ADB maintains Malaysia’s 2021 growth outlook at 6.5%

KUALA LUMPUR (Sept 15): The Asian Development Bank (ADB) has maintained its gross domestic product (GDP) forecast of 6.5% for Malaysia next year in its September update, but downgraded 2020 growth rate to -5% from -4% previously.

“The economy will continue to be dragged down by the adverse effects of the pandemic on consumption, exports, and investment. Measures to contain the spread of the virus by restricting travel and business activity weigh on household spending,” it said.

However, with restrictions relaxed from mid-June, some recovery is expected in the second half of 2020 and the release of pent-up demand is already showing in wholesale and retail trade, which picked up strongly in June, it said in its Asian Development Outlook (ADO) 2020 Update released today.

Malaysia’s GDP contracted by 8.3% year-on-year in the first half of 2020, a sharp reversal of the 4.7% expansion in the same period of last year. The economy grew by 0.7% in the first quarter of 2020 but fell by 17.1% in the second quarter (Q2).

The government announced stimulus packages amounting RM295 billion, including an estimated RM45 billion in additional fiscal expenditure.

Government fiscal stimulus and liquidity support, equal in total to 20% of GDP, is expected to boost domestic demand, but weak labour market conditions under persistent layoffs and pay cuts will still dampen consumer spending, it said.

It said with the COVID-19 containment measures lasting longer than expected when ADO 2020 was published in April and the global economy plunging into a sharp recession, the update revises down the forecast for GDP growth in 2020 from -4% to -5%.

“A rebound by 6.5% is forecast for 2021,” it added.

In terms of sector, it said growth in agriculture should revive in the near term. “Palm oil yield and production are expected to recover with better weather.”

However, ADB said mining is expected to continue to struggle under low global oil prices.

It said manufacturing will face headwinds from much weaker demand, both at home and internationally.

“In Q2 2020, manufacturers were hit hard by a change in restrictions under which only essential industries were allowed to operate, and only at reduced capacity.

“However, with COVID-19 restrictions now relaxed, some companies have restarted operations, and manufacturing has picked up strongly,” the bank said.

It noted that one bright spot in manufacturing has been the production of medical and pharmaceutical goods, exports of which have increased by 22.2% in the first half of the year on strong global demand, in particular for rubber gloves.

On the service sector, ADB said hospitality and retail businesses have been particularly hard hit by the lockdown and people’s general reluctance to go out during the pandemic. Hotels, restaurants, and transportation services are expected to languish as international travel continues to be highly restricted.

“While travel restrictions within Malaysia have been removed, domestic tourism is not expected to make up for the loss of international tourist arrivals,” it added.

ADB forecast external demand will remain weak as the global economy slows, and exports will shrink further as Malaysia’s key markets are affected. It said lower petroleum production because of plant maintenance and depressed oil prices is expected to significantly reduce earnings from oil and gas exports.

It also said travel and tourism receipts are not expected to recover anytime soon, with most countries maintaining travel restrictions as the number of COVID-19 cases continues to climb globally. Slowdowns hitting domestic investment and exports will suppress imports of capital and intermediate goods.

“In sum, the current account surplus is projected to shrink to the equivalent of 1% of GDP in 2020, then widen to 2% in 2021, both downward revisions from 2.3% and 2.9% respectively in ADO 2020 April,” it said.

Going forward, it said while providing extensive support to people and businesses, the government is mindful of its rising fiscal deficit – projected to jump from the equivalent to 6.1% in 2020 from 3.4% of GDP in 2019 – and its rising ratio of debt to GDP.

Budget 2021 is currently being prepared for presentation to Parliament in November alongside the Twelfth Malaysia Plan, 2021–2025.

“Ensuring a path back to sustainable fiscal balances will be key to Malaysia’s medium-term economic prospects. Muted price pressures will enable the Bank Negara Malaysia (BNM) to continue to pursue accommodative monetary policy throughout 2020 and 2021 and so strengthen consumer and business confidence and support growth.”

The central bank reiterated in its announcement of the overnight policy rate reduction in July that it stood ready to use policy levers to facilitate recovery.

BNM has reduced its policy rate four times so far this year – on Jan 22, March 3, May 5 and July 7 – by a cumulative 125 basis points to 1.75%, which is expected to ease debt servicing burdens and financing costs for households, small and medium-sized enterprises, and corporations.

The central bank also lowered the statutory reserve requirement ratio for commercial banks by 100 basis points to 2%, effective on March 20.

On the downside, the economic outlook is vulnerable to external risks, in particularly heightened volatility in international financial markets or a faltering global economic recovery, ADB said.

Another risk, it said, is uncertainty about how much global economic weakening will hamper growth in private investment.

“A resurgence of COVID-19 cases could require more restrictions on economic activity and thus delay recovery. A key domestic risk would be further weakening of the job market, which could curtail household spending,” it added.

Source: TheEdgeMarkets