Malaysian economy to grow 4% this year – Fitch Solutions 

Inve$t |Market Sentiments | 17 February 2023

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According to Fitch Solutions Country Risk and Industry Research, in a statement dated Feb14, Malaysia’s economic growth is expected to slow to 4.0% this year from 8.7% in 2022, due to fading of base effects and pent-up demand, tighter credit conditions and weakening global growth outlook. Based on its outlook report for 2023, the research house said that while it expects the economy to return to growth over the coming quarters, it believes the pace of economic expansion will moderate significantly with credit conditions tightening further and pent-up demand fading. Moreover, the export outlook will likely weaken further on the back of a slowing global economy and as the semiconductor industry continues to be in a downcycle. 

The research house said that from a gross domestic product by expenditure perspective, the growth slowdown in the fourth quarter of 2022 (Q4’22) was broad-based, with export growth weakening the most from 23.9% year-on-year (y-o-y) in Q3’22, to 9.6% in Q4’22. Meanwhile, private consumption growth also slowed to 7.4% y-o-y, versus 15.1% in the previous quarter, while gross fixed investment expanded by 8.8% y-o-y, as compared with 13.1% in Q3’22. In terms of growth, it expects base effects to turn unfavourable after Malaysia posted its highest growth rate since 2000. While cash handouts and subsidies on food and fuel, combined with the easing of Covid-19 restrictions drove up aggregate demand in 2022, the growth impulse is unlikely to be sustained. 

Households and businesses have already drawn down on their savings considerably since April 2022 and it expects the 100bps of interest rate hikes by Bank Negara Malaysia (BNM) to gradually feed through, further weighing on consumer appetite. Accordingly, private consumption growth is expected to slow significantly to 5.0% in 2023, from 11.5% in 2022. Additionally, gross fixed investment growth is anticipated to slow markedly to 2.0% in 2023, versus 6.8% in 2022, as both domestic and external monetary conditions continue to tighten and as business confidence wanes. BNM has adopted a relatively gradual tightening approach, having hiked its policy rate by only 100bps to 2.75% since it began its rate hiking cycle in May 2022. However, an additional 50bps of hikes is expected over the coming months, as real interest rates remain negative and underlying price pressures remain elevated by historical standards, with core inflation coming in at 4.1% y-o-y in December. 

As higher borrowing costs gradually feeds through, this will likely weigh on domestic and foreign businesses’ appetite to borrow and invest. Malaysia’s manufacturing PMI has fallen further to 46.5, marking the sixth consecutive month of decline and fifth straight month that the reading stayed below the 50 mark that separates contraction and expansion. Meanwhile, a slowing global economy will hurt exports and growth is expected to decline sharply to 3.0% in 2023, from 12.8% in 2022.  

The reopening of the mainland Chinese economy should provide a tailwind for Malaysian exporters given that the latter is Malaysia’s largest export destination, accounting for more than one-fifth of total outbound shipments. The tourism sector should also benefit from a revival of outbound Chinese travellers after Beijing lifted border restrictions on January 9, with China making up around 30% of international arrivals in 2019. However, global growth is still expected to slow to 2.1% in 2023, from an estimated 3.1% in 2022, with both the US and EU likely to fall into mild recessions. 

Positive outlook for REITs sector – HLIB Research 

According to Hong Leong Investment Bank (HLIB) Research, the outlook remains bright for real estate investment trusts (REITs) with retail and industrial assets, supported by the return of foreign tourists and sustained demand for industrial properties. Retail malls have been experiencing an upsurge in footfall and sales as well as a significant decline in rental assistance. The retail sector still has room to grow on the back of sustained elevated footfall supported by foreign tourists from the reopening of international borders. 

This was especially so for malls with meaningful exposure to foreign tourists, such as Pavilion Kuala Lumpur and Suria KLCC. The return of Chinese patronage is set to support retail performance while cushioning some downside risks arising from an economic slowdown from the west. Axis-REIT, a proxy to industrial assets, has continued to see steady growth stemming from contribution of newly acquired properties and positive rental reversion in 2022. Major enhancement works for Axis Facility 2 @ Bukit Raja and Bukit Raja Distribution Centre 2 are slated for completion and ready for tenancy in the first and third quarters of 2023, respectively, with improved rental rates. Management has also embarked on the phase 2 development of the Axis Mega Distribution Centre, which has an estimated RM130mil construction cost to be completed in the first quarter of 2024. Coupled with the RM120mil acquisition targets in 2023, HLIB Research believes this year will be “another growth year” for Axis-REIT when its expansion plans come into fruition. 

The office market is grappling with pressured rental and occupancy rates, amid growing supplies of office space that is outpacing demand. HLIB Research expects the ordeals to persist, given the high impending office supply (5.1 million sq ft) expected in 2023. That is on top of the 113.9 million sq ft of cumulative office space as at the second half of 2022 in the Klang Valley, citing data from Knight Frank Research. As such, rental reversions will likely be in the negative territory, due to intense competition with the completions of multiple new Grade A office buildings. Investors are advised to exercise extra caution on office REITs as office owners are grappling with dwindling occupancy and rental rates due to the oversupply woes. 

The research house is “sanguine” on Sunway-REIT due to its strategically located prime malls, hospitality assets to ride on the revival of the tourism sector, as well as diversified exposure to various asset classes. It also favours Pavilion-REIT for Pavilion KL’s promising rental reversion outlook and sizable foreign tourists footfall. It likes Axis-REIT for its robust track record, occupant tenancy in its diversified portfolio and broadening expansion and acquisition pipeline. 

Eye On The Markets 

This week, on Friday (17Feb), the Ringgit opened at 4.4265 against the USD from 4.3400 on Monday (13Feb). Meanwhile, the Ringgit was 3.3089to the Sing Dollar on Friday (17Feb). On Monday (13Feb), the FBM KLCI opened at 1488.05. As at Friday (17Feb) 10:00am, the FBM KLCI is down 6.25 points for the week at 1481.80. Over in US, the overnight Dow Jones Industrial Average closed down 431.20 points (-1.26%) to 33,696.85 whilst the NASDAQ shed 214.76 points (-1.78%) to 11,855.83. 

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