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The Star
2 days ago
- Business
- The Star
Fiscal goals on track
PETALING JAYA: Malaysia appears to be on track to achieve its fiscal deficit target of 3.8% this year, in spite of the various external challenges that are on the horizon. Economists surveyed by StarBiz were in agreement and point to various measures that have been embarked on by the government on both the revenue and expenditure side that would help the country to stay on track in its fiscal goals in the bigger picture. These include the various subsidy rationalisation moves such as the egg subsidy cuts, diesel subsidy re-targeting and the planned RON95 petrol subsidy removal. While on the revenue side, the government had also announced various measures to increase the tax base, which includes the expansion of the scope of the sales and services tax (SST) and the 2% tax on dividends for individuals earning over RM100,000 in dividend income. There is also the rollout of e-invoicing by the Inland Revenue Board, which is being done in phases at this point in time. Perhaps, the coming Budget 2026, which is scheduled to be tabled in less than three months on Oct 10, will detail these initiatives further and reveal if any potential new ones are in the pipeline. Socio-Economic Research Centre executive director Lee Heng Guie said he is confident the fiscal deficit target set for this year will be met, although there may be ongoing concerns that the revenue side will be impacted by lower oil prices at the moment. 'Malaysia will definitely not miss the fiscal deficit target set earlier. 'The government is intent and moving forward with the subsidy rationalisation. 'Oil-related revenue will be impacted by lower oil prices now but at the same time also the subsidy bill for RON95 petrol will be lower as well, if leakages are plugged,' Lee told StarBiz. 'The government has always met these targets, unless there is a major shortfall in revenue or overspending. 'So far, they have already booked in everything, for example the rise in civil service salaries is being covered by the SST scope expansion and SST rate increase for some categories,' he added. Lee said these initiatives will help the country meet these fiscal targets but in any case if the target isn't met, there could be a risk whereby rating agencies have to re-rate the country. Commenting on the country's national debt, Lee said the total outstanding debt is still high, although the new debt figures have seen a decline in recent years. Kenanga Research, in its May report noted that government total current liabilities rose to a record high of RM1,277.3bil in the first quarter of financial year 2025 (1Q25) this year compared with RM1,247.6bil in 4Q24. 'Based on our calculation, the government debt to gross domestic product (GDP) ratio in 1Q25 expanded to 65.5% from 64.6% in 2024. This is higher than the government's calculation of 62.6%,' Kenanga Research said. The research house anticipates that government debt is projected to rise to RM1,330.6bil or 65.9% of GDP in 2025, which is higher than its previous forecast of 64.7%, amid slower growth and potential delays in fiscal reforms. 'The higher debt projection also reflects our fiscal deficit forecast of 4.1% of GDP, based on a revised GDP growth forecast of 4.3% from 4.8% previously. 'This accounts for downside risks such as lower oil prices, potential subsidy reforms delays and ongoing external uncertainties, driven by the unfolding US tariffs,' it said. Meanwhile, UOB Kay Hian Wealth Advisors' head of investment research Mohd Sedek Jantan said Malaysia is firmly on track to meet its fiscal deficit targets. 'Malaysia is on track to achieve a fiscal deficit of 3.8% in 2025, underpinned by the Fiscal Responsibility Act (FRA) 2023, which institutionalises fiscal discipline through enhanced parliamentary oversight. 'Concurrently, tax reforms — including broadening the revenue base and implementing the e-invoicing system to strengthen compliance — supports fiscal consolidation. 'These measures align with sound public finance principles, fostering sustainable growth, promoting inclusivity and reinforcing governance for improved socio-economic outcomes.' Mohd Sedek said further it would be a good move if the government prioritises continued debt reduction at the national level since lower borrowings would alleviate crowding-out pressures, support private investment and preserve macroeconomic stability. 'Anchored by the FRA and ongoing tax reforms, this trend expands fiscal space, bolsters policy credibility and lowers sovereign risk — key to sustaining investor confidence and economic resilience. 'It also cushions Malaysia against external shocks, particularly amid global trade policy uncertainty and potential growth slowdowns,' he added. CGS International Research head of economics Ahmad Nazmi Idrus said it is still premature to say if the government will miss or meet its fiscal deficit targets for this year. 'As of May, we see fiscal data still on track and there are a few reasons I think the fiscal numbers can still be achieved - the rise in collections from the SST adjustments, electricity tariff reforms, and subsidies removal. 'While GDP is expected to weaken amid the tariff scuffle, I think the domestic economy could stay resilient amid wage reforms, the stronger ringgit, and high tourism numbers which could support tax collections. 'We already have good momentum from last year. If you recall, the 2024 fiscal deficit was targeted at 4.3% of GDP, but the audited result showed that the government managed to get it lower to 4.1%. 'This year's deficit target was designed under the assumption that the deficit last year was 4.3% and not 4.1%, so we started off on a better footing,' he added. Ahmad Nazmi noted that any new debt incurred would tie strongly with the fiscal deficit target as a better fiscal deficit forecast should mean lesser new debt issuance. Moreover, since the government is targeting a fiscal deficit at 3.8% of GDP this year from 4.1% last year, that would mean debt issuance should be lesser, he said. 'Also the overnight policy rate cut will cause the Malaysian Government Securities yield to fall so it will be slightly cheaper for the government to finance its debt, so that's a plus,' Ahmad Nazmi said. He also said any miss in fiscal targets would have to be evaluated based on its circumstances. 'But as long as the government is committed to fiscal consolidation, any near-term deviations are acceptable.'
The Star
02-07-2025
- Business
- The Star
Manufacturing inching to stability
KUALA LUMPUR: The outlook for Malaysia's manufacturing sector, which showed signs of stabilisation in production activity in June, will depend on several factors – one key element being the potential impact of tariff-related developments. According to S&P Global, Malaysia's manufacturing purchasing managers' index (PMI) rose to 49.3 in June, up from 48.8 in May, marking the highest reading since February. While still below the neutral 50.0 mark that separates expansion from contraction, the latest data signals that business conditions are inching closer to stabilisation. This improvement was underpinned by a softer pace of decline in both output and new orders. External demand also showed tentative signs of recovery, with new export orders moderating at a slower rate, hence contributing to the overall stabilisation in manufacturing activity. At the Asean level, the manufacturing sector ended the first half of 2025 (1H25) on a weak note, with the PMI falling to 48.6 in June. Analysts noted that this was 'the most pronounced worsening in operating conditions since August 2021.' Notably, the region's headline PMI slipped to a 46-month low as output continued to contract across the region, accompanied by sharper declines in new orders, purchasing activity, and employment. Among Asean countries, TA Research said Vietnam recorded the steepest drop in new export orders in over two years. Myanmar's manufacturing sector remained in decline, while Indonesia saw a marked deterioration in operating conditions by mid-2025. Given these mixed regional dynamics and the still-cautious recovery seen in Malaysia, Socio-Economic Research Centre executive director Lee Heng Guie said the local manufacturing sector's trajectory in the coming months will depend on both domestic and external factors. He said Malaysia's June PMI reading, although still below the growth threshold, mirrors global trends and uncertainty, particularly around tariffs. 'With the June number, even though it's still under 50, I think it's quite in tandem with what we're seeing globally – where uncertainty about tariffs remains unresolved,' he told StarBiz. He said this uncertainty may have contributed to Malaysia's weaker trade performance, citing the recent 1.1% year-on-year (y-o-y) decline in exports in May, a contraction that came against market expectations for growth. This, he said, suggests that businesses had previously frontloaded their shipments in anticipation of potential tariff hikes. 'Now, that frontloading appears to be tapering as companies are likely holding back and waiting for the outcome of the 90-day tariff review, which concludes on July 9, before making further decisions.' In the latest development, US President Donald Trump had ratcheted up trade tensions, stating he won't delay the July 9 deadline for imposing higher levies on trading partners. 'What we hope to see in the 2H25 is some clarity. Once we have the numbers after July 9, then businesses, buyers and producers, can plan accordingly, assuming there are no further changes,' Lee said. 'But we still don't know if it will stop there. If it does, at least there's clarity,' he added, referring to the potential for further tariff actions beyond July 9. Turning to the domestic front, Lee said manufacturers are also bracing for rising input costs with several policy changes and cost adjustments set to take effect in July, compounding the pressures already felt from external uncertainties. From July 1, manufacturers are contending with additional cost pressures stemming from the implementation of the expanded sales and service tax (SST), which now covers a broader range of goods and services. At the same time, a new electricity tariff structure has come into effect, introducing tiered components for energy, capacity and network charges. 'For manufacturers, the single-tier sales tax means they pay it upfront, and eventually the cost passes down to wholesalers, retailers, and consumers,' he explained. Although many essential consumer goods remain exempt under the SST, he said manufacturers are grappling with other rising costs, which could further squeeze operating margins. 'Manufacturers have to decide whether to absorb these costs or pass them on. If they want to retain their market share, they may absorb part of it. 'But they can't fully absorb everything ... so either margins get squeezed, or they risk losing customers,' Lee added. As a result, the net effect could be a slowdown in production, especially if consumers respond by cutting back on spending, he added. However, Lee does not expect a deep contraction unless there's a prolonged shock. 'To see an actual decline in production, you'd need many months of negative data or a recession, which we don't see happening right now. But yes, the operating environment is becoming more challenging.' Meanwhile, MIDF Research said the latest PMI reading indicates that the country's modest gross domestic product (GDP) growth recorded in the first quarter of 2025 (1Q25) likely continued into the 2Q25. 'In an earlier data release, industrial production (IPI) growth slowed to 2.7% y-o-y in April (down from 3.2% in March). 'We expect further moderation in May 2025, largely due to weaker export performance during the month, which is likely to dampen output growth,' it added.
The Star
11-06-2025
- Business
- The Star
Export growth hinges on trade talks
PETALING JAYA: The possibility of Malaysia's economic growth outlook being weighed down by the overall exports performance is now becoming more apparent with the latest industrial production index (IPI) and manufacturing data released by the Statistics Department. The government forecasts gross domestic product (GDP) growth of 4.5% to 5.5% this year. For the first quarter of financial year 2025 (1Q25), GDP grew 4.4% after expanding 5% in 4Q24. The prevailing sentiment continues to be that overall exports performance would depend on the outcome of the ongoing trade negotiations to lower the now paused reciprocal tariffs portion of the Liberation Day tariffs imposed by the United States while demand for the country's manufactured goods would depend on global economic conditions and shifts in the supply chain. The April IPI expanded 2.7% compared to the 3.2% growth in the same month a year ago mostly due to the 5.6% rise in the manufacturing index, with the mining and electricity indices contracting 6.3% and 1.6% respectively. Drilling down further, export-oriented industries grew 6.4% after registering a 4.8% increase in March. On a month-on-month basis, the IPI contracted 8%, with export-oriented industries decreasing 10.2%. Socio-Economic Research Centre executive director Lee Heng Guie told StarBiz that the April IPI data presages a weak start to the country's 2Q25 GDP growth and potentially indicates a weakening economy. He expects the front-loading of shipments to the United States under the 90-day reciprocal tariff pause to wane going into May and June. This was reflected in the IPI's April manufacturing index, which rose 5.6% following a 4% gain in March. The reciprocal tariffs portion of the Liberation Day tariffs comes into effect on July 9 following the announcement of a 90-day pause while the baseline tariff of 10% imposed on all goods imported into the United States remains and have been effective since April 5. Malaysia's reciprocal tariff rate was 24%. 'Pending the outcome of tariffs negotiation expected in July, the export-oriented industries are expected to grow moderately in tandem with the anticipated slowing global demand due to the tariffs impact. 'The implementation of the Sales and Service Tax (SST) expansion is expected to soften domestic demand, and hence impacting domestic-market oriented industries,' Lee added. The expanded SST, which would be effective July 1, covers an additional six services categories while there would be higher sales tax rates on selected imported luxury goods. Meanwhile, the April manufacturing data showed manufacturing sector sales value rising 4.8% in April to RM160.6bil compared to the same month a year ago after growing 3.7% in March. Electrical and electronics (E&E) products saw sales value expand 9.8% after increasing 7.4% in March. Month-on-month, sales value dropped by 2.3% compared to RM164.3bil in March. April sales value growth of the export-oriented industries, which accounted for 70.3% of total sales, rose 5.3% compared to the same month a year ago after increasing 4.6% in March. Sales value growth of computer, electronics and optical products increased 10.6% from the same month a year ago after rising 8% in March. On a month-on-month basis, export-oriented industries' sales value growth saw a decline of 3.2%. E&E veteran and Malaysia Semiconductor Industry Association president Datuk Seri Wong Siew Hai said the direction of US tariff policy, global economic growth and the ongoing supply-chain shifts would continue to have an impact on the country's manufacturing sector outlook. 'We need to see the outcome of the negotiations on the reciprocal tariffs to know better the impact on E&E, the tariff levels and how we can prepare for it. 'What we can say for now is that Malaysian companies have benefitted US companies in the half-century that we have worked together and that this relationship should continue,' he said. Wong noted that Malaysia has been a beneficiary of the supply-chain shifts related to the US-China trade rivalry in recent years and may continue to benefit as businesses plan for various outcomes, including on policy uncertainty and geopolitical uncertainty. 'There are many plus one strategies today, not just China+1 but also Europe+1,' he said. Wong said the E&E growth outlook would also hinge on global economic growth, which the World Bank projected to be 2.3% for the year, or nearly half a percentage point lower than projected at the start of the year on heightened trade tensions and policy uncertainty in its latest Global Economic Prospects report. 'Growth for E&E will depend on the sub-sector, we are still seeing demand in artificial intelligence, but this could slow in consumer electronics,' he said. MIDF Research expects IPI growth of 2% this year after the 3.7% increase in 2024, with front loading providing a temporary boost to trade activities and support industries vulnerable to external headwinds. 'Although there could be short term support following the United States decision to pause from implementation reciprocal tariffs, encouraging progress from the ongoing trade talks will be crucial to reduce the adverse impacts of trade tensions on future demand outlook and production activities,' the research house said.
The Star
08-05-2025
- Business
- The Star
Bank Negara signals readiness to cut OPR
PETALING JAYA: Bank Negara is playing a waiting game as it delayed a cut to its benchmark interest rate, despite cautioning that the risks to economic growth are 'tilted to the downside'. The latest Monetary Policy Statement (MPS) sounded dovish, which according to economist Lee Heng Guie, signals Bank Negara's readiness to cut interest rates should the economy slow down significantly. The central bank blamed the United States' tariff measures and retaliations for weakening the outlook of global growth and trade, which remains subject to 'considerable uncertainties'. 'Such uncertainties could also lead to greater volatility in the global financial markets,' warned Bank Negara in the MPS issued yesterday. In a surprise move to help Malaysian banks deal with greater financial market volatility, Bank Negara also announced a 100-basis-point (bps) reduction in the statutory reserve requirement (SRR) to 1% from 2% earlier. The SRR reduction, effective May 16, will release approximately RM19bil worth of liquidity into the banking system. Bank Negara stressed that the SRR is not a signal on the stance of monetary policy and the overnight policy rate (OPR) is the sole indicator. However, OCBC senior Asean economist Lavanya Venkateswaran noted that SRR cuts have more often than not been precursors to OPR cuts, or have at least accompanied cuts in the OPR. 'In the last easing cycle, the SRR was cut by 50 bps in November 2019, followed by a 25-bps rate cut to the OPR in January 2020. The OPR and SRR were reduced further at the March 2020 meeting,' she said. The third Monetary Policy Committee (MPC) meeting of this year yesterday decided to keep the OPR at 3%, in line with market predictions. Earlier, only five out of 25 economists polled by Bloomberg had forecast the OPR to be lowered to 2.75%. The decision by Bank Negara came a day after the US Federal Reserve (Fed) paused its rate cut again at 4.25% to 4.5% as it warned of higher risks to inflation and unemployment. 'I think Bank Negara will wait for more clarity on the tariff negotiation outcome expected in July and incoming data to ascertain the impact on the domestic economy,' said Lee, the executive director of Socio-Economic Research Centre. When asked whether there is a necessity to cut the OPR in the second half of the year, Lee said it depended on the 'hurdle rate' if the gross domestic product growth slows to below 4%. Economist Geoffrey Williams said Bank Negara made the right decision in keeping the OPR at 3%, pointing out that the central bank needed to remain calm and steady in this period of uncertainty. 'There is, therefore, no need to cut rates now and I do not see a need in the foreseeable future for rates to be cut anytime soon. 'In fact, the Fed and most global banks are also adopting a wait-and-see stance,' he said. Meanwhile, OCBC's Lavanya said there is a 'clear risk' that rate cuts could be brought forward to the July-December 2025 period. At the moment, OCBC's baseline estimate is for a cumulative 50-bps cut in the OPR in the first half of 2026. 'All told, we believe Bank Negara was more dovish compared to its March 6 meeting. 'This does open the door for potential rate cuts, but the (MPS) statement does not suggest that it will come imminently,' stated Lavanya. Williams cautioned against reacting prematurely to external developments, including by cutting key policy rates. 'We do not know the full impact of the US tariffs and since the reciprocal tariffs do not affect half of Malaysia's exports to the United States and the rest are likely to be reduced or removed, then the actual impact might not be as bad as pessimistic estimates suggest. 'We are already expecting a UK-US trade deal, with others for Japan and South Korea well underway. 'So, economic uncertainty is actually reducing although geopolitical issues in India-Pakistan, Ukraine and Gaza remain tense,' he added. In the MPS issued yesterday, Bank Negara said the current monetary policy stance is consistent with the current assessment of inflation and growth prospects. 'Recognising that there are downside risks in the economic environment, the MPC remains vigilant on ongoing developments to inform the assessment on the domestic inflation and growth outlook. 'The MPC will ensure that the monetary policy stance remains conducive to sustainable economic growth amid price stability.' The MPS noted that the latest indicators point towards continued global growth and trade, supported by domestic demand and front-loading activities. The global growth outlook would remain supported by positive labour market conditions, less restrictive monetary policy and fiscal stimulus. However, the tariff measures announced by the United States and retaliations have weakened the outlook on global growth and trade. For Malaysia, economic activity expanded further in the first quarter, driven by sustained domestic demand and continued export growth. Moving forward, the escalation in trade tensions and heightened global policy uncertainties will weigh on the external sector. The continued demand for electrical and electronic goods and higher tourist spending, however, will provide some cushion to exports. Overall, growth is expected to be anchored by resilient domestic demand. Employment and wage growth, particularly within domestic-oriented sectors, as well as income-related policy measures, will support household spending. The expansion in investment activity will be sustained by the progress of multi-year projects in both the private and public sectors, the continued high realisation of approved investments, as well as the ongoing implementation of catalytic initiatives under the national master plans. The balance of risks to the growth outlook is tilted to the downside, stemming mainly from a deeper economic slowdown in major trading partners, weaker sentiment amid higher uncertainties affecting spending and investments, as well as lower-than-expected commodity production. Meanwhile, favourable trade negotiation outcomes and pro-growth policies in major economies, as well as more robust tourism activity could raise Malaysia's growth prospects. On inflation, Bank Negara foresees it to remain manageable in 2025. Global commodity prices are expected to continue to trend lower, contributing to moderate cost conditions. As for the ringgit, its performance will continue to be primarily driven by external factors. 'Malaysia's favourable economic prospects and domestic structural reforms, complemented by ongoing initiatives to encourage flows, will continue to provide enduring support to the ringgit,' said Bank Negara.
