KUALA LUMPUR (Aug 11): Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus will be giving a press conference on Friday on the country's second quarter growth, which will be released on the same day and is widely expected to be strong, given the economy's reopening and the low base effect.

The consensus is growth of 5.6%, according to a Bloomberg poll of 10 economists, whose estimates range from 4.6% to 6.7%.

There are sceptics, however, who do not think a strong GDP growth is indicative of the health of the domestic economy, which is facing unprecedented challenges following the pandemic.

Here are five potential questions that the public may want the governor's views on:

1. Will Malaysia maintain its 2022 economic growth projection of 5.3%-6.3%?

While GDP growth for 2Q is expected to be strong, what concerns the market more is whether this rate of economic expansion would be sustainable going into the second half of this year and 2023, amid persistent high inflation globally, supply chain bottlenecks, rising interest rates as well as intensifying geopolitical tension.

Just last month, the International Monetary Fund (IMF) cut its global economic growth to 3.2% from its 3.6% projection in April, citing a slowdown in China, the Russian-Ukraine war, and inflation in the US and major European economies as main concerns. At the same time, it cut its forecast for Malaysia's growth to 5.1% — below BNM's projection — from 5.6% previously.

S&P Global Market Intelligence, on the other hand, has projected Malaysia's GDP growth to hit 7% by 2022, due to strengthening domestic demand, strong exports and the reopening of international borders.

Bank Negara’s response is expected to provide a better gauge of the country's economic performance ahead.

2. The ringgit has weakened significantly against the US and Singapore dollars. Is this a concern and should BNM be more aggressive in defending the ringgit?

Since the beginning of the year until Aug 11, the Malaysian ringgit has depreciated almost 7% against the US dollar to 4.4453, no thanks to the hawkish monetary policy stance by the US Federal Reserve. The last time it dropped by more than this quantum over a similar eight-month period was in 2015, when crude oil prices crashed.

It also weakened to a new historic low of 3.2473 (at press time) against the Singapore dollar, with a YTD decline of 5.2%.

Meanwhile, there has been anecdotal evidence of imported inflation leading to higher food prices, further exacerbating the increase in cost of living, which might potentially affect consumer spending, a major GDP contributor. While headline inflation averaged 2.4% and is projected to remain between 2.2% and 3.2% this year, food inflation however jumped 6.1% in June, to average 4.45% YTD.

Does the central bank see a need to more aggressively defend the local currency?

3. What is your view on when the proposed targeted subsidies scheme should be implemented?

As the current blanket subsidies scheme is estimated to hit RM80 billion this year, the government is in the midst of formulating a more targeted approach for distributing subsidies, to ensure that economic aid only flows to those who really need it, particularly the bottom 40% income earners (B40).

However, the proposal raises the question whether it would lead to a sudden surge in inflation amid current price pressures, and hurt domestic consumption.

4. How has the economy absorbed the 50bps OPR hike so far? Will we see a faster pace of tightening, if GDP growth strengthens?

BNM has repeatedly said this year that any OPR increases would be done in a "measured and gradual manner", while ensuring that monetary policy remains accommodative to support sustainable economic growth in an environment of price stability.

So far this year, the central bank’s Monetary Policy Committee has raised the OPR twice — at 25 basis points (bps) each time — which has increased the benchmark interest rate to 2.25% from its historical low of 1.75%.

Further increasing the OPR may tame inflation and cushion the local currency's depreciation, and we have seen a number of central banks making jumbo hikes recently to do just that, such as Canada (100 bps in its recent announcement), the Philippines (75bps) and of course the US (225 bps so far).

This, however, may also increase borrowing costs at a time when the local economic recovery remains fragile.

Malaysia’s high household debt-to-GDP of about 90% also raises concern of whether rising OPR would affect household repayments going forward.

5. Should Malaysians be worried about the government's rising debt servicing charges?

Malaysia has been spending in excess of its revenue every year since 1998 by issuing debt. Direct federal government debt, which stood at RM824 billion as at end-March 2020, has now risen to RM1.06 trillion — or 61.4% of GDP — as at March this year.

Debt servicing charges, which made up 8% of federal government revenue in 2008, had surged past the 18% mark in 2021. Interest payments on Malaysia's direct federal government debt alone is more than half of development expenditure (DE) since 2014, hovering around 60% of DE since 2015. For this year, the government’s estimated interest payments of RM43.1 billion — revealed during the tabling of the Budget 2022 — would be 57% of the RM75.6 billion earmarked for DE.

In a rising interest rate environment, the government would incur higher debt servicing charges as it continues to roll over its borrowings with new debt papers, limiting its capability to invest for future development.