KUALA LUMPUR: Malaysia is expected to experience a slightly stronger economic growth momentum of four to 4.5 percent in 2024, supported by resilient private consumption, a stronger labor market, and global trade diversion, according to MARC Ratings.
However, the firm said a steeper-than-expected slowdown in trade would be the primary growth risk next year.
On inflation, MARC said its base case headline inflation forecast is anticipated to be around 2.4 to 2.8 per cent in 2024 as inflation pressures continue to ease from a high base.
"Nonetheless, we foresee upside risks to our 2024 inflation forecasts, given the ripple effects of the anticipated rollout of the targeted subsidies mechanism and elevated commodity prices amid geopolitical tensions, as reflected in the Ministry of Finance's broad inflation forecast range of 2.1 to 3.6 per cent.
"The timing and extent of shifts from broad-based to targeted subsidies remain unknown at this stage," it said in a note. Given the spillover from tight global monetary conditions and domestic inflation upside risks, MARC Ratings foresees the overnight policy rate (OPR) in 2024 at three per cent, with the potential for a hike to 3.25 per cent.
In its statement on November 2, Bank Negara Malaysia said it views the current OPR level to be supportive of the economy.
"Should the interest rate rise, Malaysia's strong banking system has the capacity to absorb potential credit risks and costs associated with higher interest rates, affording the central bank significant policy flexibility," it noted.
Meanwhile, MARC Ratings expects the ringgit to trade within the 4.40 to 4.70 range in 2024, contingent on domestic catalysts and progress of ongoing structural reforms, particularly reforms associated with fiscal consolidation.
The firm said amid ongoing negative interest rate differentials and risk of capital outflows, the weak ringgit alongside emerging market currencies could possibly persist.
It added that for emerging markets' currencies to improve, greater clarity on the possibility of a further extended period of US interest rate cuts is required.
"Concurrently, the stability of emerging markets will be influenced by the extent to which interest rate cuts are eventually delayed, which may consequently have an adverse effect on economic growth rates," it noted.
Globally, MARC Ratings observes signs of divergence in economic momentum among major economies, as US growth remains healthy, China's economy is recovering despite property sector distress, while the eurozone's growth remains tepid, complicating the return to pre-pandemic output trends.
It said another central bank dilemma globally is the inflation outlook, as low unemployment and a slower pace of rising inflation offer market relief, although meeting major central banks' inflation targets remains challenging.
It noted that central banks in advanced economies are likely to exercise caution in concluding the current tightening cycle, followed by the possibility of fewer policy rate cuts in 2024.
Regarding the global bond market, MARC Ratings observed a rise in interest rates around the world over the last two years and this increase is attributed to higher commodity prices, inflation expectations driven by geopolitical risks, and growing public debt deficits and the supply of bonds.
The firm said this may lead to an extended period of already high bond yields, regardless of anticipated interest rate cuts.