KUALA LUMPUR (Jan 8): Another round of debt-led stabilisation policy can be expected in Malaysia this year if the Conditional Movement Control Order (CMCO) persists, says Malaysian Rating Corp Bhd (MARC).
  
This will likely strain the country’s fiscal position further, as the government may need to revisit the recently raised debt ceiling of 60% of gross domestic product (GDP) and increase it to 65%, the ratings agency said in a statement today.

The current CMCO imposed in Selangor, Kuala Lumpur and Sabah will end on Jan 14, but is likely to be further extended. It was first imposed on Oct 14 last year and originally scheduled to end on Oct 27, but has gone through five extensions.

Against the backdrop of resurgence of new Covid-19 cases, MARC also expects the virus which has shaped the global and the Malaysian economies in 2020, to continue in 2021. 

MARC said despite the rapid development and deployment of vaccines in recent weeks, Covid-19 will continue to force economies to balance a difficult trade-off between managing public health and driving economic growth. 

“We anticipate that governments’ response to the resurgence of the virus will likely challenge earlier forecasts for a V-shaped recovery in 2021. 

“As far as the major economies are concerned, we take note of the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development’s (OECD) forecasts that the US economy will recover in 2021. 

“However, political risks will weigh on such positive outlook, given a large segment of the US population did not vote for President-elect Joe Biden,” the ratings agency said.

For China, which has seen a speedy economic recovery, MARC said the nation will continue to perform well, despite the resurgence of Covid-19.

The European Union, meanwhile, appears to be facing a realignment of new economic engagements this year, following the conclusion of the Brexit deal in late December, it added.

As for Malaysia, MARC expects the country’s economy to record a contraction of 5.7% in 2020, before posting a 6.4% positive growth in 2021, due to the low base effect. 

The growth in 2021, it said, will be driven by private consumption (7.7%) and private investments (6.5%), amid a higher inflation of 2.0%, while the unemployment rate is expected to remain elevated at 3.9%.

“The Malaysian labour market has somewhat improved in recent months but it will likely trend sideways, as the economy continues to perform below its long-term capacity. 

“As oil prices have risen alongside the resumption of economic activities, naturally, inflation will also similarly increase in 2021,” MARC said.

As for the overnight policy rate, MARC expects it to remain low at 1.75% throughout 2021.

Turning to the ringgit, the ratings agency said it expects more upside for the currency, given that its real effective exchange rate is currently trading at one standard deviation below its 10-year mean. 

The ringgit was trading at 4.029 against the greenback today. On Jan 4, it had moved below the RM4 level for the first time since June 2018.