KUALA LUMPUR (April 3): Bank Negara Malaysia (BNM) said today Malaysia's economic growth, as measured by Gross Domestic Product (GDP), is projected at between -2% to 0.5% in 2020 against a highly challenging global economic outlook due mainly to the COVID-19 pandemic.

Apart from the pandemic, the domestic economy will also be affected by the sharp decline and volatile shifts in crude oil prices and continued supply disruption in the commodities sector, according to the Central Bank.

According to BNM’s Economic and Monetary Review 2019, the global economy is projected to register negative growth in 2020, due mainly to the significant economic repercussions arising from the unprecedented COVID-19 pandemic.

In 2019, the country’s GDP grew 4.3% from a year earlier, BNM said.

"The ongoing COVID-19 pandemic has significantly weakened global growth prospects, with the outlook heavily contingent on how countries across the world successfully contain the pandemic over the remainder of the year. The IMF (International Monetary Fund) is expecting a recession in 2020 that is at least as bad as during the global financial crisis in 2009, and is projecting a recovery in 2021.

"The domestic economy will be impacted by the necessary global and domestic actions taken to contain the outbreak. Of significance, tourism-related sectors are expected to be affected by broad-based travel restrictions and travel risk aversion, while production disruptions in the global supply chain will weigh on the manufacturing sector and exports.

"The implementation and subsequent extension of the Movement Control Order (MCO), while critical, will dampen economic activity following the suspension of operations by non-essential service providers and lower operating capacity of manufacturing firms,” BNM said.

The Central Bank said that beyond the MCO period, reduced social and recreational activities until the pandemic is fully controlled globally and domestically will continue to dampen consumption and investment activity.

Apart from the pandemic, BNM said the domestic economy will also be affected by the sharp decline and volatile shifts in crude oil prices and continued supply disruption in the commodities sector. Unfavourable weather conditions and maintenance works will weigh on the production of oil palm, crude oil and natural gas, it said.

"While this is partially a consequence of significantly softer global demand, crude oil prices are also weighed by the OPEC+ decision of not pursuing additional voluntary output adjustments. Prolonged low global oil prices will impact the income, employment and investment prospects in the mining-related sectors directly. Nonetheless, lower oil prices may alleviate cost pressures on consumers and businesses. Prices of other major commodities are projected to be lower.

"The continued supply disruption in the commodities sector will continue to weigh on domestic growth.

"The low oil palm production since end-2019 is expected to extend to the early months of 2020, due mainly to the lagged impact of severe dry weather conditions experienced in 2019 as well as output constraints arising from the MCO.

"These disruptions are, however, anticipated to dissipate gradually as weather conditions normalise and oil palm production benefit from higher fertiliser application in early-2020.

"Meanwhile, crude oil and natural gas production will be affected by continued maintenance works and to a certain extent, reduced operating capacity due to the MCO,” BNM said.

Overall risks to the domestic growth outlook are tilted to the downside, mainly due to the risk of a prolonged and wider spread of COVID-19 and its effects on the global and domestic economy, BNM said.

According to BNM, domestic growth also remains susceptible to a recurrence of commodities supply shocks and continued low commodity prices which could pose additional risks to production in the commodities sector, exports and income growth.

"In addition, heightened financial market volatility due to ongoing external uncertainties may lead to tighter domestic financial market conditions.

"The baseline growth projection could, however, be lifted by a stronger-than-expected impact from the various stimulus measures by the federal government and additional measures implemented by several state governments,” it said.

BNM’s latest economic forecast for Malaysia has attracted quick response from economists. RHB Investment Bank Bhd economist Ahmad Nazmi Idrus wrote in a note today that RHB maintains its Malaysia GDP growth projection at 0%, although the research firm noted further revisions are possible, depending on how it perceives the likelihood of a recovery ahead.

"This will depend on how the Government’s policies pan out in the months to come. Meanwhile, given the sharply moderating growth environment and weaker inflation projection, we reiterate our call for monetary policy to be reduced by another 50bps, bringing the interest rates down to 2%. This was similar to the level seen during the Global Financial Crisis of 2007-2009,” Ahmad Nazmi said.

For more stories on BNM's annual report, click here.