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ASEAN’s economic resilience will likely be put to test in 2023, as outlined in our annual outlook. Softer global economic growth led by advanced economies is likely to weigh on externally driven economies like Malaysia, despite some positive impact from China’s reopening. Domestically oriented economies should be better buffered, but we see the Philippines facing its own internal challenges from multi-year high inflation and rising borrowing costs. In this note, we track the developments in these two economies in early-2023.   

Malaysia: Facing global external headwinds but cushion from China’s reopening

Following a stellar post-pandemic growth recovery in 2022, Malaysia’s 2023 economic outlook is looking more moderate, in our view. Malaysia’s open and trade-reliant economy remains at the mercy of global external headwinds, informing our view for real GDP growth to normalise to 4.0%. This is especially as growth in major advanced economies, including the US and the Europe, slows. That said, China’s earlier-than-expected reopening and upcoming rebound after enduring the current covid infection spike should provide some cushion to Malaysia’s economy as the year progresses.

Malaysia’s goods exports ended 2022 on a soft note. Headline export growth decelerated to 6.0% YoY in Dec 2022 – the first single-digit expansion since 3Q21. While unfavourable base effects were partly at play, external conditions were challenging and look set to continue in 2023. Overseas shipments to China underperformed significantly in Dec 2022 due to pandemic-related disruptions, while that to the US and EU outperformed but were already on a decelerating trend.

Exporters are likely to stay under pressure amid softer global demand especially from advanced economies, even as Malaysian shipments to China would start to bottom out and act as a cushion at least in commodities. After all, exposure to China’s final demand is ~7% of Malaysia’s GDP, vs exposures to the US and EU combined at 8.7% of GDP.

In our view, despite the external challenges, a continuation of the post-pandemic reopening dynamic in Malaysia’s tourism sector is a positive development. This is thanks to China’s earlier-than-expected international border reopening from January 8. We see positive spill-overs onto related services sectors, even if the impact is smaller than tourism dependent Thailand. International tourism receipts accounted for ~6% of Malaysia’s GDP pre-pandemic in 2019, still the second highest among ASEAN-6 peers even though lower than Thailand’s 12%.

Malaysia’s foreign tourist arrivals, on a monthly basis, have returned to ~60% of pre-pandemic Dec 2019 levels as of Sep 2022, spurred mainly by returning Singapore visitors. Arrivals from Singapore hit 80% of pre-pandemic levels as of Sep 2022, while Chinese tourists languished at just 10% of pre-pandemic levels.

We see Chinese tourists returning amid Malaysia’s relaxed entry requirements and easing flight constraints. Even though Chinese tourists (including Hong Kong and Macau special administrative regions) accounted for a small share of overall arrivals pre-pandemic at ~12% of the total, they spend comparatively more than Singaporeans per arrival. We estimate that a complete return of Chinese tourists to three million could cumulatively add ~0.8% to Malaysia’s nominal GDP.

Domestic political uncertainty has also eased considerably following the formation of the unity government in late-2022 led by Pakatan Harapan (PH)’s leader and Prime Minister Anwar Ibrahim. As promised, Malaysia unveiled a leaner cabinet of 28 ministers in Dec 2022, with 15 positions going to PH given that it is the largest coalition within the unity government.

The next key event to watch for Malaysia will be the re-tabling of Budget 2023 on Feb 24. Indications are that the Anwar-led administration would aim to maintain the same spending level as the previous government despite high government debt. The parliament passed a temporary supplementary bill worth MYR163.7bn for operating and development expenditures covering 1H23 before the start of 2023 as the revised budget is being prepared.

Yet, we note that the approved spending was 44% of budgeted expenditures tabled previously on October 7 pre-elections. This was lower than the amount spent when PH was in office in 2019 and 2020, raising some risks of less supportive fiscal policy than earlier planned. Beyond ‘high impact’ projects that would bode well for investment, details regarding the review of the subsidies program and plans to alleviate the rising cost of living on the low income would be closely watched. Any changes to domestic policy on subsidies and price controls could impact the inflation outlook, as pointed out by Bank Negara Malaysia (BNM) in its January meeting statement. While BNM appears to have shifted towards a growth focus amid the policy rate pause on January 19, greater concerns on elevated inflation could surface (see ‘Malaysia: BNM pause ahead after surprise hold’).

Philippines: Domestic challenges loom

After registering the fastest annual growth since 1976 at 7.6% for full-year 2022, we expect Philippines’ economic expansion to normalise and moderate in 2023. 2022’s economic activity was bolstered by the full reopening from the pandemic and lifting of restrictions, despite inflation surging to multi-year highs over the course of 2022.

That said, growth has trended lower based on the quarterly profile. 4Q22 real GDP growth eased to 7.2% YoY vs 1Q22 peak of 8.2%. We think that some fading of post-pandemic economic momentum, alongside a challenging domestic backdrop of still elevated inflation, tighter monetary conditions, and higher statistical base are likely to dampen growth in 2023. We, therefore, lower our 2023 growth forecast to 5.8% (from 6.3% previously). Yet, the Philippines is less exposed to the tougher global environment from the trade angle due to its relatively lower openness. The benefit from China’s earlier-than-expected reopening is likely to be marginal relative to ASEAN peers such as Thailand. 

Private consumption remained the key growth engine in 4Q22 but also moderated. In 4Q22, the category grew by 7.0% YoY (vs 1Q22 high of 10%), contributing 5.3 percentage points to headline expansion. Household spending was powered by double-digit gains in ‘restaurants & hotels’ (24.7% YoY) and ‘recreation & culture’ (15.2% YoY), which were highly linked to post pandemic reopening gains. We think that such strong expansions are likely to fade, with marginal support from the return of Chinese tourists due to the earlier-than-expected international border reopening. International tourism receipts accounted for just 3.0% of Philippines’ GDP pre-pandemic in 2019, with Chinese tourists constituting ~21% of total foreign visitor arrivals. We estimate that a full return of Chinese tourists to 1.7 million could cumulatively add ~0.5% to Philippines’ nominal GDP. Meanwhile, household spending on the food category was already hurt by rising food inflation, notwithstanding better labour conditions. Elevated inflation is likely to continue biting into real purchasing power of consumers.

Investment activity (gross fixed capital formation) decelerated to its slowest rate since early-2021, registering at 6.3% YoY in 4Q22. This weakening trend looks set to continue over the coming quarters, in our view. The aggressive monetary tightening cycle and resultant pick-up in borrowing costs would hurt corporate net profit margins, and consequently delay the private sector’s capital expenditure plans. Nevertheless, public investment on infrastructure would be a bright spot given the Marcos administration’s ‘Build, Better, More’ infrastructure program.

Regarding monetary policy, the above pre-pandemic economic expansion in 4Q22 is likely to provide continued room for the Bangko Sentral ng Pilipinas (BSP) to tighten policy rates in early-2023 to rein in multi-year high inflation. Headline and core inflation were both well above the BSP’s 2-4% inflation target band at 8.1% YoY and 6.9% in Dec 2022, respectively. The BSP remains keen to do what is needed to bring inflation back to its target, flagging that more interest rate hikes are in the pipeline. That said, BSP governor Medalla also signalled in January that the policy rate might peak in 1Q23. We see a terminal rate of 6.00% by 1Q23, with risks weighted to the upside should inflation prove to be stickier than expected.

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