppliers to their business. 

Eye On The Markets 

This week, on Friday (15Apr), the Ringgit opened at 4.2335 against the USD from 4.2280 on Monday (11Apr). Meanwhile, the Ringgit was 3.1195 to the Sing Dollar on Friday (15Apr). On Monday (11Apr), the FBM KLCI opened at 1607.95. As at Friday (15Apr) 10:00am, the FBM KLCI is down 13.27 points for the week at 1594.68. Over in US, the overnight Dow Jones Industrial Average closed down 113.36 points (-0.33%) to 34,451.23 whilst the NASDAQ shed 292.51 points (-2.14%) to 13,351.08. 

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