Is Malaysia 2021 Growth Prospect Dimmed By Another Lockdown?

The lockdown announced by Prime Minister Tan Sri Muyhiddin 2 days ago will take effect from today where once again we see empty streets and shuttered retail stores. However this time around, MCO 3.0 has a different impact on the economy, Ministry of International Trade and Industry has allowed businesses to remain open albeit with minimum work force.

A move viewed by many economic analyst as a positive one as this will reduce the impact on our recovering GDP, but the danger persist if the lockdown continues and curbing the spread becomes another prolonged battle. In view of the latest action by the Malaysian Government, Fitch Solutions has taken a negative opinion, the rating agency maintains the real GDP forecast for 2021 at 4.9%, while its forecast already accounts for the possibility of yet another nationwide lockdown, it highlights the downside risks emanating from possible further surges in infections, another round of lockdown measures and the slow pace of vaccinations.

Its expected that the domestic demand to likely perform poorly, with unemployment climbing over the coming months, weighing on disposable incomes, while spare capacity will likely curtail investment. Government consumption will remain muted given existing fiscal constraints. The key source of support will once again be net exports, driven primarily by shrinking imports as demand falls.

Real GDP contracted 0.5% y-o-y in Q121, meaning the economy is slightly smaller than it was in Q120 when Malaysia was affected only indirectly by the Covid-19 outbreak, which was then mostly limited to China. On a q-o-q, seasonally adjusted basis, the economy expanded by 2.7%, as reported by the Department of Statistics. This compares poorly to other regional economies that have released Q121 data, including Singapore, which posted a 0.2% y-o-y expansion and is due mainly to the resurgence of Covid-19 in Malaysia. In line with this, the lockdown measures imposed in January and extended in various forms throughout the rest of Q121, have weighed on the economy’s key growth engine accounting for around 70% of GDP, private consumption, which took away 0.9 percentage points (pp) from the headline figure. Gross fixed capital formation (GFCF) has also performed poorly as a result in line with our view, subtracting 0.7pp. These two categories ultimately outweighed a balanced net exports account and a 0.7pp positive contribution from government consumption

Private Consumption To Remain Muted
Accordingly, Fitch maintains its forecast for private consumption growth at 3.0%, reflecting mostly the boost from low base effects in 2020 (when it contracted by 4.3%) rather than any resurgence in actual consumption. Specifically, the latest nationwide lockdown is likely to worsen and prolong the severe negative impact on employment, as was the case in Q220 during the previous lockdown, when the unemployment rate spiked to 5.1% from 3.5% in Q120. To be sure, the unemployment rate has remained elevated at 4.8% in Q121, with the lockdown imposed during the quarter likely having hampered any possible recovery in the labour market. The resulting poorer outlook for disposable income will have a pronounced negative impact on private consumption growth.

Compounding matters, the government has even less fiscal space to enact the level of job support measures needed to significantly offset the impact of the lockdown, leaving the labour market and the economy far more exposed to the downside risks than in 2020 and could even feed some degree of a vicious cycle, with lower consumption feeding lower employment and so on. While there is still a clear prospect of the latest surge being brought under control later in the year, especially with ongoing vaccination efforts, the experience of export-oriented economies around the world, including China and Malaysia itself, shows that feedthrough of any recovery to the labour market, and therefore private consumption, is slow. These same factors spell worse prospects for GFCF as well, as businesses are unlikely to have neither the capital, nor the need (amid depressed demand), to build capacity.

Strong Government Support Remains Unlikely
Malaysia’s total government debt has already exceeded the government’s self-imposed debt limit of 60% of GDP,
coming in at 62.1% of GDP at the end of Q420. Even i, the government raises the debt limit again (the debt limit was already raised from 55% in August 2020), the contracting economy means that this limit will be calculated off a smaller base, reducing the fiscal space such a move would provide. Further evidence supports for limited government support came from the two support packages worth only 2.5% of GDP announced so far in January and in March. The stronger forecast compared to 2020 reflects more the lack of actual government spending contained within the stimulus packages announced that year than any significant increase in government spending in 2021.

Net Exports Will Once Again Be Key Growth Support
Amid the dim prospects for domestic economic activity, we expect net exports to once again be the most important
contributor to overall growth, forecasting it to contribute 1.7pp to headline growth compared to -0.9pp in 2020, and far ahead of the rest of the expenditure components. Given that the government has opted to allow more industries to operate in spite of the lockdown and the ongoing recovery in key trading partners such as China and Singapore, we believe overall exports will be able to post growth of 0.6% in 2021, especially given that it had already contracted by 1.3% in 2019 and 8.7% in 2020. This muted figure accounts for the poor outlook for services exports, which will likely continue to underperform, with the tourism sector dealt another blow by the ongoing struggle with Covid-19.

Imports will likely continue contracting and a 1.1% contraction in 2021 is being forecast, given the dismal outlook for private consumption and these two contrasting dynamics will help to support the trade balance.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company. FSG is an affiliate of Fitch Ratings Inc. (‘Fitch Ratings’). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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