Growth will strengthen but remain erratic 

Growth is expected to accelerate in 2022, supported by sustained robust external demand and pent-up domestic demand following the progress of the vaccination campaign and the low likelihood of further travel restrictions, which had previously weighed on private consumption (55% of GDP) and thus slowed the recovery in 2021 following the resurgence of the virus. The 2022 budget, which includes improvements in cash transfers, social benefits, and the social security system, will support private consumption. Furthermore, the recovery in key markets such as the United States and Japan should continue supporting exports (70% of GDP), even though these figures were recently revised downwards due to the war in Ukraine. Robust external demand, particularly for oil products, electronics, rubber gloves, and chemicals, should stimulate investments by exporting companies. However, rising commodity prices and the current shortage of electronic chips could limit production. Although Malaysia is not heavily exposed to the Russian and Ukrainian economies, the ongoing conflict raises an additional risk due to the economic impacts on major trading partners such as European countries, primarily due to volatile food and energy prices. The public investments planned in 2022 in transport, infrastructure, and education will contribute to growth. While headline inflation remains subdued, increasing food prices, led by higher costs for meat, have contributed to the government’s decision to ban chicken exports indefinitely from June 2022. Besides, faced with aggressive monetary tightening by the Fed, Bank Negara began its rate hike cycle in May, mentioning the firmer recovery of the Malaysian economy.  

The fiscal deficit should remain high to support the recovery and lay the foundation for long-term reforms

The fiscal deficit is expected to remain high in 2022 to support the economy’s recovery and long-term structural reform efforts under the 12th Malaysia Plan (12MP), the new five-year development plan to ensure sustainable economic growth.

A prolonged conflict in Ukraine could lead to a sharp increase in global risk aversion and tighter financial conditions in Malaysia, as in other emerging countries. Nevertheless, the 2022 budget will support bank resilience to facilitate access to financing for businesses and households already affected by the pandemic, thereby continuing to promote financial stability. For instance, the BNM will make additional funds available for SMEs through new allocations (e.g., Targeted Relief and Recovery Facility and Agrofood Facility) and create two new funds. The improving economic outlook and high oil prices are expected to boost revenue collection (estimated at 10% of GDP in FY2022). The rise in public revenue should outweigh spending, as oil revenues remain a significant source of federal government income (15-20%). Public debt, for which the ceiling has been increased to 65% of GDP, will remain high but manageable, as most of it is held by residents in local currency.

The current account is expected to remain in surplus, as the favorable development of the goods surplus will continue to offset the service deficit - mainly due to the tourism and transport segments. The goods surplus is linked to robust export performance, supported by high commodity prices. External debt is high (68.9% of GDP) but manageable, as one-third is denominated in local currency. Most of this debt is owed by companies (private and public) and banks. Fueled by the current account surplus and foreign investment, foreign exchange reserves remain sufficient and cover 7.7 months of imports (in December 2021).

Political uncertainty remains

Following the resignation of Malaysian Prime Minister Muhyiddin Yassin and his government, Ismail Sabri Yaakob was appointed to succeed him in August 2021. Yaakob belongs to the historic United Malays National Organisation (UMNO) party, which had ruled Malaysia for six decades before losing the 2018 elections following a corruption scandal involving the state fund (1MDB). Pending new elections (delayed due to the health situation), Ismail Sabri Yaakob and his cabinet do not have a clear parliamentary majority with the support of only 114 MPs (111 required for the majority), who are not always loyal to their party. They may therefore need help in pushing through reforms. However, a pact signed with the main opposition bloc, the People’s Justice Party (PKR), led by Anwar Ibrahim, which ensures that the parliament will not be dissolved before the end of July 2022, should provide some stability to safeguard the national recovery. Following the ruling coalition’s significant victory in the Johor state elections, winning 40 of 56 seats, UMNO calls for an early general election to re-establish itself as the prevailing ruling party. However, it is not expected to take place until July 2023. Despite improved relations with China, maritime territorial disputes persist and remain a sovereignty issue for Malaysia as Chinese vessels continue to enter its exclusive economic zone near the coast of its Borneo states.