Prolonged Covid-19 pandemic expected to pull down Malaysia’s growth, says AMRO

According to the ASEAN Macroeconomic Research Office (AMRO)’s latest report, ASEAN+3 Regional Economic Outlook 2020, Malaysia’s economy growth in 2019 which expanded by 4.3 percent is said to have been the slowest pace in 10 years, due to the downturn in the global electronics cycle, escalation in the commodities sector lowered exports and investments.

The report further shows that in Q4 2019, private investment has also gained pace, as investment commitments in the preceding quarters were likely starting to be implemented however the virus outbreak has disrupted productions.

Growth is expected to slow down this year before improving in 2021.

The shift to sales and services tax (SST) from the prior goods and sales tax (GST) post 2018 election had depressed inflation in the first five months of 2019. However, inflation rate had picked up in the following months as lower fuel prices had offset increases in food and several service items.

Inflation rate is expected to pick up gradually this year and 2021. The report stated going forward, the inflation rate is expected to rise from 0.7 percent in 2019 toward the long-term average of about 2 percent by 2021.

Additionally, positive sentiment in the bond market contributed to the $2.2 billion increase in Bank Negara Malaysia’s foreign exchange reserves by end-2019 and to another $0.6 billion increase by mid-February this year.

However, due to heightened risk aversion, reserves fell by $0.9 billion to $103.4 billion by end-February,  sufficient to cover six months of goods imports and 1.1 times short term external debt.

According to AMRO, the MYR-USD exchange rate had appreciated slightly last year but has depreciated by nearly 5 percent since the start of 2020.

Heightened global economic uncertainty along with greater risk aversion could result in greater market volatility, exposing Malaysia to the risk of sharp capital outflows and down pressure on its currency and foreign exchange reserves.

Furthermore, the risk could also be intensified by the re-weighting of major stock and bond indices to make room for China’s securities at the expense of other emerging markets like Malaysia.

The report has also pointed out that the overall tax buoyancy has also fallen to a level below one since 2014, indicating urgency to advance reforms in tax revenue mobilisation.

 

 

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