KUALA LUMPUR (July 14): Malaysian Rating Corp Bhd (MARC) has shaved off its earlier forecast of a 5.1% gross domestic product growth for Malaysia for 2021 to 3.9%, prompted by the country's implementation of back-to-back mobility restrictions.

MARC economists Firdaos Rosli, Lee Si Xin and Lyana Zainal Abidin said in a report today this implies that the economy will perform 2% below the pre-pandemic level this year. MARC had in January forecast Malaysia's GDP growth to come in at 6.4%, but revised it in May to 5.1%.

The economists said the longer-than-planned nationwide lockdown is set to weaken prospects for recovery further, with more significant economic scarring arising from increased insolvencies and higher retrenchments.

“These, coupled with looming political uncertainties, will see business and consumer sentiment deteriorate even further, undermining discretionary spending and investment,” they said.

Moving forward, they said, Malaysia’s growth outlook is solely dependent on how stringent mobility restrictions will be.

“We expect the economy to recover to pre-pandemic gross domestic product (GDP) levels only in late 2022, or even later if mobility restrictions continue as is,” they said.

While the government aims to reduce the number of daily positive Covid-19 cases to below 500 and achieve a 60% inoculation rate before allowing a full reopening of the economy in November or December, they believe the target is ambitious, given the vaccine supply constraints and lack of explanation of how the number of positive cases could be reduced in the future.

At the time of their note, only 11.3% of the population was fully inoculated, still far behind the target, they said. The latest inoculation rate, based on the newest available data as of July 13, was 11.76%.

Meanwhile, they said, private consumption — the main driver of economic growth — will be hard hit in the near term due to the strict lockdown measures, which include the closure of non-essential services.

They also said the ominous labour market has deeply impacted consumer confidence. “Notably, the unemployment rate could see an uptick in the coming months and remain elevated for the rest of the year,” they said.

Spending by low-income households, which experienced higher job and income losses, will likely remain below pre-pandemic levels for a more extended period, especially when stimulus support expires, they added.  

They also noted that businesses have been grappling with persistent supply chain disruptions and falling domestic demand since MCO 1.0, and the challenging business operating environment will push firms to delay or even cancel their investment decisions.

“It does not help that some quality foreign direct investments (FDI) bypassed Malaysia and instead made a beeline towards our regional neighbours. Ongoing political uncertainties, in addition to the pandemic, have shaken FDI confidence,” they said.

Given the significant revenue shortfalls and rising expenditures to finance various stimulus packages, they said the fiscal deficit will likely breach the current target set by the government of 6% of GDP in 2021.

“Instead, we anticipate the fiscal deficit to come in at 6.3% of GDP. We believe more fiscal support could still be forthcoming, albeit in smaller sizes amid the increasingly constrained fiscal space, until the recovery path is clear,” they said.

Given the deteriorating economic and fiscal metrics, they see a higher risk of a rating downgrade by another international credit rating agency. S&P’s A- rating on Malaysia currently has a negative outlook.

“Having said that, a sovereign rating downgrade may not necessarily translate into lower overall economic sentiment/confidence per se throughout a historically low interest rate environment,” they said.

But if that happens, it will mean that Malaysia is no longer the second highest-rated ASEAN member state after Singapore, they added.

Meanwhile, as the current monetary stance remains adequately accommodative, they believe Bank Negara Malaysia will continue to retain the overnight policy rate at its historical low of 1.75%.

They also expect inflation in 2021 to come in at 3% after experiencing a deflation of 1.1% last year, as the upward movement in oil prices pushes the prices compared to 2020 where oil was cheaper.