Malaysia central bank sees significant growth hurdles ahead

Yahoo

24-03-2025

By Anisah Shukry
(Bloomberg) – Malaysia's central bank said growth risks loom large in its monetary policy considerations, as brewing global trade disputes and geopolitical tensions threaten exports.
Bank Negara Malaysia Governor Abdul Rasheed Ghaffour said he expects an increasingly challenging external environment in 2025, even as he reaffirmed the government's annual growth forecast of 4.5% to 5.5%. He's counting on domestic sources of growth and a diversified export structure to help the economy withstand the challenges, after a 5.1% expansion last year.
'Whilst we benefit from the positive momentum of 2024, it is clear there are significant hurdles ahead,' he said in a foreword of the bank's annual economic and monetary review released Monday. 'The external environment is highly fluid and unpredictable, and we cannot rest on our laurels.'
Malaysia, a major technology and commodity exporter, is seeking to avoid either being caught in the cross-hairs of the global trade war or suffering indirect effects from higher US tariffs on China, its biggest trade partner. Exports to China declined 8.1% from a year ago in February.
'The statement is an acknowledgement of global uncertainties and downside risks to growth,' said Oversea-Chinese Banking Corp economist Lavanya Venkateswaran. 'It seems that BNM is prioritising growth risks over inflation risks.'
Many in Malaysia are concerned the economy would be directly affected if US President Donald Trump follows through with a plan to impose tariffs on semiconductors. The Southeast Asian nation is the sixth-largest exporter of semiconductors globally, with the US being its third-biggest market for chip shipments. That may hamper Malaysia's plans to expand into more valuable semiconductor production.
'Heightened uncertainties surrounding the resurgence of protectionist actions, alongside continuing geopolitical conflicts, pose headwinds to Malaysia as a small and open economy,' Abdul Rasheed added.
Narrowing interest rate differentials between the US and other economies will lend support to the ringgit, said Abdul Rasheed. In the longer term, Malaysia's solid economic prospects and ongoing reforms will provide more enduring support to the currency, he added.
The ringgit was 0.3% lower at 4.4350 against the dollar, seeing little reaction to the report.
There are 'mounting risks' in the second half of 2025 as 'supply chain realignments, rising input costs, and weaker external demand could further strain Malaysia's export outlook,' Sabrina Edora, an analyst at Public Investment Bank, wrote in a note published Friday.
The government has been tempering expectations for trade growth, and BNM on Monday forecast Malaysia's gross exports to grow by 5.2% in 2025, from 5.7% the previous year.
Abdul Rasheed said BNM will continue to stand firm on its mandate of maintaining price stability conducive to sustainable growth when deciding on policy. The central bank last adjusted its overnight policy rate in May 2023, with a 25-basis-point hike.
'Towards this end, we will keep a close watch on global developments and potential spillovers of ongoing domestic policy reforms,' he said. 'This entails continuous assessments on the persistence and pervasiveness of inflation, while considering external shocks and the overall trajectory of the Malaysian economy.'
Malaysia plans to reduce subsidies on its most popular gasoline RON95 by the middle of the year to reduce spending and improve fiscal health, though authorities have acknowledged that the move could stoke price pressures.
The effects of subsidy rationalisations, as well as the expansion of a sales and services tax, are anticipated to result in some short-term price increases, said Abdul Rasheed.
'Ultimately, if inflation is well contained even after RON95 rationalisation, BNM will likely have some room to manoeuvre in supporting growth in late 2H25 or early 2026,' OCBC's Venkateswaran said.
These effects on underlying inflation will be 'limited and temporary,' Abdul Rasheed said. The central bank expects annual inflation to stay between 2% to 3.5%, affirming the government's forecast, before later reverting lower as policy effects fade.
Monetary policy will be guided 'by the evolving balance of risks surrounding the outlook on Malaysia's inflation and growth,' the economic review stated.
Abdul Rasheed said the ringgit, which was Asia's top performing currency last year, would continue to be influenced by external developments, particularly from potential policy shifts in major economies.
(Adds analyst comments from fifth paragraph, currency in ninth, export projections in 11th.)
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